Payroll tax on wheat given as wages

Question

We have a farm in the US, with an employee paid with wheat rather than money. He is an ordinary employee that receives a W2. My accountant said that we don't have to withhold income tax or pay either employee or employer portions of FICA tax on his income, because it is "payment in kind".

Its hard to say why this sounds iffy, but in my experience with taxes, usually something that creates an obvious loophole is not correctly understood. For example, I could just operate the farm as a corporation, make myself an employee, take all profit as "payment in kind", and not pay self employment tax. Obvious loophole = I think my accountant is wrong about this.

Is my accountant wrong about "payment in kind" not being subject to payroll tax?

If not, is she partially correct in any way, in that, are there any changes to payroll tax requirements relating to "payment in kind", which might explain her position?

Would the situation be different if he was also paid in cash, like 50% cash reimbursement and 50% wheat reimbursement?

Please state the experience you have that justifies your answer. Thanks.

Answer 1

The CPA is mostly correct. Her use of "in kind" may be confusing, but it appears that while our gut would call this "bartering" and refer to the rules regarding same, there's a different set of rules that apply to farm workers.

The following appears in IRS Pub 51 Agricultural Employer's Tax Guide -

Noncash wages (including commodity wages). Noncash wages include food, lodging, clothing, transportation passes, farm products, or other goods or commodities. Noncash wages paid to farmworkers, including commodity wages, aren't subject to social security taxes, Medicare taxes, or federal income tax withholding. However, you and your employee can agree to have federal income tax withheld on noncash wages.

You can see, Social Security, for those paid 100% in non-cash wages, is avoided, legally, but federal tax is still due.

Answer 2

Conceptually, you should think of it like this: You issue your employee a paycheck, and your employee then turns around and purchases the amount of wheat from you which equals the entire net amount of the paycheck. You in turn report the amount you sold the wheat for as income. If you do this (and perhaps you should), then your payment to the employee is partially offset by the income you received (minus employee paid taxes), and you are out the wheat. Simply skipping the step of printing the check does not relieve you or your employee of any tax liability.

If you choose to sell wheat to your employee at a discount, that's fine, so you can effectively lower the tax burden for both of you by doing this, however, the price you charge must be considered reasonable with the discount (note the IRS uses the term "fair market value"). You cannot lower the price down to zero.

Answer 3

Farm income is a separate beast under Schedule F. There may be a basis for the CPA'S assertion in regards to a farm-income concept of "commodity wages" though I don't have the expertise to parse "if the substance of the transaction is a cash payment" in the quote from pub 225 below:

IRS Pub. 225

Noncash wages (including commodity wages).    Noncash wages include food, lodging, clothing, transportation passes, and other goods and services. Noncash wages paid to farmworkers, including commodity wages, aren't subject to social security and Medicare taxes. However, they are subject to these taxes if the substance of the transaction is a cash payment. For information on lodging provided as a condition of employment, see Pub. 15-B.

Report the value of noncash wages in box 1 of Form W-2 together with cash wages. Don't show noncash wages in box 3 or in box 5, (unless the substance of the transaction is a cash payment).

Answer 4

It's not a payment "in kind". Payment "in kind" refers to barter transactions where similar kinds of items are exchanged (prepared food for prepared food at a dinner party, for example). Exchanging labor for a commodity is not a payment in kind. And, therefore, it is not a type of barter which is exempt from taxation. The good news is that, unless you sell all the wheat, you can declare its value as if you purchased it at a wholesale price (which may reduce the amount of tax that you owe).