52

We have a farm in the US, with an employee paid with wheat rather than money. He is an ordinary employee that receives a W2. My accountant said that we don't have to withhold income tax or pay either employee or employer portions of FICA tax on his income, because it is "payment in kind".

Its hard to say why this sounds iffy, but in my experience with taxes, usually something that creates an obvious loophole is not correctly understood. For example, I could just operate the farm as a corporation, make myself an employee, take all profit as "payment in kind", and not pay self employment tax. Obvious loophole = I think my accountant is wrong about this.

Is my accountant wrong about "payment in kind" not being subject to payroll tax?

If not, is she partially correct in any way, in that, are there any changes to payroll tax requirements relating to "payment in kind", which might explain her position?

Would the situation be different if he was also paid in cash, like 50% cash reimbursement and 50% wheat reimbursement?

Please state the experience you have that justifies your answer. Thanks.

  • 4
    The "duck factor" at work. – JoeTaxpayer Jan 16 '17 at 17:05
  • 2
    Even if the accountant were right, your scheme wouldn't work. Since you're both parties, it makes no difference who pays the tax. With an employee/employer, the question is who pays that tax. Having the employer avoid the tax wouldn't help if you're both the employer and the employee. – David Schwartz Jan 16 '17 at 17:39
  • 2
    @JoeTaxpayer: In his hypothetical example of not paying self-employment tax. – Ben Voigt Jan 16 '17 at 20:44
  • 1
    @BenVoigt - got it. Thx. The hypothetical was his hint why this doesn't work this way. – JoeTaxpayer Jan 16 '17 at 20:57
  • 2
    Setting up a limited company, paying yourself a minimal wage and taking the profits as a share dividend is a standard tax scheme in the UK, especially for contractors. Something similar may work for you. Sometimes an obvious loophole really is an obvious loophole. – Separatrix Jan 18 '17 at 10:31
65

The CPA is mostly correct. Her use of "in kind" may be confusing, but it appears that while our gut would call this "bartering" and refer to the rules regarding same, there's a different set of rules that apply to farm workers.

The following appears in IRS Pub 51 Agricultural Employer's Tax Guide -

Noncash wages (including commodity wages). Noncash wages include food, lodging, clothing, transportation passes, farm products, or other goods or commodities. Noncash wages paid to farmworkers, including commodity wages, aren't subject to social security taxes, Medicare taxes, or federal income tax withholding. However, you and your employee can agree to have federal income tax withheld on noncash wages.

You can see, Social Security, for those paid 100% in non-cash wages, is avoided, legally, but federal tax is still due.

  • 3
    Note - I edited to correct the gender. On re-read I see the accountant is a woman. If 'gal' is not the female word for 'guy' I will correct. This may be regional, but either way, I don't wish to offend anyone. – JoeTaxpayer Jan 16 '17 at 18:49
  • 13
    How do you withhold from an in-kind payment? Suppose employee is to be compensated with 1,000 bushels of wheat, market value $4,000, and you would normally withhold 8%. Do you have to give him only 920 bushels and sell the remaining 80 bushels and send the cash to the IRS? – Nate Eldredge Jan 16 '17 at 20:03
  • 7
    @NateEldredge If Williston ND is a commercial wheat-producing area (which it is, according to Wikipedia), there will almost certainly be a local grain marketing and transportation company which publishes price records. (Somebody has to own and operate the storage silos and elevators to load the stuff onto freight trains or a fleet of trucks, for example.) If the OP was farming and growing a tiny amount of wheat just in order to pay one employee in wheat rather than dollars, that would be really bizarre. – alephzero Jan 16 '17 at 22:17
  • 5
    @JoeTaxpayer gal is approximately comparable to guy, but it’s a little more condescending and diminutive, and has at least some sexist historical baggage associated with it. Nothing terrible, but it wouldn’t necessarily surprise me if someone objected. Up to you if that’s the appropriate level of dismissiveness towards this accountant for your post. – KRyan Jan 17 '17 at 15:03
  • 6
    @KRyan - I appreciate the reply. I am mortified when pros get these matters so wrong, CPAs, Lawyers, anyone with a fiduciary responsibility, whether legal or implied. I meant to be dismissive, but gender neutral. I've changed the word to 'CPA'. – JoeTaxpayer Jan 17 '17 at 15:10
11

Conceptually, you should think of it like this: You issue your employee a paycheck, and your employee then turns around and purchases the amount of wheat from you which equals the entire net amount of the paycheck. You in turn report the amount you sold the wheat for as income. If you do this (and perhaps you should), then your payment to the employee is partially offset by the income you received (minus employee paid taxes), and you are out the wheat. Simply skipping the step of printing the check does not relieve you or your employee of any tax liability.

