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Pub. 225, Farmer's Tax Guide 2004 Tax Year

Chapter 13 - Employment Taxes

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Table of Contents

What's New for 2005

Increase to FUTA tax deposit threshold. The Treasury Department recently amended Regulations section 31.6302(c)-3 to increase the accumulated FUTA tax deposit threshold from $100 to $500. The $500 threshold applies to FUTA tax deposits required for taxes reported on Forms 940, 940-EZ, and 940-PR, Employer's Annual Federal Unemployment (FUTA) Tax Return, for tax periods beginning after December 31, 2004.

Additional federal holiday. January 20, 2005, is Inauguration Day and has been designated as a federal holiday for tax purposes. Tax returns due on that day may be filed on the next business day. Also, January 20, 2005, is not a banking day under federal tax deposit rules.

Wage limit for social security tax. The limit on wages subject to the social security tax for 2005 will be published in Publication 51 (Circular A), Agricultural Employer's Tax Guide. There is no limit on wages subject to the Medicare tax.

Household employees. Household employees, such as maids, babysitters, gardeners, or cooks, who perform domestic service on a farm operated for profit are not agricultural employees. However, they may still be employees for social security, Medicare, and federal unemployment taxes. See the instructions for Schedule H (Form 1040).

Reminder

Electronic deposits of taxes. You must use the Electronic Federal Tax Payment System (EFTPS) to make electronic deposits of all depository tax liabilities you incur in 2005 and thereafter if you deposited more than $200,000 in federal depository taxes in 2003 or you had to use EFTPS in 2004. See Electronic Federal Tax Payment System (EFTPS) under Reporting and Paying Social Security, Medicare, and Withheld Income Taxes.

Introduction

You are generally required to withhold federal income tax from the wages of your employees. You may also be subject to social security and Medicare taxes under the Federal Insurance Contributions Act (FICA) and federal unemployment tax under the Federal Unemployment Tax Act (FUTA). This chapter includes information about these taxes.

You must also pay self-employment tax on your earnings from farming. See chapter 12 for information on self-employment tax.

Topics - This chapter discusses:

  • Farm employment

  • Family employees

  • Crew leaders

  • Social security and Medicare taxes

  • Income tax withholding

  • Advance payment of the earned income credit

  • Reporting and paying social security, Medicare, and withheld income taxes

  • Federal unemployment (FUTA) tax

Useful Items - You may want to see:

Publication

  • 15 (Circular E), Employer's Tax Guide

  • 15-A Employer's Supplemental Tax Guide

  • 15-B Employer's Tax Guide to Fringe Benefits

  • 51 (Circular A), Agricultural Employer's Tax Guide

  • 926 Household Employer's Tax Guide

Form (and Instructions)

  • W-2
    Wage and Tax Statement

  • W-4
    Employee's Withholding Allowance Certificate

  • W-5
    Earned Income Credit Advance Payment Certificate

  • W-9
    Request for Taxpayer Identification Number and Certification

  • 940 (or 940-EZ)
    Employer's Annual Federal Unemployment (FUTA) Tax Return

  • 943
    Employer's Annual Federal Tax Return for Agricultural Employees

  • 8109
    Federal Tax Deposit Coupon

See chapter 16 for information about getting publications and forms.

Farm Employment

In general, you are an employer of farm workers if your employees do any of the following types of work.

  • Raising or harvesting agricultural or horticultural products on a farm.

  • Operating, managing, conserving, improving, or maintaining your farm and its tools and equipment.

  • Handling, processing, or packaging any agricultural or horticultural commodity if you produced more than half of the commodity.

  • Work related to cotton ginning, turpentine, or gum resin products.

For more information, see Publication 51 (Circular A).

Workers are generally your employees if they perform services subject to your control. You are not required to withhold or pay employment taxes for independent contractors who are not your employees. For more information, see Publication 15-A, Employer's Supplemental Tax Guide.

If you employ a family of workers, each worker subject to your control (not just the head of the family) is an employee.

Special rules apply to crew leaders. See Crew Leaders, later.

Employer identification number (EIN).   If you have employees, you must have an EIN. If you do not have an EIN, request one on Form SS-4, Application for Employer Identification Number. The instructions for Form SS-4 provide information on how to apply for an EIN by telephone, internet, fax, or mail. Form SS-4 is available from either the IRS or the Social Security Administration (SSA). See chapter 16 for information about ordering this form.

