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A Guide For Farmers, Growers And Crew Leaders

SSA Publication No. 05-10025, January 2005 [View .pdf] Get Accessible Adobe Acrobat Reader  ICN 455350 (En EspaƱol)

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Contents

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Social Security’s benefit package

Reporting farm workers’ income

Employer’s responsibilities

Reporting your own income to Social Security

Who should report farm income

How to report your earnings

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About this booklet

If you own or operate a farm, ranch, orchard or other place where you grow fruits, vegetables or flowers for sale, or if you are a grower or crew leader, this booklet has important information for you. It tells what you are paying for with your Social Security and Medicare taxes, how to report your employees’ income to Social Security and why it is important that you do so. It also tells you how to report your own income to Social Security, whether you are an owner/operator, partner, renter, share farmer or crew leader.

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Social Security’s benefit package

Generally, the Social Security benefits to which workers are entitled are based on how much income they have earned and is reported to us. That is why accurate income and wage reporting are so important.

Your Social Security and Medicare taxes pay for:

  • Retirement insurance—Benefits paid every month to retired workers—as early as age 62.

  • Disability insurance—Benefits paid every month to workers of all ages who have a severe disability. In some cases, a young worker may qualify for a disability benefit with as little as one and one-half years of work.

  • Family insurance—Benefits paid every month to the spouse and children of retired or disabled workers.

  • Survivors insurance—Benefits paid every month to the widow or widower and children of a deceased worker. In some cases, the family of a young deceased worker can receive these benefits even if the worker had as little as one and one-half years of work.

  • Medicare insurance—Assistance with hospital bills, as well as limited coverage of skilled nursing facility stays, hospice care and other medical services.

Accurate reporting of wages is more than just a tax matter. It helps determine who is eligible for Social Security and how much they and their families can receive. That is why we always stress the importance of recording the right name, Social Security number and earnings for you and each of your employees. Make sure you use the name and number exactly as they are shown on the Social Security card.

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Reporting farm workers’ income

Most farm workers are covered by Social Security. If you employ covered workers, you must keep records of their wages, withhold their Social Security and Medicare taxes, report their wages and pay all taxes due. If you do not, you may be subject to a penalty. If a farm worker complains to Social Security that wages were not reported, and if he or she has proof of those wages, the violation will be reported to the Internal Revenue Service (IRS).

Farm workers under your direction and control cannot be considered independent contractors. They are employees and their wages must be reported to Social Security.

When are farm workers covered?

Farm workers are covered by Social Security if you pay them:

  • 150 or more in cash wages during the calendar year for farm work; or
  • Less than $150 in cash wages, but your total expenses for agricultural labor are $2,500 or more in a year.

However, if you employ seasonal hand-harvest laborers who commute to work daily from their homes, who are paid on a piece-rate basis and who did less than 13 weeks of farm work the previous year, a different rule applies. Their work is covered under Social Security only if you pay the employee at least $150 in cash for the job.

Who is the “employer” of farm workers?

Some farmers hire crew bosses who are independent contractors to handle all their wage-reporting responsibilities. However, if a written agreement states that the crew leader is the farmer’s employee, the farmer is responsible for all wage reporting and recordkeeping. If no written agreement exists, use the following rules:

  • If the crew leader pays the workers (even if it is for the farmer), then the crew leader is the employer; or
  • If the farmer pays the workers, then whoever has the final right to control the workers on the job is the employer.

NOTE: If you employ farm workers, you may need to register with the U.S. Department of Labor as a farm labor contractor. For more information, contact the Department of Labor’s Wage and Hour Division listed in most telephone directories under U.S. Government, Department of Labor, Employment Standards Administration.

How to prepare a written agreement

If the farmer and crew leader agree that the farmer will handle Social Security matters and that the crew leader is the farmer’s employee, they should prepare a written agreement. No special form is needed, but the agreement should be signed by both parties and include:

  • Name and address of the farmer and the crew leader;
  • Location of farm, kind of crop and operation and approximate dates of the work;
  • A statement that the crew leader will furnish a crew to do the work;
  • A statement that the crew leader and crew workers are employees of the farmer who will report their wages and pay Social Security and Medicare taxes that are due; and
  • A statement about charges made by the crew leader for services, wages to be paid to workers and any transportation, housing and insurance to be provided.

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Employer’s responsibilities

If you employ farm workers, you must:

  • Keep a record for each worker—Show the worker’s name, Social Security number (copy it only from the Social Security card), cash wages paid and taxes you withhold. If the farm worker is subject to the Migrant and Seasonal Agricultural Workers Protection Act, the record also must show: the rate of pay; total hours worked each day and each week; the date that wages were paid; and the period of time covered by the payment.

  • Collect and pay Social Security taxes—Generally you must pay the tax periodically during the year, using deposit coupons from Form 8109, Federal Tax Deposit Coupon Book, available from the IRS.

  • Prepare Form 943—Once a year you must complete IRS Form 943 (Employer’s Annual Federal Tax Return for Agricultural Employees). It is normally due on January 31 for wages paid in the preceding year. You have until February 10 if you deposited all taxes with your coupons for the preceding year.

  • Provide a pay statement and prepare a W-2 form—After the year ends, prepare a W-2 (Wage and Tax Statement) for each employee who was paid any wages. Include the cash value of any payment that was not in cash in the “wages, tips, other compensation” block of the W-2, but show only cash wages in the “Social Security wages” block and the “Medicare wages and tips” block. Send Copy A of the W-2 along with a W-3 Form (Transmittal of Income and Tax Statements) to the Social Security Administration by the last day of February following the year in which wages were paid. (The address for your area is in the instructions for Form W-3.) Give copies of the W-2 to the employee by January 31 of the year following the year he or she earned the wages.

