Farm employers generally get help from family, part-time workers, youth, and sometimes contractors; however, they’re still responsible for processing payroll and taxes like a non-farm business. The process for doing agriculture payroll is similar to that which most employers follow, but there are some exceptions. Depending on how much you pay in wages, who you’re paying, and how you’re paying them, you (and your employees) may be exempt from payroll taxes.
If you’re completely new to payroll, it may be helpful for you to review our How to Do Payroll guide. You’ll need to account for the differences noted in this article though, because some payroll responsibilities are specific to the farming industry.
Steps to Doing Agriculture Payroll
Here’s a quick summary of the steps you’ll need to follow to do agriculture payroll:
Initial Steps to Setting up Farm Payroll System
- Set your business up as an employer: Apply for Federal and State Employer ID numbers, payroll bank account, electronic tax payment accounts.
- Establish payroll process: Will you pay hourly, salary, or piece rate? How will you track time? Will you pay weekly, biweekly, or semimonthly? Benefits? Outsourcing vs doing payroll in-house? Paying in cash, by direct deposit, check, or non-cash commodities?
- Gather new hire paperwork: I-9 Forms, W-4 Forms, and W-9 Forms (for contractors).
Steps to Run Payroll Each Pay Period
- Verify each employee’s work time or units produced: Employees should submit time sheets or a doc showing the units they produced during the pay period. They may also log it on an app.
- Calculate payroll due, including taxes: Use a calculator or Excel to help calculate payroll amounts.
- Withhold money for taxes and other deductions: Withhold money for federal, state, and local taxes (if applicable; there are some exceptions). Also, pay benefits providers (like insurance providers) or debtors (for garnishments), if needed.
- Pay employees: Cash, direct deposit, check, non-cash; be sure to withhold money for taxes and deductions, if they apply.
- Pay taxes: Frequency depends on how much you owe.
Periodic Steps for Payroll Tax Reporting
- File Form 943 annually: To report federal taxes (employees’ and your employer share) annually.
- Furnish W2 and 1099 forms by Jan. 31 of following year: Send W2 copies to employees and 1099s to contractors; send a copy of all to the IRS and keep copies for yourself.
If you need affordable payroll software to help you run your agriculture payroll, consider OnPay. It automatically separates tax filings for agricultural workers and your non-farm employees. It can also pay and process for workers on H-2A visas. You’ll pay $40 monthly for one employee, but you can sign up for a free 30-day trial today.
Pay Rate for Farm Workers
When it comes to paying agricultural workers, many farm employers opt to pay by the hour or piece (units produced). Regardless of which rate you choose, farm workers must receive at least the federal minimum wage of $7.25 per hour (or your state minimum wage, if it’s higher), unless you can get an exemption from minimum wage requirements.
Minimum Wage for Agricultural Workers
It’s easy to confirm you’ve paid employees the minimum wage amount if you have a system for tracking their work hours (you can print your own time sheets); however, some farm employers opt not to track work time if paying a piece rate. This is a mistake. If an employee who is paid a piece rate doesn’t produce enough to earn the minimum wage amount, you must legally pay them the difference. To avoid compliance issues, you should maintain records of all employees’ work time, regardless of what rate they’re paid.
There are instances in which you may be required to pay more than the federal or state minimum wage:
- If you agreed to pay a piece rate and the employee produced or picked enough to earn more than minimum wage
- If you agreed to pay a higher wage rate when hiring the employee
- If state law requires overtime (currently, New York and California)
Overtime Pay for Agricultural Workers
At the federal level and in most states, farm employers aren’t required to pay their employees overtime pay. In other industries, overtime pay is required: It’s an increased pay rate (time and a half) for any hours worked over 40 in a workweek. If you’re in California or New York, you are required to pay farm workers overtime. And if you’re in Washington, we recommend you stay tuned in to pending legislation as it’s headed in a similar direction, although nothing has passed.
Work Time on the Farm
Since minimum wage and overtime are based on hours worked, it’s essential that we define work time. Any time that the employee spends actively doing what you hired them to do (tending to animals, clearing land, etc.) should be included. In addition, you should also include the following in your employees’ work time calculation:
- Short rest breaks (10- or 15-minute duration)
- Any time the employee isn’t permitted to leave the workplace
- Travel between fields during the workday
- Time spent waiting for a field to dry
- Time waiting for a machine to be repaired
While each state has its own laws governing how often you must pay employees, federal law requires you to pay employees no less than every two weeks or semimonthly (twice per month). In addition, you’re also not allowed to pay any farm workers late. Farm workers are generally paid low wages and thus receive some protections from the Department of Labor.