Employee's social security number (SSN).   An employee who does not have an SSN should submit Form SS-5, Application for a Social Security Card, to the Social Security Administration (SSA). Form SS-5 is available from any SSA office or by calling 1-800-772-1213. It is also available from the SSA's website at www.socialsecurity.gov.

  The employee must furnish evidence of age, identity, and U.S. citizenship (or lawful alien status) with the Form SS-5. An employee who is age 18 or older must appear in person with this evidence at an SSA office.

Form I-9.    You must verify that each new employee is legally eligible to work in the United States. This includes completing the Form I-9, Employment Eligibility Verification. Form I-9 is available from the U.S. Citizenship and Immigration Services (USCIS) offices or by calling 1-800-870-3676. It is also available from the USCIS website at www.immigration.gov. You can contact the USCIS at 1-800-375-5283 or 1-800-357-2099 for more information.

New hire reporting.   You are required to report any new employee to a designated state new hire registry. Many states accept a copy of Form W-4 with employer information added. Call the Office of Child Support Enforcement at 202-401-9267 or visit its website at www.acf.dhhs.gov/programs/cse/newhire for more information.

Family Employees

Generally, the wages you pay to family members who are your employees are subject to employment taxes. However, certain exemptions may apply to wages paid to your child, spouse, or parent.

Exemptions for your child.   Payments for the services of your child age 17 or younger who works for you in your trade or business (including a farm) are not subject to social security and Medicare taxes. However, see Nonexempt services of a child or spouse, later. Payments for the services of your child age 20 or younger employed by you in other than a trade or business, such as payments for household services in your home, are also not subject to social security or Medicare taxes. Payments for the services of your child age 20 or younger employed by you, whether or not in your trade or business, are not subject to federal unemployment (FUTA) taxes. Although not subject to social security, Medicare, or FUTA tax, the child's wages still may be subject to federal income tax withholding.

Exemptions for your spouse.   Payments for the services of your spouse who works for you in your trade or business are subject to federal income tax withholding and social security and Medicare taxes, but not FUTA tax. However, payments for the services of your spouse employed by you in other than a trade or business, such as payments for household services in your home, are not subject to social security, Medicare, or FUTA taxes.

Nonexempt services of a child or spouse.   Payments for the services of your child or spouse are subject to federal income tax withholding as well as social security, Medicare, and FUTA taxes if he or she works for any of the following entities.

  • A corporation, even if it is controlled by you.

  • A partnership, even if you are a partner. This does not apply to wages paid to your child if each partner is a parent of the child.

  • An estate, even if it is the estate of a deceased parent.

In these situations, the child or spouse is considered to work for the corporation, partnership, or estate, not you.

Exemptions for your parent.    Payments for the services of your parent employed by you in your trade or business are subject to federal income tax withholding and social security and Medicare taxes. Social security and Medicare taxes do not apply to wages paid to your parent for services not in your trade or business, but they do apply to payments for household services in your home if both the following conditions are satisfied.

  • Your child lives in your home and is age 17 or younger or requires adult supervision for at least 4 continuous weeks in a calendar quarter due to a mental or physical condition.

  • You are a widow or widower, divorced, or married to a person who, because of a physical or mental condition, cannot care for the child during such period.

  Wages you pay to your parent are not subject to FUTA tax, regardless of the type of services provided.

Crew Leaders

If farm workers are provided by a crew leader, the crew leader may be the employer of the workers.

Social security and Medicare taxes.   For social security and Medicare tax purposes, the crew leader is the employer of the workers if both of the following requirements are met.

  • The crew leader pays (either on his or her own behalf or on behalf of the farmer) the workers for their farm labor.

  • The crew leader has not entered into a written agreement with the farmer under which the crew leader is designated as an employee of the farmer.

Federal income tax withholding.   If the crew leader is the employer for social security and Medicare tax purposes, the crew leader is the employer for federal income tax withholding purposes.

Federal unemployment (FUTA) tax.   For FUTA tax purposes, the crew leader is the employer of the workers if, in addition to the earlier requirements, either of the following requirements are met.

  • The crew leader is registered under the Migrant and Seasonal Agricultural Worker Protection Act.

  • Substantially all crew members operate or maintain mechanized equipment provided by the crew leader as part of the service to the farmer.

