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With harvest inbound, your operation may be considering bringing on a person to help run the grain cart, help unload or do relief milking while you handle the harvest. Here is a refresher of the rules you need to be aware of.

Employee versus independent contractor is a something that has been covered here previously, but bottom line is that if you tell the person how what when where and in what order, they are an employee. If you simply tell them what the goal is (i.e. need the field combined and the grain in the grain bin) and they provide some or all of their own equipment, with no rules from you about the order, timing (other than a dead line) and who does the work, they may be an independent contractor and not subject to Employer employee rules.

Next do you have an ag employee?

The IRS defines an agricultural employer as an entity who:

  • Raises or harvests agricultural or horticultural products (including the raising and feeding of livestock);

  • Works in connection with the operation, management, conservation, improvement, or maintenance of the farm and its tools and equipment;

  • Handles, processes, or packages any agricultural or horticultural commodity they produce

  • The term “farm” includes stock, dairy, poultry, fruit, fur-bearing animals, and truck farms, as well as plantations, ranches, nurseries, ranges, greenhouses or other similar structures used primarily for the raising of agricultural or horticultural commodities, and orchards.

  • Farm work doesn’t include reselling activities that don’t involve any substantial activity of raising agricultural or horticultural commodities, such as a retail store or greenhouse used primarily for display or storage.

Workers’ Compensation Exemption under Iowa worker’s compensation law

Iowa farmers do not have to provide workers’ compensation for employees unless the payroll amounts to $2,500 in the calendar year. When you have to buy it, all employees will be covered. There are large fines and possible felony charges for not carrying workers’ compensation. Federal law requires a farmer employing H-2A workers provide workers’ compensation to all employees. Workman’s compensation coverage does provide a benefit to you as it is the employee’s only recourse if they are injured and covered. Sometimes money spent upfront prevents greater problems later.

There are some exemptions to the statute for ag-related persons:

  • The employer’s spouse, parents, siblings, stepchildren (including the spouse’s stepchildren), and the siblings, children and stepchildren of the employer’s spouse whether they are in a partnership or corporation or LLC engaged in farming.

    • A person engaged in agriculture, or as a person engaged in agriculture who is otherwise exempt while exchanging labor with another owner of agricultural land, farm operator or person engaged in agriculture who is also exempt-That means swapping labor with your neighbor.

Federal and State Unemployment Taxes

Federal Unemployment Tax is not required for employer’s parent or spouse or by employer’s child under age 21.

State reporting and unemployment insurance taxes must be paid by agricultural employers that paid cash wages of $20,000 or more to agricultural laborers, or employed 10 or more workers in some portion of a day in 20 separate weeks in the current calendar year or preceding calendar year.

Fair Labor Standards Act (FLSA) and Agricultural Employers-Overtime

Employees who are employed in agriculture are exempt from the overtime pay provisions. Agriculture does not include work performed on a farm which is not incidental to or in conjunction with such farmer’s farming operation. Think of the hired man dry walling the basement in the wintertime for the kid’s room.  

Any employer in agriculture who did not utilize more than 500 “man days” of agricultural labor in any quarter year is exempt from the minimum wage and overtime pay provisions of FLSA for the current calendar year. A “man day” is defined as any day during which an employee performs agricultural work for at least one hour. Additional exemptions from the minimum wage and overtime provisions of FLSA for agricultural employees apply to the following:

  • Agricultural employees who are immediate family members of their employer

  • Those principally engaged on the range in the production of livestock

Employment of your children

If under the age of 18, a parent is not required to withhold social security tax and wages not subject to federal unemployment taxes until reaching the age of 21. As long as the total income doesn’t exceed $6,200 and unearned income doesn’t exceed $350, the child will not owe income tax on their income. You still need to send W-2 and pay a wage that is comparable to work done.

IRS Additional Information

Income tax withholding, Social Security and Medicare (including Additional Medicare Tax when wages are paid in excess of $200,000) are exempt for employer’s child under age 18, but counted for $150 test or $2,500 test. Taxable for spouse of employer.

                $150 or $2,500 Test

                All cash wages paid to an employee during the year for are subject to social security and Medicare taxes and federal income tax withholding if either of the below is met:

  • You pay cash wages to an employee of $150 or more in a year for farm work. The $150 test applies separately to each farmworker that you employ.

  • The total you pay for to all your employees is $2,500 or more during the year.

Compensation paid to H-2A workers for agricultural labor performed in connection with the visa isn’t subject to social security and Medicare taxes and an employer is not required to withhold federal income tax.

 

Breaking up

Iowa requires a notice by 1 September of a land owner or tenants desire to terminate a farm lease arrangement. Don’t forget that under recent changes in the law , one 38 year old horse on a parcel can provide protection to a tenant as a farm tenant. Those terminations are 1 March unless the parties BOTH agree to an earlier date. When terminating a lease, Iowa Code requires adherence to proper notice. Failure to properly notice a tenant may result in a renewal of the lease under the current terms even if a party dies after the 1 September dead line.

If you and co owner (like a sibling) own a parcel together and the sibling rents it out and you cash your portion of the check, you are providing a strong presumption that you like the current arrangement, if you don’t, you best terminate the relationship by 1 September.