If you choose to sell wheat to your employee at a discount, that's fine, so you can effectively lower the tax burden for both of you by doing this, however, the price you charge must be considered reasonable with the discount (note the IRS uses the term "fair market value"). You cannot lower the price down to zero.

  • 2
    Your last paragraph needs clarification. Lowering the price of a commodity given as salary would either be tax fraud (i.e. lying about the price) or slavery (i.e. a worker is not being paid for work done), pick your poison. There is nothing forbidding giving away goods for free, but in the context of the question the above applies. – Mindwin Jan 17 '17 at 10:54
  • @Mindwin - If the farmer paid the worker money and the worker purchased the entire pay's worth of wheat, the price would be agreed upon and it would be reasonable to provide a discount for your employees. A discount means more wheat for the employee. In this case, the quantity of wheat is already predetermined but the price may not have been, so a price needs to be established in order to figure wages and taxes. I am simply suggesting that when reverse calculating the price, it is reasonable to price the wheat at a discount, as long as it still fits within the bounds of "fair market value". – TTT Jan 17 '17 at 16:06
10

Farm income is a separate beast under Schedule F. There may be a basis for the CPA'S assertion in regards to a farm-income concept of "commodity wages" though I don't have the expertise to parse "if the substance of the transaction is a cash payment" in the quote from pub 225 below:

IRS Pub. 225

Noncash wages (including commodity wages).    Noncash wages include food, lodging, clothing, transportation passes, and other goods and services. Noncash wages paid to farmworkers, including commodity wages, aren't subject to social security and Medicare taxes. However, they are subject to these taxes if the substance of the transaction is a cash payment. For information on lodging provided as a condition of employment, see Pub. 15-B.

Report the value of noncash wages in box 1 of Form W-2 together with cash wages. Don't show noncash wages in box 3 or in box 5, (unless the substance of the transaction is a cash payment).

5

It's not a payment "in kind". Payment "in kind" refers to barter transactions where similar kinds of items are exchanged (prepared food for prepared food at a dinner party, for example). Exchanging labor for a commodity is not a payment in kind. And, therefore, it is not a type of barter which is exempt from taxation. The good news is that, unless you sell all the wheat, you can declare its value as if you purchased it at a wholesale price (which may reduce the amount of tax that you owe).

  • Thanks, I was wondering where the "payment in kind" phrase was coming from. Apparently it is incorrectly used, but I knew it must come from somewhere. – Kyle Jan 17 '17 at 19:11
  • 1
    "unless you sell all the wheat" - does that imply that if you sell it all, you might have sold the amount given to the worker at a higher price, and therefore the higher price should be used in the calculation? – TTT Jan 17 '17 at 20:43
  • Even if it was in-kind (which doesn't require exchange of similar goods. It is just an exchange of non-monetary goods.) It would still be consider income and the tax must be paid on the value of the goods at the time of the exchange. – Matthew Whited Jan 17 '17 at 22:33
  • @Matthew Whited, "barter" is an exchange of non-monetary goods. Barter of goods or services of the same kind doesn't have to be reported. If it did, then all interactions between people would have to be reported as long as someone somewhere charges for the same type of interaction. For example, tutoring in math in exchange for tutoring in history? Both have individuals would have to report it as an income. In the same manner, exchanging apples for frozen meat would have to be reported as income by both sides. But at what price? – grovkin Jan 18 '17 at 21:25
  • in-kind covers barter. And all interactions where a profit is made are supposed to be reported... we just don't – Matthew Whited Jan 18 '17 at 21:27

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.