Tax Season Mythbusters Part III, Farm Employee Tax

Though the main filing date for 2023 taxes has passed, preparing for farm taxes is a year-round task. Earlier this year we shared a two-part series featuring tax professionals partnering with USDA to debunk common misconceptions about taxes and USDA programs. We’re following up with a few more tips from our Mythbusters series to bear in mind as you manage your financial records throughout the year. In this installment, tax expert Kevin Burkett addresses tax considerations for transactions involving farm employees.

Kevin Burkett is an Extension Associate at Clemson University working in farm management and taxation. In this role Kevin provides tax and farm management education. This includes working with producers, tax professionals, students, and others in agribusiness.

Here is another myth that Kevin has identified regarding farm employees and taxes:

Myth - If the transaction is under $600, it doesn’t have to be reported.

Sometimes tax rules can get confused with other, similar rules, so we’ll do our best to untangle some of the nuances. 

IRS Tax Form-1099 is an informational filing used to report and summarize payments that a business made during the year. There are several variations of this form, but common versions used in agriculture primarily include 1099-MISC, 1099-NEC, and 1099-G. The purpose of these forms is the same, though which one is used varies. 

It is important to note that a farm may both issue and receive 1099s. These forms are issued to the recipients by January 31 of the following year. For instance, 1099s for tax year 2024 will start being issued in early 2025. 

Generally speaking, a business is required to issue a 1099 when cash payments from the business to another unincorporated business exceed $600. This could be one payment or a combination of payments that exceeded $600 during the year.

Let’s walk through three examples:

Example 1:

As an example, say that you issued an independent contractor a check for $1,000 to paint your shed and barn. Because the payment exceeded the $600 threshold, you would be required to issue the 1099-NEC. 

Example 2:

Let’s say however, the contractor only painted the shed and it cost $500, would a 1099-NEC be required? The answer is no, a 1099-NEC is not required to be issued in that instance. 

However, you as the farm owner would want to record the expense as part of your business and the independent contractor should record the $500 as earned revenue for their business. 

Example 3:

Let’s say the independent contractor came back to paint the barn later in the year and received the other $500 payment. In this instance, the 1099-NEC would be issued from your farm to their business showing in total the $1,000 that was paid from your farm to their business. 

On the other hand, there may be businesses that are sending 1099s to your farm indicating payments were made to you during the year. The dollar thresholds for these may vary depending on the 1099 form but regardless, your farm should accurately report all items of income received during the year whether a 1099 was received or not. 

It’s important to note that for credit card, debit card, gift card, and other third-party payment transactions, 1099s will be issued from the third-party to the recipient, absolving the payer of the reporting responsibility. This is known as a 1099-K. So, in the example above, if $1,000 was paid from your farm Visa credit card to the contractor, that amount will be included in the 1099-K that the contractor receives from Visa (if required) and you are not obligated to issue the 1099-NEC. 

For further information you can visit a past webinar on 1099s here or visit RuralTax.org Form 1099 Information Returns. 

For the first two parts visit farmers.gov/blog/mythbusters-part-1-farm-tax-general-edition and Ask the Expert: Tax Season Mythbusters Part II, Farm Employee Tax | Farmers.gov.  More information about taxes and USDA programs is available on the Taxes and USDA Programs webpage.