For the purposes of this article, we will refer to farms and ranches and “farm(s),” and farmers or ranchers as “farmer(s).”

One great opportunity that can be missed on the family farm may be the hiring of your children to work for your operation. Hiring children to work can provide several benefits and help teach children about personal money management.

Key Benefits

Tax Deductibility of Wages

Farmers can deduct reasonable wages paid to their children for farm work as a business expense on Schedule F. This reduces the overall taxable income of the farm business.

Exemption from Social Security and Medicare Taxes

Wages paid to a child under the age of 18 for work on a farm that is a sole proprietorship, or a partnership in which each partner is a parent of the child, are not subject to Social Security and Medicare taxes. This can result in significant tax savings.

No FUTA Tax

Wages paid to a child under the age of 21 for work on a farm are not subject to the Federal Unemployment Tax Act (FUTA) tax. This further reduces the tax burden on the farm business.

Income Shifting

By paying wages to their children, farmers can shift income from themselves (who may be in a higher tax bracket) to their children (who are likely in a lower tax bracket). This can reduce the overall family tax burden.

Retirement Savings

Wages paid to children can be used to fund their Individual Retirement Accounts (IRAs), providing them with a head start on retirement savings. Contributions to a traditional IRA may be tax-deductible, further reducing taxable income.

Educational and Financial Responsibility

Employing children on the farm can teach them valuable skills, work ethics, and financial responsibility. It can also provide them with practical experience and a better understanding of the family business.

Family Bonding and Succession Planning

Working together on the farm can strengthen family bonds and prepare the next generation for potential future roles in the family business. It can also be an integral part of succession planning, ensuring that the farm remains within the family.

I have an uncle who did this on his farm while his kids were growing up. His children were paid an hourly rate that was appropriate for their age and the work they provided on the family farm instead of paying them an allowance. In turn, they had their own “fun money,” purchased their own school clothes and supplies, bought their own cars and gas when they were ready to drive, and learned responsibility and money management throughout the process.

As I’ve described here and witnessed in person, hiring children to work on a family farm can provide significant tax benefits, educational opportunities, and strengthen family ties. In addition to contributing to the overall efficiency and sustainability of the farm business.

If you are interested in hiring your children to work for your operation, or other tax savings opportunities, please consult with one of our Ag Tax Experts at KT.