Understanding “In-Kind” Compensation
The IRS defines in-kind compensation as payment made in goods or services instead of cash. This can include anything from meals and lodging to crops or livestock. This form of payment provides some advantages to both the employer and employee if they follow specific criteria.
For example, if an employer gives an employee a bushel of corn instead of $5.00, it is still taxable income. It is just in a non-cash form. The tax authorities treat the fair market value (FMV) of the corn at the time of transfer like cash wages. So, you must report it on a W-2 at the end of the year.
Wage Payments: Potential Benefits for Employers
Paying wages in goods does not remove the need to report or tax these wages. However, there are benefits for employers regarding tax duties. Farmers can use this method in smart ways in farming-related industries.
- Potential exemption from Social Security, Medicare & Federal Unemployment Taxes
- Employees may have greater buy-in to the success of the crop
- Employer may not be required to withhold any Federal Income Tax
- However, the wages are still taxable, with taxes due at the employee level
- Generally simplifies reporting and administrative burdens for the employer
- Employees can sell their own grain to benefit from price increases. This can improve their situation. However, they may face losses if prices go down.
Compliance Requirements
Even when paying in commodities, the IRS requires:
- W-2 Reporting: The fair market value of non-cash compensation must go in Box 1 (Wages) on an employee’s W-2.
- Businesses must prove the fair market value (FMV) they use. This is usually based on the local elevator or board price on the transfer date.
- To receive a real commodity wage, the person should take on some market risk. This means there should be a delay between delivery and sale. A delay of at least 2 weeks is recommended.
Summary
Grasping the use of commodity wages can be a great method for producers to reward their workers. It is essential to know how to document commodity wages correctly. A tax advisor, payroll specialist, or your lawyer can assist you in comprehending how commodity wages can enhance your business.
Disclaimer: The information above is a guideline. It should not be seen as tax or legal advice. Each tax situation is unique. You should contact your tax accountant or attorney for advice specific to your situation.
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