Establishing Required Payroll Withholding in a Beginning Farm Business

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By Jack Dunford of the Department of Agricultural and Applied Economics, Virginia Tech

If a farmer pays $150 in cash wages to any one employee in a year or a total of $2,500 or more to all his employees during the year, he is required to withhold social security, Medicare, and federal income taxes on all cash wages paid to all employees. Moreover, if either of these requirements is met, the farm operator must also withhold Virginia income taxes from each employee. The employer (farmer) must initiate all the required paper work and make timely deposits to the appropriate agencies for these taxes to avoid penalty and interest charges.

When the business is initiated and either of the two wage tests mentioned above is met, the employer must file a Form SS-4. This form is used by the Internal Revenue Service to assign an Employer Identification Number (EIN) to the business. As a result of filing this form, the taxpayer (farmer) will be supplied with a set of pre-printed Form 8109's which are Federal Tax Deposit Coupons that must be mailed with each required deposit for social security and federal income tax.

Most farmers with hired employees will probably be required to make monthly deposits unless the total net tax liability for social security and federal income taxes withheld is under $1,000 for the year. In that case, the farmer is not required to make monthly deposits but can pay the total withheld taxes by January 31 when he files Form 943. This form summarizes all the federal-related taxes withheld and deposited during the year. The employer must deposit the 7.65% social security and Medicare withheld from the employees as well as his 7.65% matching share of these taxes for a total of 15.3% of all wages paid. Also, the required withheld federal income taxes must be deposited. These taxes will vary for each employee depending on their filing status and number of exemptions. If all the deposits have been made by the due dates, the farmer has until February 10 to file the Form 943.

Similarly, the farmer must file the Form R-1 with the Virginia Department of Taxation to register as an employer withholding tax and be assigned an account number with the state. Form VA-5 will be provided to accompany periodic deposits of withheld state income taxes to the Department of Taxation. If the average monthly withholding for state income taxes is $100 or less, the taxes will be due quarterly on April 30, July 31, October 31, and January 31. If the average monthly withholding tax liability is over $100 but less than $1,000, a monthly filing status will be assigned. Most farmers will not have to deal with the semi-weekly deposit required with a monthly tax liability of $1,000 or more. By February 28, the farmer must file Form VA-6 which summarizes the total state income tax deposits for the year.

IRS Publication 51, Circular A, Agricultural Employer's Tax Guide and the Commonwealth of Virginia Employer Income Tax Withholding Instructions include all the information, withholding tables, etc. to properly withhold and deposit the required federal and state payroll taxes. IRS Publication 225, Farmers Tax Guide is also a good source of information on tax withholding as well as most other agricultural tax issues.

All farm employees must complete and provide their farm employer a W-4 and Form VA-4 indicating their filing status and number of exemptions for federal and state income tax withholding. The I-9 form must be completed by the employee and verified by the employer to determine if the employee is legally eligible to work in the United States. This form is required for every employee and must be kept on file for three years after the employee leaves work.

This article glosses over only the major requirements and forms associated with withholding social security and income taxes. In most cases the farmer's spouse, bookkeeper, or accountant manages this chore, which can be a time consuming job on larger farms. In addition to everything else that has been discussed, the farmer must also provide W-2 forms to each employee and send transmittal copies to IRS and the Virginia Department of Taxation by January 31. If any employee qualifies for and desires advanced payments of the Earned Income Credit, he must provide his employer a W-5 form by December 31 so that withholding adjustments can be made in the following year. To really complicate matters, some larger farmers may be required to provide Workman's Compensation, Virginia Unemployment and Federal Unemployment coverage for their employees. These taxes have their own set of requirements, forms, and payment schedules, which add to the complexity of owning a farm.