For the purposes of this article, we will refer to both farms and ranches and “ranch(es),” and farmer or rancher as “rancher(s).”

I know a person who is a ranch employee for a large ranch and feedlot operation. Each fall, his employer pays him an annual bonus with a “load of corn.”  They receive a statement from the grain elevator on the date the load is transferred from the ranch owner to the ranch manager that states the price per bushel at the date and time of transfer. They also receive a sale bill written and paid to the ranch employee for the sale of the corn (usually on the same day) showing the sale of the “load of corn.” 

This “noncash” payment of wages is an example of using commodity wages, and it can save on taxes for both the ranch owner and the employee. Commodity wages for ranch workers involve paying employees with non-cash items such as crops, livestock, or other ranch products instead of cash.

The tax implications, reporting requirements, and specific regulations for paying ranch workers in the form of commodities are detailed below:

Tax Implications

Social Security & Medicare Taxes

  1. Generally, ranch workers do not have to pay Social Security and Medicare taxes on non-cash wages, including commodity wages. The Internal Revenue Code specifies that remuneration paid in any medium other than cash for agricultural labor is excluded from the definition of wages for FICA purposes.
  2. However, if the IRS determines that the transaction is essentially a cash payment disguised as a commodity payment to avoid taxes, it may reclassify the payment as cash wages subject to Social Security and Medicare taxes.

Federal Income Tax Withholding

  1. Employers generally do not withhold federal income tax on non-cash wages, including commodity wages, unless they agree with the employee to do so.
  2. Employers should include the value of non-cash wages in the employee’s gross income and report it on Form W-2 in box 1, but not in boxes 3 or 5 unless the transaction is essentially a cash payment.

Federal Unemployment Tax (FUTA)

  1. Employers do not have to pay FUTA tax on non-cash wages for agricultural labor.

Documentation

  1. Employers should keep detailed records of the commodity payments, including the date of transfer or sale, the type and quantity of commodities, their valuation at the time of transfer, and any related agreements or contracts.

Ranch workers generally do not have to pay Social Security, Medicare, and FUTA taxes on commodity wages unless the IRS deems the arrangement to be a disguised cash payment. Employers must report the value of these wages on Form W-2 and maintain thorough documentation. If the IRS determines that the primary purpose of such payments is to avoid taxes and the arrangement lacks a substantial business purpose, it may reclassify them as cash wages.

As always, the IRS does have a few specific regulations that apply to this type of transaction. If you are interested in how this or other tax saving strategies may apply to your ranch operation, please consult with your KT Ag Tax Expert for details.