About This Episode
Shay Foulk, recording from a combine cab, asks Paul Neiffer to explain payment in kind. The idea is old: farm labor was once paid in beef or milk, and it was written into the code about a century ago. An employer can pay an employee, including an owner-employee if the farm is a corporation, in corn, soybeans, or wheat. The commodity is still income to the employee, who then holds an asset and books a capital gain or loss when it sells.
The savings are payroll taxes, not income taxes. Neiffer is direct that there is no double deduction: $10,000 of commodity wages books as $10,000 of wages offset by $10,000 of corn sales on the employer's side. What goes away is the 15.3 percent FICA and Medicare load, split between employer and employee, plus federal unemployment and, in most states, state unemployment. He warns that rank-and-file employees living paycheck to paycheck are a poor fit for grain wages.
For families, a sole proprietor can pay cash wages to a child under 18 free of payroll tax, and the child owes no federal tax up to about $13,850. After 18, commodity wages take over. Gifted grain held a year and a day is typically tax-free when wages cover more than half of the child's support. Neiffer also covers grain donations: with a standard deduction near $30,000, giving grain instead of cash produces a deduction most farmers would otherwise lose.
“You're only saving on the payroll taxes. There really is no additional income tax savings.”
— Paul Neiffer
Key Takeaways
Commodity wages avoid the 15.3 percent FICA and Medicare load plus federal unemployment and, in most states, state unemployment tax.
There is no income tax savings: the employer books the wage and an offsetting commodity sale, so no double deduction exists.
A sole proprietor's child under 18 can take cash wages free of payroll tax and owe no federal income tax up to roughly $13,850.
Grain gifted to a child and held a year and a day is typically tax-free when the wages paid cover more than half of that child's support.
Donating grain rather than cash keeps the income off Schedule F, effectively adding a deduction on top of the roughly $30,000 standard deduction for a married couple.
Technically the grain should be transferred into the charity's name and sold by the charity; Neiffer estimates about 80 percent of donations skip that step.
Full Transcript
Shay: Welcome back everyone to another episode of the Ag View Pitch. Today you have Shay Poles with Paul Niefer. Paul, I'm coming to you from the combine cab. Where are you at in the world today?
Paul
Neiffer: Well, yesterday you would have got me in the combine cab. I was actually operating an X9, a brand new X9 down in southwest Missouri for a couple hours, so That's a very nice machine.
Shay: There you go. How are crops doing on your farm there, Paul?
Paul
Neiffer: You know, I had— we got hit by wind. Now, I had a 40 that was not hit by the wind very bad. It did about 230, but my quarter section ended up about 190. So, yeah, I was actually riding the combine on that corn and about half or more of it was just lying flat on the ground. So you just know you're going to have, you know, it's it's not going to be very good. But I still actually— I'm happy with $190, really.
Shay: Yeah, no, that's great. Paul, we're having a conversation today around payment in kind, and I got to thinking of you last week. There's a couple operations that we work with utilizing payment in kind. I was wondering if you could maybe just give a brief overview on what that is, and then I'll ask you some probing questions there.
Paul
Neiffer: Yeah. So the idea behind payment in kind, if we go back 100 years or so, a lot of the farm labor was paid in kind. You know, it would have been a half section of beef. It might have been milk. It might have been, you know, various commodity— farm commodities that were paid to the laborers. So that was codified in the code, like I say, about 100 years ago. And what it says is if you pay an employee, including yourself if your farm operation is a corporation of some type. But if you pay an employee, um, let's say corn or soybeans or wheat or whatever it might be, that is still income to the employee, but now they have an asset that they later on sell. They're going to have a capital gain or capital loss related to whether it goes up or down. But the benefit, the big benefit, is that there is no self-employment— or excuse me, no payroll taxes on that.
So there's no FICA, there's no Medicare. Typically in almost all states there's no state unemployment. You know, I think some states will assess it, but most states do not assess state unemployment taxes. Typically there's no— well, there is no federal unemployment taxes. So that's really the big benefit, is that you're escaping that essentially the 15.3%— you know, FICA and Medicare tax, half by the employee and half by the employer.
Shay: So is it also then that the employer is not getting taxed on that income and then turning around and having, you know, having to pay what you just said on the FICA and Medicare, and then also the employee then gets taxed on, you know, their compensation? So it seems like there's pretty big tax savings here in that scenario.
Paul
Neiffer: Yeah, there is no real income tax savings, you know, that I think sometimes that's a misconception. Remember the, the so-called journal entry when we book this at the, at the employer level is, let's say that we're giving the employee $10,000 worth of corn. On our books, we're going to debit, or we're going to say that we have $10,000 of wages, but we're going to offset it with $10,000 of corn sales. Because really, effectively, what we've done is we sort of sold the corn for $10,000 and gave it to the employee. So you're not getting a double deduction really with commodity wages or in-kind wages. You're only saving on the payroll taxes. There really is no additional income tax savings. It's purely a payroll tax savings. So I think sometimes people don't understand the fact that, hey, you still have to pick up the income over on the employer side.
