In many farm families, children help their parents with chores, caring for the animals, or tending the crops. When they’re young, they often just want to help and “do what mom and dad do.” But once they get old enough (and experienced enough) to perform more skilled or “grown-up” tasks, many farmers want to pay their children for their labor at a rate more in line with the fair market value of their labor. When farmers start paying their children for work on the family farm, one general question invariably comes to mind: “Do my kids need to file a tax return?”
Here are some frequently asked questions about when your children need to file taxes and paying them for work on the farm:
Q: When do my children need to start filing taxes?
A: Generally, you can assume that your child needs to earn the “standard deduction amount” before you must file taxes. The standard deduction amount is $12,400 for a single person in 2020. However, if your children have W2 income they might want to run the numbers to see if they qualify for a refund of the withheld taxes from that W2 income, in which case filing a tax return would be a good idea.
Q: What if my child is an owner in the family farm and receives income through the family farm operation, or has income from dividends or interest on investments?
A: If a minor has “unearned income” in excess of $1,100, then they will need to file a tax return, regardless of earned income. A minor is taxed at their parents’ rate on any taxable unearned income. For farm kids, this becomes an issue if they have an ownership interest in a pass-through farm entity and receive a K1. If a child’s unearned income is only on bank account income, then filing a tax return is usually not necessary unless they approach the standard deduction amount in earned income.
Q: How should I report my children’s’ farm income that I pay to them for their work on the family farm?
A: It depends, based on how much that farm income is.
If your children’s total earned income for the year is under $600, then you don’t need to do anything.
If your children will likely be well within the $12,400 mark for their 2020 income but over $600, a 1099 is a good idea. If their income is within the standard deduction amount then they won’t owe any income tax on earned income, and with a 1099 they won’t have to go through the process of filing a return to get a refund of withheld income. On the other hand, YOU will be able to deduct the amount that you pay them as a legitimate farm expense.
If your children will be earning close to $12,400 mark and you are already issuing W2’s to other employees, then consider adding your children to the payroll system and issuing them a W2 as well. [NOTE – if you put your children on your payroll, remember that they are also subject to consideration in worker’s comp and unemployment reporting].
BONUS: If you pay your child through normal payroll, your child has the opportunity to start funding an IRA. While retirement years seem far, far, away for a minor, a small investment in a tax-deferred account can grow significantly over your child’s working life.