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Labor has always been an issue in farming. Every year, finding individuals willing to work on a farm is harder and harder. Farmers are forced to be creative. Some invest in robotics, while others use the H-2A program to find workers. To keep key employees, farmers sometimes offer equity in their operations.

One question that often comes up is how one should pay farm labor. Following are some of the most common methods to pay owners and employees of farming operations.

W-2/INDEPENDENT CONTRACTORS

If you have employees, depending on how much control you have over their job, you can pay them as independent contractors or employees. There is no magic formula to determine an employee versus an independent contractor; the key is to look at the entire relationship. If the employer has enough control over the worker, he or she is an employee. If the worker has autonomy, he or she is an independent contractor.

According to the IRS, there are three categories to look at when determining worker classification: behavioral control, financial control and relationship. Behavioral control is when the employer has the right to direct or control the work performed. Financial control is the employer's right to direct or control the financial and business aspects. Relationship is how the employer and worker perceive their interactions with each other.

How do you pay employees and independent contractors? Employees are paid wages, which are reported on a 943â??/â??W-2. Independent contractors are paid with cash or commodities, and the employer reports it on a 1099 form. The independent contractor is responsible for paying the self-employment tax on his or her return. The employer has no fiduciary duty to collect and remit payroll tax; the responsibility is on the independent contractor.

Keep in mind: If you are an owner of an S corp, you should pay yourself a reasonable wage via W-2.

GUARANTEED PAYMENTS

Many people ask if they should pay wages to owners of a partnership. Owners of a partnership do not get a W-2 -- they are paid through distributions or guaranteed payments.

Distributions are payments made through the distribution of money or property out of the partnership. If you have basis, the distributions are tax-free. If you do not have basis, the distributions can be taxable.

Guaranteed payments are similar to wages. They are taxed as ordinary income subject to self-employment tax. Like wages, the partnership deducts the guaranteed payment as an expense. Guaranteed payments are also required for certain nonwage items, such as health insurance and contributions to a 401(k) or retirement plan on the owner's behalf.

H-2A

Due to the labor shortage, many farms rely on the H-2A program. This program allows farms to employ workers from a foreign country on a temporary or seasonal basis. H-2A workers are not statutory employees, so they are not subject to Social Security tax or Medicare tax. However, they are issued a W-2 like other employees. Also, employers must collect the W-4 and withholding allowance certificate. If the H-2A employee doesn't have a taxpayer identification number, the employer is required to back up withholding.

Just because an employee is H-2A doesn't mean he or she will not have a U.S. tax liability. If the H-2A worker earns more than the standard deduction, there would be a tax liability. In my experience, most H-2A workers do not file a tax return. However, when they want a green card, they must file back taxes. This results in considerable tax, interest and penalties. So, if an H-2A worker is considering becoming a U.S. citizen, encourage them to file tax returns regardless of how much they make.

Labor and payroll are something to take very seriously. If you make a mistake, it could be costly. Make sure you ask your lawyer or accountant if you have any questions about how to classify and pay your workers.

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-- DTN Tax Columnist Rod Mauszycki, J.D., MBT, is a tax principal with CLA (CliftonLarsonAllen) in Minneapolis, Minnesota.

-- Read Rod's "Ask the Taxman" column at https://www.dtnpf.com/…

-- You may email Rod at taxman@dtn.com

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