As many farmers know, employing family members to work on the farm is essential for success. What many may not know are the potential tax benefits for both the business and the family members who are employed. Paying family members a wage provides a range of benefits, including tax deductions, the fair distribution of farm income, potential tax-free income for the family members, and the opportunity for children to invest in a Traditional or Roth IRA for future savings, all while ensuring fairness in compensation.

Wages paid to your spouse or children are fully deductible, which lowers net income and income taxes due. An important note when compensating family members is that their rate should be comparable to what you would pay a non-family member. It is common for children to contribute to family-run farms during evenings, weekends, or summer breaks, so why not pay them a fair wage and take the deduction for your business?

Paying your children a wage can help distribute farm income amongst family members and shift taxable income to those in lower tax brackets. There are even instances where your children may not have to pay any income taxes on the wages earned.

In 2024, the standard deduction for individuals is $14,600. As long as individuals, including your children, stay under this threshold, they will not have to pay any federal or state income taxes. Notably, this applies to all income earned within the year. If your children have another job, take this into consideration as they may have some taxable income if they go over that threshold.

For sole proprietorships or partnerships owned by both parents, if your child is under the age of 18 neither the business or child are typically subject to Social Security, Medicare, or Federal Unemployment taxes. You are subject to these taxes if you own a corporation or partnership where one partner is not a parent. If your child is aged 18-20 or you are paying your spouse, they are subject to Social Security and Medicare taxes, but not Unemployment. For children aged 21+, the business must treat them as ordinary employees for payroll tax purposes.

An additional benefit to paying your children a wage is it gives them the ability to invest their earnings into a Traditional or Roth IRA to save for the future. For 2024, the contribution limit for those under age 50 is $7,000.

HBE is Here to Help

Navigating the complexities of compensating family members can be challenging. Consulting with your accountant ensures all payroll tax filings and reporting requirements are met. HBE’s specialized agriculture team is committed to identifying the most suitable options for you. Our goal is to leave you feeling confident that you have a well-reasoned plan and solid strategy in place. Contact one of our trusted tax advisors today to explore how we can assist you.