Tax Guide for Farmers – Deductible Expenses, Part 3

For those who own a farm or are otherwise in the farming business, they need to know there are specific requirements in the Internal Revenue Code that govern the unique types of income and expense only associated with farming. Those unique expenses include hired labor.

This article is the third in a series on the various deductible business expenses associated with farming. The previous articles on deductible expenses covered Prepaid Farm Supplies and Prepaid Livestock Feed.

Hired Labor

You are permitted to deduct reasonable wages paid for hired farm labor to perform farming operations. This includes labor paid in cash or non-cash items, including inventory or other assets produced by your farm. The deductible cost of hired labor includes costs other than their direct pay, including room and board, health insurance, workers’ compensation insurance, and other worker benefits.

When you must withhold Medicare, social security benefits, and income tax from the wages of your hired labor, you can deduct the full amount of wages before withholding. In addition, you can deduct the employer’s share of Medicare and social security taxes you must pay related to your hired labor’s wages as a business expenses of your farm on Schedule F.

Property Paid for Services

If you pay for services rendered by giving your hired labor property, you can deduct the fair market value of the property on the date it was given as a part of farm wages. If the hired labor pays you anything in return for the property, you must reduce the amount you deduct by the monies paid to you by the hired labor.

If the adjusted basis in the property at the time it is transferred for payment of wages is different than the fair market value of the property, you must also report the gain or loss on the property.

Spouse and Children as Hired Labor

You can deduct reasonable wages and other compensation paid to your children or your spouse for farm-related labor they perform, so long as there is an employer-employee relationship between you and your child or spouse that is similar in nature to any other hired labor.

In the case of children, depending on the amount of the pay, they may have to file an income tax return. In addition, if the child is 18 years old or older, their wages may be subject to Medicare and social security tax withholding.

Non-Deductible Pay

You cannot deduct amounts paid to the following types of workers.

Construction Workers

You cannot deduct wages paid to hired labor for the construction of new buildings or the improvement of existing buildings. Wages paid for construction are considered a cost of the building and must therefore be capitalized and depreciated over the useful life of the building.

Household Workers

You cannot deduct wages paid to hired labor responsible for household work, except to the extent that household work is related to the boarding of hired farm labor.

Home Maintenance

You cannot deduct wages paid to hired labor for any time they spend maintaining or otherwise repairing your home, even if the hired labor typically performs responsibilities related to farming operations. Wages paid related to maintenance and repair of your home are considered personal expenses and are therefore not deductible.

Employment Credits

You must reduce the deduction you take for wages paid to hired farm labor by the amount of any employment credits you claim, such as the work opportunity credit for qualified tax-exempt organizations who hired qualified veterans. Use Form 5884-C to calculate the tax implications of such credits.

How can I get additional help with my income tax return?

If you need help preparing your income tax return or you just have questions about how to minimize your income tax, you need to work with a tax attorney. There are tax attorneys who can help you, who have experience and training about the tax laws that govern farm-related income and expense.

You can speak with a tax attorney who can give you the help you need by completing the form below or by calling the phone number located at the topic of this web site. The initial consultation with a tax attorney is free of charge, and all conversations are completely confidential.

Therefore, you have every reason to get in touch with a tax attorney today.

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by Mark Johnston

Mark has been a contributor to legal web sites related to bankruptcy, tax, and criminal law since 2011. He has an Accounting degree from Texas A&M University.