Sometimes agricultural workers are paid in kind for their labor. IRS and Social Security regulations provide that, generally, such in kind payments are not treated as wages.
Social Security Ruling (SSR) 95-3p sets out principles for determining when such in kind payments are considered wages. These principles mirror those set forth in IRS rulings and regulations.
In kind payments are any kind of noncash transfer for services. Sometimes, employers can take advantage of the general rule that noncash payments for agricultural services are not treated as wages in order to avoid paying FICA taxes. For example, some agricultural employers have used commodities as payment to their employees for farm services in order to skirt paying FICA taxes This can harm the employees by preventing them from accumulating sufficient quarters of coverage (QC) to qualify for Social Security benefits.
Because of this, IRS has clarified, in its ruling 79-207, that when an in kind payment for agricultural services is immediately convertible to cash, in economic reality, it is a cash payment and will be treated as wages subject to FICA taxes.
Prior to issuing SSR 95-3p, Social Security’s practice had been not to treat such in kind payments as wages. However, in order to achieve consistency with IRS practices regarding treatment of in kind payments for agricultural services, Social Security enacted SSR 95-3p, which adopts the principles of the internal revenue ruling mentioned above; I.e., IRS Revenue ruling 79-207.
This ruling outlines the principles for determining when in kind payments for agricultural services are treated as wages. The determination involves looking at the following factors:
1) Does an employer/employee relationship exist? Only an employee (as distict from an independent contractor, or a self-employed person) qualifies for the Section 209(a)(7)(A) exemption.
In making this determination, Social Security applies common law rules. Generally, an employer/employee relationship exists when the person for whom services are performef has the right to direct or control the person who performs the services.
2) Is an in kind payment, in economic reality, a payment in cash?
In making this determination, Social Security will look at the extent to which the employee exercises dominion and control over the noncash item. They will look at many factors, such as: 1) whether the employer has transferred a readily identifiable potion of an item; 2) whether there is documentation of a transfer; 3) the length of time between an employee’s receipt and sale of an item; 4) whether the employee negotiates the subsequent sale of the item; 5) whether the risk if gain or loss shifted to the employee; and 6) whether the employee bears the costs incident to ownership of the item, for example, storage, feeding, or maintenance costs.
Three examples are given in the regulation that illustrate these principles.
Example 1: An employee gives a worker 30 head of cattle for labor performed on the farm. The employer sells 100 head of cattle to a commodity purchaser, who delivers a check for 70 head of cattle to the farmer, and a check for 30 head of cattle to the employee. The payment is wages because the employee never exercised control or dominion over the cattle.
Example 2: An employer pays a farm worker $50/per month plus 10 head of cattle for farm labor. The worker pays his employer rent for housing the cattle on his property in an area separate from the employer’s cattle. The worker pays for his cattle’s feeding, maintenance, and transfer to market for sale. The employee receives payment directly from the commodity purchaser for the sale of his cattle. The commodity payment is not wages. The employee exercised dominion and control over the cattle subsequent to their receipt, and bore the costs incident to their ownership.
Example 3: A farmer has an agreement with his wife to pay her &100 per month and 100 head of cattle in exchange for her work on the farm. The wife’s cattle are taken to market along with the husband’s cattle and are not kept separate. The wife receives a check directly from the market for the cattle. The payment of the cattle is wages. Because the cattle were sold and converted to cash simultaneously with their receipt, the transaction was, in economic substance, the equivalent of a cash transfer.
In making the determination whether in-kind payment for agricultural services should be treated as wages, documentation should be obtained showing the terms of the agreement, the existed of an employment relationship, and the terms of the commodity sale.
There is a presumption that Social Security’s records of an individual’s earnings are accurate. Social Security will decide if this presumption has been rebutted by evidence.
The issue of earnings and quarters of coverage may sometimes arise in the context of a disability case, in determining whether an individual has disability “insured status”, or in determining the amount of benefits.
This material should not be construed as legal advice for any particular fact situation, but is intended for general informational purposes only. For advice specific to any individual situation, an experienced attorney should be contacted.