You can pay employees using cash, check, money order, and even direct deposit if you like. If wages are fairly low, less than $100 for the year, paying electronically wouldn’t make sense, because it usually costs extra.
Paying Farm Employees With Non-Cash Items
You can also opt to pay farm employees using non-cash items, like grain or other products produced on your farm. If you do this, you won’t need to withhold or pay money for payroll taxes on the value of the items given. However, to ensure you don’t run into any problems with the IRS down the road, we recommend you do the following:
- Document the non-cash payment: What items are you paying the employee with? How much are the items worth? What work are you paying the employee for? Hours? Units produced? What pay period does the payment cover?
- Ensure the employee bears all of the risk: Be sure you complete the transfer of goods in full; for instance, it wouldn’t be a good idea to invite a buyer to drop by the moment you intend to transfer the non-cash items to your employee. If the employee plans to sell the items for cash, let them do it on their own time and after the items are in their possession.
- File payroll reports: Although you’re not responsible for paying taxes on goods you issue as payment to employees, you still need to report it to the IRS. Be sure to estimate the value of the items so you can document it correctly. Add the amount in their total paycheck for the period to ensure you’ve met minimum wage requirements.
Youth Labor Laws Farm Employers Must Follow
If you have anyone working for you who is under the age of 16, you are subject to the federal agricultural youth laws. This differs from other industries that are required to treat any employees under the age of 18 as youth.
Agricultural workers who are between the ages of 12 and 15 are allowed to work hours outside of school hours as long as the job isn’t considered hazardous by the Secretary of Labor. However, for 12- and 13-year-old farm workers, you must have written parental consent or also employ their parent(s) or guardian on the same farm.
Payroll Records for Farm Businesses
We’ve mentioned the importance of maintaining adequate payroll records, like employee work hours and related wages, but let’s dive a little deeper into what that means.
- Provide pay stubs on each pay day: Be sure your pay stub template includes space for pay rates (hourly or piece rate/units earned), number of hours worked, total earnings, deductions (taxes, meals, benefits), net pay, employer’s name and address, workers’ name, address, and Social Security number.
- Start a personnel file for each worker: A personnel file should include an employee’s name and Social Security number, along with a corresponding employee ID number, if you’ve assigned one. Also, keep record of basic information like birth date, address, occupation, etc.
- Maintain records of pay: Pay stub copies, regular pay rate plus any pay increases, overtime earnings per pay period, all deductions, payment dates and pay periods worked, time sheets
You’re legally required to keep an employee’s pay records on file for at least three years after the document date. Since this is sensitive information, it’s a good idea to keep them in a safe place that only you have access to. Many employers are opting to save these documents in the cloud; if you’re running payroll on your own (without the help of payroll software), you can scan them to your computer and save them as PDF files.
Payroll Taxes for Farm Workers
As a farm employer, you may have to collect and pay payroll taxes; this depends on how many people you’re paying as well as how much you’re paying out in total. Before we talk about the scenarios in which you can be exempt from certain taxes, let’s list the payroll (or employment) taxes employers are generally responsible for:
- Social Security and Medicare (FICA) taxes: 12.4% of an employee’s earnings; You pay 7.65% and withhold the other 7.65% from the employee’s pay.
- Federal income taxes: You have to withhold money from employee paychecks to cover this federal income tax bill. The amount you withhold is based on IRS withholding tables and the information employees provide on their W-4 form.
- State and local income taxes: You have to withhold money from employee paychecks to cover any money due. The amount you withhold is based on the individual state the employee resides in; some states don’t charge a state income tax, while others charge a state and local tax.
- Federal unemployment taxes (FUTA): You pay this amount from your farm business account; it’s a flat 6% on the first $7,000 of an employee’s earnings but can be decreased to 0.6% if you are up-to-date with state unemployment taxes.
- State unemployment taxes (FUTA): You pay this amount from your farm business account; amounts vary by state.
Take note of which taxes you are required to pay from your bank account as the employer and which ones you can pay from employee paychecks.
Payroll Tax Exemptions for Agricultural Employers
Now that we’ve covered the taxes you may need to pay, let’s see if you qualify for any exemptions.
You won’t need to pay or withhold money for FICA taxes if you paid less than $150 to any one employee during the year OR less than $2,500 to all employees during the year.
You won’t be subject to paying federal unemployment taxes if you paid less than $20,000 in any quarter within the current or prior tax year OR employed 10 or more farm workers during at least some part of the day during any 20 or more different weeks in the current or prior tax year.
If you’re paying any H-2 foreign nationals, they are exempt from FICA (and so are you).
