Stephen R. Sutter
Payroll taxes form a sizable cost of doing business. Recent tax law changes are a source of concern to employers, because they have contributed to the complexity of withholding and reporting requirements.
Agricultural employers can cut payroll costs in two ways. First, they may provide compensation that is not subject to employment taxes, such as educational and dependent care assistance plans. Second, they may institute systems, such as computerized reporting, that make paying wages to employees and complying with payroll tax requirements less burdensome.
Most employers are concerned about payroll tax compliance, especially because penalties for noncompliance are stiff. An audit by a thorough IRS Revenue Agent usually includes review of payroll reports, general ledger, and the like, to be sure the employment tax returns correctly report the number of employees and amount of wages.
Information Returns
Growers who pay to a farm labor contractor (that is not a corporation) $600 or more in compensation must complete an information form 1099-MISC (with a copy to the payee), and Form 1096, Annual Summary and Transmittal of U.S. Information Returns. The payor (grower) is required to withhold 20 percent of the payment reported on the 1099-MISC, unless the FLC payee provides its taxpayer identification number (TIN). For most individual payees, the TIN is their social security number.
Form W-9 is used to obtain certification of the payee's TIN. If the number cannot be obtained from the payee, the payor must file an affidavit to that effect with the information return. Failure to comply can result in IRS penalties against the payor.
Withholding Requirements
Agricultural workers' cash wages are now subject to federal income tax withholding (FITW) if the wages are subject to social security (FICA) taxes. There is a two-part test for FITW and FICA coverage of farm employment. Farm workers are covered if their employer pays more than $2,500 in wages to all employees for agricultural labor during the year. If the annual payroll is $2,500 or less, workers are covered if they work for any one employer who pays them at least $150 in cash wages in a calendar year.
Special Agricultural Workers (SAWs) with I-688 or I-688A cards are subject to FICA and FITW like everybody else. So are undocumented workers.
Employers should be aware of a minor exemption from employee social security taxes. I refer to it as the "tiny loophole" [IRC Sec. 3121 (a) (8) (B)]. Social security taxes need not be paid on the wages of (1) hand-harvest workers paid on a piece-rate basis (2) who commute daily from their permanent residence and (3) who did not work more than 13 weeks in agriculture last year - if (4) they earn less than $150 for the year from the employer (even one whose total payroll exceeds $2,500 for the calendar year).
The amount of federal income tax that employers are required to withhold from employees' paychecks depends on the amount of wages paid and the withholding allowance information furnished to the employer by the employee on Form W-4. Employers should ask each new employee to file a Form W-4 on or before the employee's first day of work. If an employee fails to provide the W-4 certificate, the employer is required to withhold at the rate for a single person with no other personal exemptions. Making certain that the form is properly completed may help prevent employee shock and confusion at the level of net pay left after withholding based on this rule.
Generally the employer simply keeps the certificates. However, the employer must send the IRS a copy of any Form W-4, if (1) the employee filing it has claimed more than 10 withholding allowances, or (2) the employee has claimed an exemption from FITW but it appears that his or her wages will be more than $200 per week. The W-4 should be accompanied by any written statement received from the employee in support of the claims made on it.
Earned Income Credit
The earned income credit (EIC) is intended to give tax relief to low-income working parents. For 1992, taxpayers with one qualifying child can claim a maximum EIC of $1,324. If there are two or more qualifying children, the maximum amount of this part of the EIC is $1,384.
The phaseout income level for the EIC was increased to $11,250 for 1991 and to more than twice as much for 1992. Taxpayers with one or two qualifying children will get no credit once their income level exceeds $22,370 for 1992.
If an employee who is eligible for the EIC files a Form W-5 with the employer, the employer is required to make advance payment of the EIC to the employee by adding the amount to his or her paycheck. Unlike a Form W-4, which stays in effect until a new one is filed to replace it, a Form W-5 stays in effect only until the end of the calendar year to which it applies.
Employers who fail to make advance EIC payments as required are subject to a penalty equal to the amount of the advance EIC payment not made. This failure is treated as a failure to deduct and withhold income taxes. Employees who do not file a Form W-5 cannot receive this advance payment. Any eligible employee who chooses not to get this advance payment of the EIC will still get the full benefit of the credit on his or her return.
The employer treats the advance earned income credit as if paid to the IRS on the day that amount is paid to the employee. The payment would normally have been submitted to the IRS through tax deposits. The advance payment to the employee is not considered compensation and is not subject to payroll taxes. Tables for the advance earned income credit are in IRS Publication 51.
The employer is not required to determine whether any completed and signed W-5 is correct. However, an employer who has reason to believe that the certificate contains any incorrect statement should inform the District IRS Director. IRS Publication 225, Farmers Tax Guide, discusses requirements to notify certain employees about the EIC. Request the booklet by calling 800/TAX-FORM.
Deposit Requirements
Employers who have an accumulated payroll tax liability of $500 or more but less than $3,000 at the end of any month must deposit the entire amount of taxes within 15 days after the end of the month (with Form 8109).
Employers with an accumulated employment tax liability of $3,000 or more at the end of any "eighth-monthly" period must deposit these taxes within three banking days of the end of the period. Agricultural employers whose tax liability is $3,000 or more for any month during the year must attach Form 943A to Form 943, Employer's Annual Tax Return for Agricultural Employees.
Employers are required to use magnetic media if they file 250 or more copies of information return Form W-2. The magnetic media requirement may be waived for one year if a hardship exists (Form 8508).
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