Shay: Right, well that's good clarification. That's why I wanted to ask there, Paul. I know some operations use this internally, especially with kids in the family, maybe, maybe before they're on full payroll or as they kind of come up and are doing work from the time that they're, you know, however old where they're physically contributing to the farm operation. Do you have any examples of that or any ways that you've seen that work well? Any watchouts on that, Paul?
Paul
Neiffer: Yeah, there's, there's actually the, the nice feature about— let's say you have a sole proprietor, you know, just a Schedule F farmer. The kids that are under age 18, they can actually pay cash wages to that child, and it's not subject to payroll taxes, similar to commodity wages. And the benefit for that is right now a child can make about $13,850, I think. I think that's the number at the federal level and not owe any taxes. It's a deduction to the farm operation. The child picks up the income, but they don't pay any taxes. There's no— it reduces the self-employment tax for the parents. Now the key is it has to be a child under age 18. Once they hit age 18, then the farmer can go ahead and pay the child in commodity wages and The taxes would be what we talked about.
Now the other benefit of that is let's say the child's getting ready to go to college and the parents want to pay them for working on the farm, but also maybe give them some commodities, give them some corn or wheat or soybeans. That actually is a benefit because as long as that wage that's paid to them is more than 50% of their support and they hold that gifted grain, you know, the grain that not the wages, but the gifted grain for at least a year and a day, that's typically going to be tax-free. So it's a pretty good benefit, and a lot of farm families really don't take advantage of it.
Shay: Yeah, who doesn't this work for, or maybe how should this not be utilized? You know, someone listening to this is thinking, oh, I can use it for this or that. Is there any watchouts here or anything that you've seen? Hey, don't do it that way.
Paul
Neiffer: Yeah, the primary benefits are for the owners and their kids. If you have the rank and file employee that has no farm operation of their own and so on, typically those farm employees are living paycheck to paycheck. They can't really wait for that grain wage to be paid to them and so on. Now, if you have an employee that maybe has their own little farm operation on the side, You know, that can work out okay, but for the typical rank-and-file employee, commodity wages really— they work, but they don't work as well. So that would be the caution I have on that.
Shay: Okay. I think while we're on the topic, if we don't have much more there, Paul, I'd like to just add in maybe a charitable contributions outlook too. I know we've done that in our operation. Talk through maybe how that grain delivery works there or other strategies that people might be looking at.
Paul
Neiffer: Yeah, so the key benefit for most farmers now, they're not itemizing their deductions. The standard deduction is almost $30,000 now for a married farm couple, and really there's no benefit for— a tax benefit for making a donation to your church or to the school or whatever it might be. Whereas if you donate grain to the church or to the school, you effectively are getting an extra deduction via the fact that you don't have to pick up that grain income. You don't have to recognize the grain income. Let's say you give $10,000 of grain to the church. Effectively, you reduce your Schedule F income by $10,000, and you still get the standard deduction. You effectively have gotten an extra $10,000 deduction in that situation. Most rural communities, churches and schools and so on, understand this.
Technically, I'm going to use the word technically, you know, you're supposed to have the grain get transferred into the name of the charity, and then the charity is supposed to individually go ahead and sell that grain. Now, I'll be the first to admit that a lot of people just call the local elevator, hey, take $10,000 worth of corn and write a check to the church, and they call that a commodity wage— that, I mean, a commodity gift. Technically, that's not correct, but, you know, I would say that's probably what happens in 80% of the situations.
Shay: Gotcha. And you referenced $10,000 there. I mean, if it's a larger amount, I mean, if someone wants, or, you know, church wants to, you know, sell that grain or has been gifted that grain, $50,000 or $100,000, does that make a difference, Paul?
Paul
Neiffer: No, that, that actually is just still a benefit to the farmer because remember, if the farmer sold their grain for $100,000, they're going to have to report self-employment tax on that. They get the deduction, the offsetting deduction, but that doesn't reduce self-employment tax. So yes, if a farmer— let's say there's a big pledge at the local church and they're trying to help out the church or the school and they want to donate $50,000 or $100,000 That's the commodity gift is always still going to work very well.
Shay: Okay. Oh, that's great. And what Chris and I always say when it comes to transition is in that scenario, from like a gifting standpoint, or as you're doing a transition, is do you want to invest in Uncle Sam or do you want to invest in the next generation? And I think that's a similar scenario here, Paul, is do you want to invest in your church and your local community, or do you want to invest in Uncle Sam. So any closing thoughts here, Paul?
Paul
Neiffer: No, I think we've covered commodity wages, commodity gifts pretty well.
Shay: Okay, well I hope this is helpful to those of you that are sitting in the combine. Paul, you got any more future combine rides in your outlook or what do you got shaking?
Paul
Neiffer: I do. I'm actually going to be out at the Iowa farm riding or operating a combine for Chris here in about another 2 weeks, and I'm going to be actually in Maryland. You know the people that I'm talking about in Maryland. I'm going to be back there. Um, you know, one will be red and one will be green, but they still basically— they still basically do the same thing.
Shay: So yeah, now that's awesome. Well, Paul, thank you for the time, and thank you everyone for listening to another episode of the AFU Pitch, and we will catch you next time.