  The farmer is the employer of workers furnished by a crew leader in all other situations. In addition, the farmer is the employer of workers furnished by a registered crew leader if the workers are the employees of the farmer under the common-law test. For example, some farmers employ individuals to recruit farm workers exclusively for them. Although these individuals may be required to register under the Migrant and Seasonal Agricultural Worker Protection Act, the workers are employed directly by the farmer. The farmer is the employer in these cases. For information about common-law employees, see section 1 of Publication 15-A.

Social Security and Medicare Taxes

All cash wages you pay to an employee during the year for farm work are subject to social security and Medicare taxes if you meet either of the following tests.

  • You pay the employee $150 or more in cash wages during the year for farm work (the $150 test).

  • You pay cash and noncash wages of $2,500 or more during the year to all your employees for farm work (the $2,500 test).

If the $2,500 test for the group is not met, the $150 test for an individual still applies.

Exceptions.   Annual cash wages of less than $150 you pay to a seasonal farm worker are not subject to social security and Medicare taxes, even if you pay $2,500 or more to all your farm workers. However, these wages count toward the $2,500 test for determining whether other farm workers' wages are subject to social security and Medicare taxes.

  A seasonal farm worker is a worker who:

  • Works as a hand-harvest laborer,

  • Is paid piece rates in an operation usually paid on this basis in the region of employment,

  • Commutes daily from his or her permanent home to the farm, and

  • Worked in agriculture less than 13 weeks in the preceding calendar year.

  See Family Employees, earlier, for certain exemptions from social security and Medicare taxes that apply to your child, spouse, and parent.

Religious exemption.    An exemption from social security and Medicare taxes is available to members of a recognized religious sect opposed to insurance. This exemption is available only if both the employee and the employer are members of the sect.

  For more information, see Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers.

Cash wages.   Only cash wages paid to farm workers are subject to social security and Medicare taxes. Cash wages include checks, money orders, and any kind of money or cash.

  Only cash wages subject to social security and Medicare taxes are credited to your employees for social security benefit purposes. Payments not subject to these taxes, such as commodity wages, do not contribute to your employees' social security coverage. For information about social security benefits, contact the Social Security Administration. Internet users can go to www.socialsecurity.gov for more information.

Noncash wages.    Noncash wages include food, lodging, clothing, transportation passes, and other goods and services. Noncash wages paid to farm workers, including commodity wages, are not subject to social security and Medicare taxes. However, they are subject to these taxes if the substance of the transaction is a cash payment.

  Report the value of noncash wages on Form W-2 in box 1, Wages, tips, other compensation, together with cash wages. Do not show noncash wages in box 3, Social security wages, or in box 5, Medicare wages and tips (unless the substance of the transaction is a cash payment).

Tax rates and social security wage limit.   For 2005, the employer and the employee will each pay both the following taxes.

  • 6.2% of cash wages for social security tax (old-age, survivors, and disability insurance).

  • 1.45% of cash wages for Medicare tax (hospital insurance).

Wage limit.   The limit on 2005 wages subject to the social security tax will be published in Publication 51 (Circular A). There is no limit on wages subject to the Medicare tax. All covered wages are subject to the Medicare tax.

Paying employee's share.   If you would rather pay the employee's share of social security and Medicare taxes without deducting it from his or her wages, you may do so. It is additional income to the employee. You must include it on the employee's Form W-2 in box 1, but do not count it as social security and Medicare wages (boxes 3 and 5 on Form W-2) or as wages for federal unemployment (FUTA) tax purposes.

Example.

Jane operates a small family fruit farm. She employs day laborers in the picking season to enable her to timely get her crop to market. She does not deduct the employees' share of social security and Medicare taxes from their pay; instead, she pays it on their behalf. When her accountant, Susan, prepares the employees' Forms W-2, she adds each employee's share of social security and Medicare taxes paid by Jane to the employee's wage income (box 1 of Form W-2), but does not include it in box 3 (social security wages) or box 5 (Medicare wages and tips).

Jane paid Mary $1,000 during the year. Susan enters $1,076.50 in box 1 of Mary's Form W-2 ($1,000 wages plus $76.50 social security and Medicare taxes paid for Mary). She enters $1,000 in boxes 3 and 5.

Federal Income Tax Withholding

If the cash wages you pay farm workers are subject to social security and Medicare taxes, they are also subject to federal income tax withholding. Although noncash wages are subject to federal income tax, withhold income tax only if you and the employee agree to do so. The amount to withhold is figured on gross wages without taking out social security and Medicare taxes, union dues, insurance, etc.

