Guide to Paying Kids for Their Work on the Farm
One of farm parents’ great joys is raising their children in the rural way of life and teaching them that lessons learned in the field can be applied everywhere. In return, parents often remind kids that they are simply earning their keep and they cash their “paychecks” each night they lay their head to sleep.
However, there are some benefits available to you through compensating your children for the time and effort they put in alongside you in the field and on the farm. Adding your mini-mes to the payroll could have significant tax benefits for your farm operation.
Taking Down Taxes
Wages are always tax deductible expenses for your farm business—for both family and non-family employees. As a grower, you also do not owe payroll tax on wages for your children, as long as they’re under the age of 18 and your farm business is categorized as a sole proprietorship or husband and wife partnership.
You aren’t the only one receiving these benefits though. The wages are usually tax-free for the child as well, until they reach the age of 18. There are no hard-and-fast rules for what age a child can start receiving paychecks—just the law of common sense.
The child must be generally considered old enough to successfully do the work you say they are doing. So, before you go listing your newborn as a combine operator, remember that you are filing government paperwork and keep it legitimate.
Show Me the Money
Let’s break this down with some numbers. As an example, if you personally give your child $6,000 a year in general allowance for their work on the farm (or just for being a good kid), you’re giving them money you likely paid income tax on and offers no tax benefits on its way out of your account.
On the other hand, if you add your child to your payroll and pay that same $6,000 in annual wages, that money is added to your farm business’s expenses and no payroll tax is owed—by you or your child. That’s $6,000 in tax deductions. On top of those tax deductions, this is likely to save you $1,000 to $1,500 in income tax, depending on your tax bracket.
And that’s not all. You may even be able to categorize that new pair of steel-toed boots your son or daughter needs to stay safe working around equipment as a deductible farm expense. But remember, this is important government information and, again, needs to be accurate and legitimate.
Only items that your child needs specifically for working on the farm are eligible for deductions. If your kid needs a new winter coat, that is not a deductible expense, because the coat is necessary for everyday life, not just for farm work. Something like a tool belt is a more likely deduction. Check with your accountant before listing any deductions to make sure you’re in the clear.
Work Hard, Pay Hard
Before you can start taking advantage of these tax benefits, you need to make sure your farm business is properly set up with the government. If your child is the first official employee being added to your payroll, you may need to complete some additional steps before writing that first paycheck.
First, you need to secure an Employer Identification Number through the IRS. This can be done online through the IRS’s website.
Next, make sure you—or your child—keep accurate records of work time and tasks. This is a great opportunity to put those 4-H record book-keeping skills to work!
When it’s time to turn that time card in, once again, remember to keep it legitimate and fair. The hourly wage on your child’s paycheck should be comparable to how you would compensate non-family employees. If your child is earning hundreds of dollars an hour, that raises a red flag with the IRS, and you may risk not only losing the tax benefits, but also being penalized for tax fraud. When it comes to submitting paperwork and cutting checks, your child is considered a standard employee with a W-4 and W-2 and listed on your payroll, just without payroll taxes deducted.
Once your child receives his or her paycheck, it’s up to you to work with them to decide how to handle their money. Whether you want to be completely hands-off and let your child decide how to spend their paycheck themselves, set up a savings account for all the money to go in until they reach a certain age or simply offer a little guidance and support is up to you as their parent.
Remember, always talk with your tax advisor or accountant before making changes to your farm’s tax planning. No one knows your unique circumstances better than them, and they will help ensure you meet all requirements and maximize the benefits you receive.
One final reminder for your new employees—make sure you are acting in accordance with your state’s child labor laws, and keep written documentation of the employment agreement between you and your child to provide extra legal protection. Now go start on that chore list!