What is Payroll?
At its most basic, payroll refers to a company’s list of employees. For the purposes of this info sheet, “payroll” refers to the suite of things that go along with paying employees, i.e. paying social security tax, Medicare tax, unemployment insurance, federal income tax withholdings and state income tax withholdings.
Payroll is required for:
- Any employees who are paid cash wages or other compensation are generally subject to social security tax and Medicare tax (including full-time, part-time, permanent, or temporary employees). You may also be required to withhold, deposit, and report Additional Medicare Tax. See section 4 of IRS Publication 51 for more information. If the wages are subject to social security and Medicare taxes, they are also subject to federal income tax withholding. You may also be liable for FUTA tax (unemployment), which isn’t withheld by you or paid by the employee. FUTA tax is discussed in section 10. Cash wages include checks, money orders, etc. Don’t count as cash wages the value of food, lodging, and other noncash items.
- Family members. Generally, the wages that you pay to family members who are your employees are subject to social security and Medicare taxes, federal income tax withholding, and FUTA tax. However, certain exemptions may apply for your child, spouse, or parent. See the table, How Do Employment Taxes Apply to Farmwork in IRS Publication 51.
- Note that payroll requirements may be different for employees doing farm work than from those doing non-farm work (marketing, etc.).
Income level requirements:
All cash wages or other compensation that you pay to an employee during the year for farmwork are subject to social security and Medicare taxes and federal income tax withholding if either of the two tests below is met.
- You pay cash wages to an employee of $150 or more in a year for farmwork (count all cash wages paid on a time, piecework, or other basis). The $150 test applies separately to each farmworker that you employ. If you employ a family of workers, each member is treated separately. Don’t count wages paid by other employers.
- The total that you pay for farmwork (cash and noncash) to all your employees is $2,500 or more during the year.
Exceptions: The $150 and $2,500 tests don’t apply to wages that you pay to a farmworker who receives less than $150 in annual cash wages and the wages aren’t subject to social security and Medicare taxes, or federal income tax withholding, even if you pay $2,500 or more in that year to all of your farmworkers if the farmworker:
- Is employed in agriculture as a hand-harvest laborer,
- Is paid piece rates in an operation that is usually paid on a piece-rate basis in the region of employment,
- Commutes daily from his or her permanent home to the farm, and
- Had been employed in agriculture less than 13 weeks in the preceding calendar year.
Amounts that you pay to these seasonal farmworkers, however, count toward the $2,500-or-more test to determine whether wages that you pay to other farmworkers are subject to social security and Medicare taxes.
Payroll is not required for:
- Independent Contractors (IC). Issue a 1099 at year-end for ICs. An IC is:
- Hired for a specific contract outlining what work is to be performed, start and completion dates, with clear payment outlines
- Free from control or direction – you are not controlling the method and means of how they perform their work, providing equipment, training, or day-to-day direction
- Engaged in their own independently established business, occupation, or trade
- In possession of an Independent Contractor Exemption Certificate (ICEC) or workers’ compensation insurance on themselves
- Household employees. The wages of an employee who performs household services, such as a maid, babysitter, gardener, or cook, in your home aren’t subject to social security and Medicare taxes if you pay that employee cash wages of less than $2,000 in 2016. Note: Wages paid for household work may not be a deductible farm expense. See IRS Publication 225.
- Share farmers. You don’t have to withhold or pay social security and Medicare taxes on amounts paid to share farmers under share-farming arrangements.
When and How Do I Pay Payroll?
For more information on payroll amounts, timing, and methods, see IRS Publication 51. It is a good idea to engage an accountant at this point to ensure that you are paying the correct amounts at the correct times. You can also contact the Taxpayer Advocate Service – an independent organization within the IRS. Visit http://www.taxpayeradvocate.irs.gov/contact-us to find an advocate near you. There are also numerous software companies that provide payroll software specific to farmers – search the internet to find the best fit for your operation. See this article on farm payroll software for tips.
Steps for managing payroll:
- Make sure you have completed all of the basic start-up steps for your business. For more information, see our start-up checklist.
- Register for a withholding account with the Department of Revenue:https://tap.dor.mt.gov/ (Choose “Request Account ID” from under the Business tab to register and when you have your Account ID, use “Sign Up Now” to create a user account to make payments and file reports)
- If necessary, apply for unemployment insurance and workers’ compensation accounts.
- Have employees complete the necessary paperwork:
- Form I-9: Employment Eligibility Verification
- Form W-4: Employee’s Withholding Allowance Certificate – if an employee claims an exemption from income tax withholding, they must give you a new W-4 each year.
- Obtain from the employee the following information so you can fill out their Form W-2:
- Social Security Number – you should ask your employee to show you his or her social security card. You may, but are not required to, photocopy the social security card.
- Legal Name
- Address for Mailing the W-2
- It is also a good idea to have the employee sign a statement that they have received your employee handbook and acknowledged receipt of any policies you have on the farm.
Note on state income tax withholdings:
While federal payroll withholdings (social security, medicare, and federal income taxes) are always required in the above circumstances, you may be exempt from withholding state income taxes if your farm employees meet certain criteria. See http://leg.mt.gov/bills/mca/15/30/15-30-2501.htm for more info. Note: employees will still have to pay state income taxes, but it may not be necessary for you to withhold them throughout the year. As the employer, you would still need to have an account with the Department of Revenue and you would still have to file and send in W-2s each year.
- Montana Department of Revenue
- Montana Secretary of State Business Services
- Montana Department of Labor Unemployment Insurance
- Montana Assistance for Business Clinics