Form W-4.   Generally, the amount of federal income tax you withhold is based on the employee's marital status and withholding allowances claimed on the employee's Form W-4. In general, an employee can claim withholding allowances on Form W-4 equal to the number of exemptions the employee will be entitled to claim on his or her tax return. An employee may also be able to claim a special withholding allowance and allowances for estimated deductions and credits.

  Do not withhold federal income tax from the wages of an employee who, by filing Form W-4, certifies that he or she had no federal income tax liability last year and anticipates no liability for the current year.

  You should give each new employee a Form W-4 as soon as you hire the employee. Have the employee complete and return the form to you before the first payday. If the employee does not return the completed form to you, you must withhold federal income tax as if the employee is single and claims no withholding allowances.

New Form W-4 for 2005.    You should make the 2005 Form W-4 available to your employees and encourage them to check their income tax withholding for 2005. Those employees who owed a large amount of tax or received a large refund for 2004 may want to file a new Form W-4.

How to figure withholding.   You can use one of several methods to determine the amount to withhold. The methods are described in Publication 51 (Circular A), which contains tables showing the correct amount of federal income tax you should withhold. Publication 51 (Circular A) also contains additional information about federal income tax withholding.

Nonemployee compensation.   Generally, you are not required to withhold federal income tax on payments for services to individuals who are not your employees. However, you may be required to report these payments on Form 1099-MISC, Miscellaneous Income, and to withhold under the backup withholding rules.

Advance Payment of Earned Income Credit

An employee who is eligible for the earned income credit (EIC) and who has a qualifying child is entitled to receive EIC payments with his or her pay during the year. To get these payments, the employee must give you a properly completed Form W-5, Earned Income Credit Advance Payment Certificate. You are usually required to make advance EIC payments to employees who give you a properly completed Form W-5, but you are not required to make these payments to farm workers paid on a daily basis.

The payment is added to the employee's pay each payday. It is figured from tables in Publication 51 (Circular A). You reduce your liability for federal income tax withholding, social security tax, and Medicare tax by the total advance EIC payments made. For more information, see Publication 51 (Circular A).

Notification.   You must provide notification about the EIC to each employee who worked for you at any time during the year and from whom you did not withhold any income tax. However, you do not have to notify employees who claim exemption from federal income tax withholding on Form W-4.

  You meet the notification requirement by giving each employee any of the following.

  • Form W-2, which contains the notification on the back of Copy B.

  • A substitute Form W-2 with the exact EIC wording shown on the back of copy B of Form W-2.

  • Notice 797, Possible Federal Tax Refund Due to the Earned Income Credit (EIC).

  • Your own written statement with the exact wording of Notice 797.

  For more information about notification requirements and claiming the EIC, see Notice 1015, Have You Told Your Employees About the Earned Income Credit (EIC).

Reporting and Paying Social Security, Medicare, and Withheld Federal Income Taxes

You must withhold federal income, social security, and Medicare taxes required to be withheld from the salaries and wages of your employees. You are liable for the payment of these taxes to the federal government whether or not you collect them from your employees. If, for example, you withhold less than the correct tax from an employee's wages, you are still liable for the full amount. You must also pay the employer's share of social security and Medicare taxes.

Form 943.   Report withheld federal income tax and social security and Medicare taxes on Form 943. The 2004 form is due by January 31, 2005 (or February 10 if the taxes were timely deposited in full).

Deposits.   Generally, you must deposit both the employer and employee shares of social security and Medicare taxes and federal income tax withheld (minus any advance earned income credit payments) during the year. However, you may make payments with Form 943 instead of depositing them if you accumulate less than a $2,500 tax liability during the year (line 11 of Form 943) and you pay in full with a timely filed return.

  For more information on deposit rules, see Publication 51 (Circular A).

Electronic Federal Tax Payment System (EFTPS).   You may have to deposit taxes using EFTPS. You must use EFTPS to make deposits of all depository tax liabilities (including social security, Medicare, withheld federal income, excise, and corporate income taxes) you incur in 2005 if you deposited more than $200,000 in federal depository taxes in 2003. If you first meet the $200,000 threshold in 2004, you must begin depositing using EFTPS in 2006. Once you meet the $200,000 threshold, you must continue to make deposits using EFTPS in later years even if subsequent deposits are less than the $200,000 threshold.

  If you must use EFTPS but fail to do so, you may be subject to a 10% penalty.