If the farm worker moves frequently and has trouble getting mail, you can give him or her a W-2 when the job ends, instead of waiting until January 31 of the next year. For more information, get IRS Publication 51, Circular A (Agricultural Employer’s Tax Guide). You can order IRS forms and publications by calling 1-800-Tax-Form (1-800-829-3676).

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Reporting your own income to Social Security

Making sure you get credit for your own earnings is just as important as reporting your employees’ income to Social Security. Owner-operators, partners, landlords who take an active role in the farm operation, tenants, renters, share farmers or crew leaders who are independent contractors are all covered under Social Security.

Types of farm arrangements

Here are examples of the most common types of farm arrangements and how the earnings from each must be reported.

Family arrangement

Usually on a family-operated farm, the head of the household is considered to be self-employed, and the farm income is credited to that person. This is true even though other family members may help on the farm. In some cases, all of the family members have a partnership, and all earn Social Security credit based on the farm income. If a husband and wife operate a farm as a partnership, they must report their share of the profits for Social Security purposes separately, even though they file a joint income tax return.

Farm partnership

A farm partnership is formed when two or more persons get together to carry on a farming operation. The agreement between partners is usually written, but it can be oral.

Signs that a partnership exists include:

  • Contribution of land or money or services by each;
  • The right of each partner to take part in management;
  • The sharing of profits or losses;
  • Mutual agency, where each partner can act for the other; or
  • Joint liability, so that each partner is liable for debts incurred through the partnership.

Each partner is responsible for reporting his or her own share of profits for Social Security purposes.

Farm rental agreements

Probably no two farm rental agreements are exactly alike. But all are similar in that the landlord lets the tenant use the farm to produce farm products and the tenant agrees to pay the landlord in cash or crop shares.

If you own land or rent land from someone else, and then rent or lease that land to another person, you are a “landlord.”

The arrangement between landlord and tenant can be oral or written. The advantage of a written arrangement is that it makes it easier to establish intent. An oral agreement may later make it necessary to obtain statements from the tenant and others who know the facts about how the two planned to operate.

The cash or crop share that a landlord receives from a tenant can be included as farm income for Social Security purposes only if the landlord has an active role in the production or management of the crop or livestock. This is called “material participation.”

Both the “materially participating” landlord and the renter/tenant/share farmer must report their own earnings for Social Security purposes.

Crew leaders and farm labor contractors

If you are a crew leader, you are either an employee of the farm owner/operator who hired you or an independent contractor. Your situation depends entirely on arrangements you made with the farm owner/operator.

If you are an employee, the farmer must give you pay statements and W-2 forms and withhold Social Security and Medicare taxes, as explained in Employer’s responsibilities.

However, if you are an independent contractor, you are considered a self-employed person just like the farmer, and you are responsible for paying your own Social Security and Medicare taxes.

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Who should report farm income

Anyone who has net earnings of $400 or more in one year must report those earnings and pay Social Security and Medicare taxes on them.

If you have less than $400 net profit, you still may be able to pay the taxes and thus earn the Social Security and Medicare protection by using the “farm optional method” of reporting.

Figuring net earnings

In general, your net farm earnings are your profits from your farm operation, which are figured by subtracting allowable farm business expenses, including depreciation, from your gross farm income.

Any federal agricultural program payments you receive must be counted in figuring your earnings.

However, the following kinds of income should not be counted when figuring net earnings for Social Security purposes:

  • Income from the sale of equipment and livestock not held for sale (such as dairy, breeding, sporting and work animals);
  • Income from timber sold on the stump;
  • Income from land sales;
  • Rental income received by a landlord who does not actively participate in the operation of a farm; and
  • Crop/livestock that a share farmer gives to, or sells for, the landlord.

NOTE: You may owe Social Security and Medicare (self-employment) tax even if your earnings are so low that you do not owe any income tax.

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How to report your earnings

You use tax form Schedule F (Profit or Loss From Farming) to report your income and expenses for the year. Then you must complete Schedule SE (Self-Employment Tax) to figure out how much you should pay in taxes for Social Security and Medicare. File these forms along with your Form 1040 (U. S. Individual Income Tax Return).

Farm optional method

If you have low net earnings or a loss, you may want to use the “farm optional method” for reporting income. Using this method, you can report more net profit than you actually had, letting you pay the self-employment tax on this amount and get Social Security and Medicare protection. You may use this method in either one of the following situations:

  • If your gross income is $2,400 or less, you have the option of reporting your real net profit or two-thirds of your gross income amount.
  • If your gross income is more than $2,400, but your net income is less than $1,600, you have the option of reporting your real net profit or $1,600.

Estimated taxes

If two-thirds of your gross income comes from farming, you may have to pay estimated income and self-employment taxes before the April 15 federal tax deadline. Generally, if you file your tax return and pay all taxes due by March 1, you do not need to pay estimated taxes. However, if you are going to wait until April 15 to file your tax return, then you must pay estimated taxes by January 15, using Form 1040-ES (Estimated Tax for Individuals). You also can spread the payment of these taxes out by completing the estimated tax worksheet in the instructions for the Form 1040-ES and including the amount of your self-employment tax in the estimate.

Tax forms and more information

More detailed information is available in IRS Publication 225, Farmer’s Tax Guide. To request this publication and the tax forms you need, call IRS’ toll-free number, 1-800-Tax-Form (1-800-829-3676).

The forms are also available from IRS offices or at most banks and post offices.

In addition, you also can get all IRS forms and publications on the Internet at www.irs.gov/formspubs/index.html.

If you have questions about income tax returns or taxes, contact any IRS office or call 1-800-829-1040, toll free. The toll-free number for the deaf or hard of hearing is 1-800-829-4059.

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