the farmer's children

[Taxman10]

Many years ago, a farmer had a son, then another, then another.

All three boys grew up on the farm, milking cows, baling hay, etc.

boy 1 grows up, goes to college, marries and moves away

boy 2 grows up, goes to college, marries and moves away

boy 3 grows up, goes to college, studies agriculture, comes home and lives on the farm with mom and dad, still milking cows, baling hay, etc.

My question is, when if ever do the boys become employees of the Dad? Should he have been paying them wages and reporting on a w-2 as soon as they starting working on the farm? (around 4 or 5?) All three worked on the farm until they graduated college.

Is Boy 3 an employee now, b/c he moved back home after college?

Thoughts? discuss. Thanks!

[mwcpa]

all amounts paid to the children is probably compensation for services as "employees".... I am sure every statutory test to be an independent contractor would fail.... now if the children were doing "chores" and the farmer did not try to take a tax deduction then it probably is not income, just like getting a buck to do the dishes is not...

the son who now works and is being paid for his effort is most definitely an employee

there are certain exclusions (federal) from having to remit "payroll" taxes when minor children work for a family business...check publication 15 (or is it 15A... someone will correct me if I am wrong).... a few years ago I had a client engage their child to do "office" work for the family business.... no federal payroll taxes were due, but there were state issues, Mom and Dad got a "wage" deduction and the child had wage income (no tax as they were paid an amount that was less than allowable deductions)

[Taxman10]

Thanks MW -- just to clarify though. None of the kids have been or are being paid.

Son #3 doesn't receive any $$ from his parents, but he does live with them, drive their truck, eat their food, etc.

He's basically running the farm now, and plans to inherit it when they pass.

[cpadvisor]

There are a variety of strategies to save money by employing the kids. There are also strategies used by employing a spouse. Provided they actually perform services to the business and the compensation is reasonable. Usually it is better to pay tax at the kids rate vs the parents as the kids are likely in a lower tax bracket. And you don't have to worry about kiddie tax with earned income as described in above...

There are additional opportunities with farm clients as "payments in kind" aka "payments in commodities" can be utilized to avoid Self-Employment tax. Find a CPA that understands farm tax returns.

There are also estate planning strategies to use when you have a farming family with some heirs that plan to farm vs those that have "other jobs." You can be fair to all while keeping the family farm in the family.

[commentator]

Examples that follow up on cpadvisor's comment include requiring son #3 to live in the farmhouse as a condition of employment. Then his room and board are tax free to him while the cost of those items is deductible by the farmer.