  If you do not have to use EFTPS because you did not meet the $200,000 threshold, you can voluntarily make deposits using EFTPS. If you are using EFTPS voluntarily, you will not be subject to the 10% penalty if you make a deposit using a paper coupon.

  For information about EFTPS, access the IRS website at www.eftps.gov or see Publication 966, Electronic Choices for Paying ALL Your Federal Taxes.

  To enroll in EFTPS, call one of the following phone numbers.

  • 1-800-945-8400

  • 1-800-555-4477

  Or to enroll online, visit www.eftps.gov.

Form W-2.   By January 31, you must furnish each employee a Form W-2 showing total wages for the previous year and total income tax and social security and Medicare taxes withheld. However, if an employee stops working for you and requests the form earlier, you must give it to the employee within 30 days of the later of the following dates.

  • The date the employee requests the form.

  • The date you make your final payment of wages to the employee.

Trust fund recovery penalty.   If you are responsible for withholding, accounting for, depositing, or paying withholding taxes and willfully fail to do so, you can be held liable for a penalty equal to the withheld tax not paid. A responsible person can be an officer of a corporation, a partner, a sole proprietor, or an employee of any form of business. A trustee or agent with authority over the funds of the business can also be held responsible for the penalty.

Willfully means voluntarily, consciously, and intentionally. Paying other expenses of the business instead of the taxes due is acting willfully.

Federal Unemployment (FUTA) Tax

You must pay FUTA tax if you meet either of the following tests.

  • You paid cash wages of $20,000 or more to farm workers in any calendar quarter during the current or preceding calendar year.

  • You employed 10 or more farm workers for some part of at least 1 day during any 20 or more different calendar weeks during the current or preceding calendar year.

These rules do not apply to exempt services of your spouse, your parents, or your children under age 21. See Family Employees, earlier.

Alien farm workers.   Wages paid to aliens admitted on a temporary basis to the United States to perform farm work (also known as H-2(A) visa workers) are exempt from FUTA tax. However, include your employment of these workers and the wages you paid them to determine whether you meet either test above.

Commodity wages.   Payments in kind for farm labor are not cash wages. Do not count them to figure whether you are subject to FUTA tax or to figure how much tax you owe.

Tax rate and credit.   The gross FUTA tax is 6.2% of the first $7,000 cash wages you pay each employee. However, you are given a credit of up to 5.4% for the state unemployment tax you pay. The net tax rate, therefore, can be as low as 0.8% (6.2% - 5.4%). If your state tax rate (experience rate) is less than 5.4%, you may still be allowed the full 5.4% credit.

  If you do not pay the state tax, you cannot take the credit. If you are exempt from state unemployment tax for any reason, the full 6.2% rate applies. See the instructions for Form 940 for additional information.

More information.   For more information on FUTA tax, see Publication 51 (Circular A).

Reporting and Paying FUTA Tax

The FUTA tax is imposed on you as the employer. It must not be collected or deducted from the wages of your employees.

Form 940.   Report FUTA tax on Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return. The 2004 form is due January 31, 2005 (or February 10, 2005, if you deposit the tax on time and in full).

Form 940-EZ.   You can use Form 940-EZ, a simplified version of Form 940, if you meet all the following tests.

  • You paid unemployment contributions to only one state.

  • You paid all state unemployment contributions by the due date of Form 940 or 940-EZ.

  • All wages subject to FUTA tax were also subject to your state's unemployment tax.

  • Your state has not been designated a “credit reduction state” by the U.S. Department of Labor.

Deposits.   If at the end of any calendar quarter you owe, but have not yet deposited, more than $100 in FUTA tax for the year, you must make a deposit by the end of the following month. If the undeposited tax is $100 or less at the end of a quarter, you do not have to deposit it. You must add it to the tax for the next quarter. If the total undeposited tax is more than $100 at the end of the next quarter, a deposit will be required. If the total undeposited tax at the end of the 4th quarter is $100 or less, you can either make a deposit or pay it with your return by the January 31, 2005, due date.

  
Tax tip
 For tax periods beginning after December 31, 2004, the accumulated FUTA tax deposit threshold increases from $100 to $500.

Electronic deposit requirement.   If you are subject to the electronic deposit requirement, you must use EFTPS to deposit FUTA tax. See Reporting and Paying Social Security, Medicare, and Withheld Income Taxes, earlier, for a discussion of the requirement for making deposits electronically.

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