Farming is a business. If you raise crops or livestock for profit, and the money you make is your primary source of income, then the Internal Revenue Service considers your farm to be a business. That means that you need to pay business taxes.
At Cook Martin Poulson, our farming clients are sometimes unclear about which business taxes they must pay and which taxes don’t apply to them. If you’re not sure what your tax obligations are, it’s easy to run into problems with the Internal Revenue Service and your state and local tax agencies.
With that in mind, we’ve put together this guide to help you understand which business taxes you’ve got to pay on your farming business.
Business Income Tax
The first business tax that you will most likely need to pay is a business income tax. Business income taxes is almost always reported on your personal income tax return, but that depends largely on how you’ve structured your farming business.
Because farming businesses often have multiple streams of income, it’s essential to keep neat and accurate records of the money you take in. You should also remember that not all income is cash. When you receive something of value, it may be considered income under Internal Revenue Service rules.
The most common sources of farming business income are:
- The sale of livestock
- The sale of produce, grains, and other products raised or bought for resale
These items will normally be paid for in cash and must be reported on IRS Schedule F, Profit or Loss for Farming. You must track both the money you receive and the fair market value of the property or service.
Some farmers sell produce and other farm products at farmers’ markets. While many of the transactions may be paid in cash, this money is considered farm income and must be reported to the IRS.
If you sometimes barter to get goods you need – or if you allow someone to work to pay for items you produce – then you must report that as income, as well. For example, if your neighbor helped you raise a new barn and you paid him by giving him a pig or a cow, the neighbor would need to report the fair market value of the animal, and you would need to report the labor as income.
Other income sources that would need to be reported on Schedule F include:
- Agricultural program payments
- Commodity Credit Corporation (CCC) loans
- Cooperative distributions
- Crop insurance proceeds
- Custom hire (machine work) income
- Federal crop disaster payments
If you have income from any of these sources, you must report it.
On a related note, you should remember that farming businesses are eligible for significant deductions that can reduce their taxable farm income and lower their tax burden. For example, you can deduct:
- Ordinary business expenses (seed, fertilizer, equipment, etc.)
- Necessary business expenses (repairs and clean-up)
- Wages you pay farm laborers (including your children if they work for you)
- Depreciation on farming equipment and livestock
You can find details about these items in our post about understanding federal farm income taxes.
As a farmer, you probably hire workers to plant and harvest crops, care for livestock, and do other work on behalf of your farming business. If that’s the case, then you’ll need to pay employment taxes.
Federal employment taxes fall into three basic categories:
- Income taxes
- Social Security and Medicare taxes
- Federal unemployment taxes
Your employment tax implications mean that you must:
- Withhold federal income taxes from the wages you pay your employees, usually with every paycheck. Your employees should fill out a W-4 form to let you know how much to withhold.
- Withhold state income taxes if your state has an income tax.
- Withhold local income taxes if applicable.
- Withhold Federal Insurance Contributions Act (FICA) taxes, which are more popularly known as Social Security and Medicare taxes. Social Security pays for expenses in retirement and old age and covers disability and the needs of survivors if the employee dies. Medicare taxes provide health insurance.
- Pay a share of FICA taxes that’s equal to what your workers pay. (In other words, there’s both an employee obligation and an employer obligation. You must withhold the former, report it, and pay it to the IRS. You must report and pay the latter.)
- Pay Federal Unemployment Tax Act (FUTA) taxes, which provide wages for your workers if they lose their jobs. You’ll likely need to pay state unemployment taxes, as well.
As someone who’s self-employed, you’ll also need to pay self-employment taxes which is basically FICA taxes, but, you get to pay both the employer’s and the employee’s share for yourself. It is important to property structure your business in order to reduce this tax if you choose to.
Keep in mind that there’s a tax exemption for your children if you pay them to work for you. You can deduct the wages you pay, and they have an exemption that allows them to take the income, tax-free, and put it into a college savings account or a Roth IRA.
You’re not required to pay employment taxes on non-cash wages that you pay to agriculture workers, such as room and board.
One final thing: if you contract with a crew boss who provides labor for your farm as an independent contractor, you are not required to pay employment taxes for the boss or their employees. That’s their responsibility, but, you need to be careful that the IRS does not consider them to be an employee.
Most states have a state sales tax – and in some states it can be quite high. Utah has both a sales tax and a use tax, which applies only when the sales tax is not applicable.
Some farming transactions and income are exempt from sales tax while others are not. The following transactions qualify for the sales and use tax exemption in Utah:
Tangible personal property used or consumed in farming operations, provided that the feed, medicine, or veterinary supplies are used:
- To produce or care for agricultural products you sell
- To feed or care for working dogs or horses in agricultural use
- To feed or care for marketed animals
- For the care of fur-bearing animals kept for breeding or their production of sellable products
- Seasonal crops, seedling plants, garden, farm, or agricultural produce sold during the harvest season
Sales made by a vendor to a farmer are liable for sales tax unless the vendor has a sales tax exemption.
For livestock farmers, there are some farm products that are not exempt from the Utah sales and use tax. These include poultry, eggs, and dairy products. The reason is that they are not considered seasonal products.
Effective on April 1, 2019, the Utah sales tax increased from 4.7% to 4.85% due to the passage of Proposition 3 by Utah voters. That means you’ll be paying a bit more in 2019 for taxable items.
As the owner of a farming business, it’s your responsibility to understand which taxes you must pay. The decisions you make about taxes can have a significant impact on current and future business decisions, including expansion of your farm, family succession, and more.
Do you need help figuring out how to pay and file your farming taxes? Click below to learn more about Cook Martin Poulson’s services for farming and ranching businesses.