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Business Basics: Compensating kids for work on the family farm offers a tax break for farmers and investment opportunities for the next generation.

February 26, 2024

4 Min Read
A young farm girl driving a tractor
DAY’S WORK: Children who grow up working on a family farm develop a great work ethic. Perhaps now is the time to pay them. It can benefit both parents as a tax break and help children invest in their futures, whether college or retirement. jentakespictures/Getty Images

by Wesley Tucker

By now, many of you have filed your taxes or soon will. While the pain of writing a check to Uncle Sam is fresh in your mind, I thought it would be a good time to suggest one possible way to save taxes while also investing in your family’s future — pay your kids.

You might be surprised to find there are significant tax benefits for both you and your kids when employing them on the family farm.

Most farm kids grow up as an integral part of the operation. As soon as they can reach the clutch on the tractor or carry a feed bucket, they are given chores. As they get older and their ability grows, we rely more and more on them as part of our farm business. How you choose to compensate your children for their work will affect this year’s tax bill, as well as theirs in the future.

Advantages for child and farmer

In 2024, the standard deduction for individuals is $14,600. So, everyone, including your kids, can earn up to $14,600 without owing any state or federal tax.

In addition, if your kids are younger than 18, their wages are not subject to Social Security or Medicare taxes when working for their parents — if it’s a sole proprietorship or a partnership where each partner is the parent of the child.

It’s kind of like having your cake and eating it too. The farm business gets to take a deduction for hired labor, and your kids don’t have to pay taxes on the income.

However, it must be a bona fide employer-employee relationship. You can’t just give your kids the money.

Their compensation must be reasonable for the scope of services provided and similar to what it would cost you to hire someone else to do the job. You can’t pay your kids $10,000 to feed two bottle calves.

But on nights, weekends and over the summer, many farm kids work countless hours in the family business. If we choose to pay them a going wage, it can be beneficial for both parent and child. Make sure you:

  • Work with your tax preparer to ensure you are following the rules.

  • Document everything, including job description and time sheets.

  • File all the necessary forms.

Guide them financially

Your children are free to spend the money however they choose. But this could be an excellent teaching moment in delayed gratification, helping them learn the value of investing for the future.

What if we encouraged them to put the money in a college savings account or retirement account so any growth earned wouldn’t be taxable either?

For instance, if your 15-year-old worked on the farm throughout the year and you were able to justify paying them $14,600, and they put the money into a Roth IRA, what would it be worth when they retired at age 65? Brace yourself. At 8% annual growth, it would grow to $684,764! That’s if they didn’t add another single dime to it during their working years.

Just consider how much it could accumulate if you both did these three or four years before they turned 18. Every dollar of that growth is tax free if they wait until the required age of 59½ to start withdrawing it.

Being realistic, most kids will want to spend some of the money. But if we can get them to invest just half, $7,300 still grows to $342,382 based on 8% interest.

This simply highlights the time value of money. Don’t mistake thinking this is only for large farms. Paying your kids just $1,000, if they invest it now, can grow to $46,902 by the time they retire.

Employing your kids on the family farm has many, many benefits. They learn the value of hard work, how to work as part of a team, communication skills, even learning about life and death through livestock production. But often overlooked benefits may be tax savings to your business and tax-free investment growth for your kids’ future.

So the next time you are tempted to buy something you want but don’t necessarily need in order to keep from paying Uncle Sam, consider investing the money in your most valuable asset — your kids.

Tucker is a University of Missouri Extension ag business specialist, succession planner and national conference speaker. He can be reached at [email protected] or 417-326-4916.

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