Payroll Tax Exemptions When Paying Family for Farm Labor
If you hire any of your children who are under 18 to work for you, you will not need to withhold money for income taxes or FICA taxes. If your child is 17 and will turn 18 during the year, any wages earned after that date will not be tax-exempt. As for federal unemployment taxes, you will be exempt from paying that on your children’s earnings if they are under the age of 21.
In addition, if your parents do work on the farm for you, you won’t need to pay unemployment taxes on their earnings.
Tip: Include any wages paid to your children and/or parents in your calculation to determine whether or not you need to pay unemployment taxes (the $2,500 test), even if you don’t have to pay taxes on it.
Payroll Taxes for Independent Contractors
If you hire contractors to work for you, you won’t need to pay or withhold any money for payroll taxes. They will square their tax bill up with the IRS themselves at the end of the year.
We do recommend you be careful when classifying workers as contractors. If you mistakenly classify employees as contractors, the IRS can enforce penalties, fees, and other financial consequences to recoup the money and damages.
When it comes to contractors, you don’t control how they work; at most, you can set expectations on what the final product should be. With employees, you can set their work hours and strategy.
If you’re only paying contractors to work on your farm and need a quick and affordable way to pay them, consider Gusto. It costs $6 monthly per contractor, and during months you don’t pay your worker(s), you don’t pay Gusto for the service. In addition, the software will prepare required year-end 1099 forms, so you can email them with the click of a button. Sign up for a free trial today.
Payroll Tax Deposit Rules
Withholding and setting aside money for payroll taxes is only half the journey. You’ll need to file and pay them to the appropriate tax agencies as well. We recommend using the IRS Electronic Federal Tax Payment System (EFTPS) to make your payments. You must deposit and file FICA, FUTA, and federal income taxes with the IRS. Many employers pay these taxes on a quarterly basis, but how frequently you need to deposit them depends on how much you owe.
FUTA Tax Deposit Rules for Farm Businesses
- If you owe and have not paid more than $500 in FUTA tax for the current year at the end of any quarter, you must make a deposit at the end of the following month.
- If you find that you owe less than $500 in FUTA tax at the end of any of the first three quarters of the year, you don’t have to make a deposit just yet.
- If you owe and have not paid $500 or less in FUTA tax at the end of the fourth quarter, you can choose to make a deposit or pay the balance with your annual tax return (Form 940).
FICA and Federal Income Tax Deposit Rules for Farm Businesses
- If your total FICA and federal income taxes due are less than $2,500 for the year, you can pay when you file your annual Form 943.
- If you estimate that your total FICA and federal income taxes due will be less than $2,500 for the year, you can pay when you file your annual Form 943.
- If you estimate that your total FICA and federal income taxes due will be more than $2,500 for the year, you will need to pay throughout the year, according to the schedule the IRS requires for your particular employment situation—semiweekly or monthly.
Year-end Tax Reports
All farm employers who are required to pay FICA and/or withhold federal income taxes are required to file Form 943, Annual Tax Return for Agricultural Employers, with the IRS by Jan. 31 of the following year—Feb. 10 if you’re up-to-date on taxes and filed them electronically throughout the year. You’ll also need to file Form 940 to report your federal unemployment taxes.
Your employees will also have to file taxes with the IRS for the year, and you’ll need to provide them with the proper paperwork to do so. Complete a W2 Form for each employee that shows their total earnings for the year, taxes withheld, etc., and mail them a copy by Jan. 31. You’ll also need to keep a copy on file for yourself as well as send the IRS a copy. Include a W3 with all of the W2 forms, as it should provide a summary of all of the information in total.
If you happen to have an employee who stops working midyear and doesn’t return before the end of the year, you can send the form before January. If they die, send it to their next of kin within 30 days of their death.
Independent contractors should receive a 1099 Form instead of a W2; send it by Jan. 31 to stay in compliance with IRS regulations. You’ll also need to send copies to the IRS along with a 1096 summary form.
There are penalties for not paying taxes or employees in the correct amount and on time:
- Back wages and additional money for damages endured by workers who have been underpaid
- Payment of civil penalties
- An injunction stopping the shipment of any good produced that violate federal labor laws
- Debarment of an H-2A employer from using the program for one to three years if found violating any program rules
- Farm Labor Contractor’s certificate can be suspended or taken away completely; contractor can be placed on the public list of ineligible contractors
Managing payroll and taxes is a common challenge all employers face, but certain industry-specific payroll, like agriculture, has some nuances. You and your employees may be exempt from paying certain taxes, but you’ll need to evaluate carefully to be sure. And regardless of what method you use to pay your workers, you should keep careful documentation and be sure to comply with all required minimum wage and overtime laws.