Will More Income Be Subject to SE Tax
Many farmers have structured their farm operation as an S corporation or manager managed LLC to save on Self-Employment taxes. About the only reason to have an S corporation is to reduce SE tax.
The IRS has and will continue to challenge S corporation farmers for not paying enough compensation to their owners. Compensation does not result in any extra income tax but rather is subject to the combined 15.3% FICA and Medicare tax.
President Biden’s Green Book has a proposal to essentially make all operating farm income subject to SE tax even if you farm as an S corporation. Additionally, if you have self-rental income that exceeds the current net investment income tax (NIIT) threshold, all of that excess self-rental income will be subject to the 3.8% NIIT.
This proposal may have a chance to succeed since it is not raising income taxes and helps shore up social security. However, farm S corporations do have a way to eliminate this tax and that is by paying commodity wages. Commodity wages under current rules is not subject to SE / Payroll taxes.
However, will that rule remain in effect. We shall see and we will keep you posted.
Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a principal with CliftonLarsonAllen in Walla Walla, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. Paul and his wife purchase an 180 acre ranch in 2016 and enjoy keeping it full of animals.
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