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.
Thanks to Kelly Phillips Erb @ TaxGirl for this one. She has an article in Forbes on the story behind the Roadmap: Taxpayer Advocate: You Literally Need a Roadmap to Navigate Our Tax System (So They Made One).
Note that this is not a roadmap to how to prepare your taxes (except for the upper left corner, where it lists various methods for having a return prepared) – It’s a roadmap that follows your tax return through the process once it gets to the IRS.
Download a PDF of the map:
Check out an overview video from the IRS Taxpayer Advocate Service:
If you don’t follow Kelly, you should – she has terrific tax tips and a sometimes hilareous twitter feed.
This is a MUST READ for anyone who is “downsizing,” and especially to parents who are thinking about estate planning and a move to a smaller home or independent living facility.
Some of the hardest conversations I have with my clients (both the parents who are engaged in estate planning and the children who are administrating the estate of a deceased parent) is what to do with the “stuff.”
This article is completely in line with the sentiments of the surviving children – they don’t want your (pardon the directness) OLD STUFF. They do not have the sentimental attachment to your china or your mother’s costume jewelry, or your collection of Precious Moments figurines, and certainly not to the furniture.
If you have a lifetime of accumulated STUFF and are ready to downsize, use this Forbes Article to help you decide how to dispose of it.
Even if you are NOT ready to downsize, it’s a Very Good Idea to KonMari your “stuff” every so often to give you some breathing room and take a substantial burden off your children who will be left to deal with your stuff after you are gone. If it is taking up room, and it if doesn’t “spark joy,” please dispose of it.
If you think that this is a little harsh, please note that I speak from experience, having provided “storage space” over the years to both sets of grandparents and my own parents’ lifetime accumulation of “this-and-that,” so I have a personal taste for the burden of sifting through decades of furniture, collectibles, and the like. I have also watched my aunt agonize over whether to keep or dispose of her mother’s lovely collectible items, knowing that her children and her nieces had little interest in the items, as lovely as they are.
Now, to step back from the rant – seriously consider whether your keepsakes will be considered as keepsakes by your children. I am completely charmed by my grandmother’s diary, which dates back to the 1930s, but am completely indifferent to every single Christmas, birthday, and greeting card that she also saved. I pulled out the letters I wrote to her when in college and put them in a binder and I kept the letters my grandparents wrote to each other when courting because those things have sentimental meaning for me. However, I don’t expect my kids to get the same “joy” out of these “keepsakes” as I do.
New telephone scams come along faster than word can get out about old ones. The newest is a caller claiming to be from the IRS Taxpayer Advocate Services (which is a real thing), offering a large refund in exchange for a bank account number. If you decline, the offer turns into a threat to suspend your driver’s license or to arrest you.
Remember – the IRS will never ask you for a credit card number, will never ask you for payment over the phone, and will never ask for personal information.
WHAT TO DO: If you are unsure, the best way to handle the caller is to say, “I’m sorry, but I do not give out information over the phone. Please send me a letter, and I will call you if I have any questions.”
With HOURS to spare, the IRS posted that penalties for non-payment of estimated tax will NOT be assessed on farmers who wait until April 15 to file and pay taxes.
Normally, farmers (due to their variable and unpredictable income) do not have to pay estimated taxes (as self-employed individuals) if they file and pay all taxes due by MARCH 1.
Rest easy, friends. There is still time.
*Note: This might not apply to your STATE tax return