1 September isn’t the only time you can break a lease, failure to pay rent when due will also violate it. In the times of soaring costs of production and falling prices, some tenants have and more will, walk on high rents they are obligated to pay. The land owner has a responsibility to rent the ground out for what they can and then may seek the difference from the original, non paying tenant. Other lease provisions being broken may or may not result in booting the tenant off the land. For other violations, the tenant must be given a right to cure (or fix) the problem, and the violation must be materially harmful.

Making up

Like surgery, it is not required that you hire somebody, but it is usually recommended. When you are reviewing a lease or attempting to put one together, some simple rules should be kept in mind with lease,

Get it ALL in writing to prevent misunderstanding and make sure successors in interest (heirs upon death) on both sides understand the terms of the agreement. Make sure both parties sign the lease. Ensure an accurate description of the leased ground is included.

Agree upon compensation for any fall field work completion in the event of non renewal of the lease. Consider fertilizer application that may have multi year benefits and how those get compensated if the parties don’t stay in a relationship. Who gets to control the hunting, fishing and recreation rights, who sprays the weeds and who pays the taxes at the court house are all things that need to be addressed. Unless the lease says otherwise, the tenant gets the above ground portion of the crop.

Pricing isn’t always as simple as looking at the ISU average land values, adding 10% because you have great ground and demanding a check. Average cash rents reported are but one piece of the puzzle, with a rents compared to yield, corn suitability rating and a flat analysis of return on investment as compared to where else that money might earing a return all play a part in determining a fair rent. Operators would be wise to invest in education of the landowners on the costs of operating and why shinny pick ups purchased in December over recent years may have been more about tax planning and less about excess wealth and low rents. Likewise, operators who are renting from land owners facing increased medical costs should attempt to understand that sometimes, the rent is going up on the farm because the cost of housing the spouse or the land owner themselves in a care facility is going up.

If the term of the lease, which can be up to 20 years long, goes over 5 years it needs to be recorded or at least a memorandum of the lease needs to be recorded with some basic essential terms.

The Ag sector is looking at the lowest net farm income in 2016 since 2002, with a drop of 56% from 2013 prices. This is across the board, with decreases in dairy, meat, poultry, vegetable sand feed crops. Why does that matter? Iowa is consistently ranked #2 in gross farm receipts and is responsible for 7.6% of the US gross receipts in the Ag. Further, Farm Asset value is expected to decrease another 1.6% this year and debt to increase 2.3% for farms and non real estate debt to increase 3.8%. Net farm cash income projected for 2014-2015, when the numbers are finally in,  down 27% and  net farm income is down 37%. Add in a hotter than average July and low commodity prices and it is  uncomfortable time in the ag sector.

Why does that matter? Iowa is consistently ranked #2 in gross farm receipts and is responsible for 7.6% of the US gross receipts in the Ag.

I have referred to this last "good run" of farming as the rise of the "shorts farmer". A shorts farmer is one who hasn't had to have livestock to spread out risk or make hay for, can afford to hire out crop scouting and spraying, and can trade equipment to avoid getting covered in grease doing maintenance and repairs.  Shorts, while good for swimming, may not be the best gear for the rising waters ahead.

As trouble waters may be brewing, it is appropriate to review some basic concepts that perhaps we in the Ag community haven' t had  to consider in quite awhile.
Chapter 7 bankruptcy is a complete liquidation of non exempt assets, leaving the filer with some cash, some basic tools of the trade, the equity in their residence , retirement accounts, and up to $7,000 in equity in a vehicle. Eligibility depends on the size of the household. In Iowa, a single person can file if they are under $46,009 in annual income, 2 person household goes to $60,872 and so on. They can be filed once every 8 years. They are quick, taking about 3-6 months to discharge most debts.  Some debts will haunt you to the grave, including tax debt that is less than 3 years old, credit purchases made with in 90 days of filing, alimony/child support, government fines and student loans (with some small relief avaialbe for those who truly can do no work).

Chapter 12 is a bankruptcy tailored for farmers, with the requirement to repay creditors tied to a five year plan that is connected to the production schedule  of the ag economy, which is different that a factory. Farmers who file can only have $4,031,575 in debt to be eligible. That is owing $10,000/acre on 403 acre and nothing more, which isn't really that outlandish. Those who don't qualify will go to a 13 or a 11.

If you are thinking about filing a bankruptcy, you can do pre bankruptcy planning. Pull your financial statements, run a cash flow, get your taxes done and filed and meet with an advisor. Sometimes, the lenders  can restructure  your debts without filing a formal bankruptcy. Iowans have a tendency to hang on too long and miss opportunities to reset the game pieces and as result, end up consulting advisors and bankers when it is already too late.

Beware of gifts or below market sales prior to filing a bankruptcy, These transfers can be set aside and pulled back into a bankruptcy filing. Additionally, creditors who receive payments from someone who files bankruptcy can have those payments pull back into the bankruptcy estate if they were made 90 days prior to the filing.  The creditor has some defenses, to include showing that the payments were ordinary business transactions but it can sometimes be more painful monetarily than it is worth.

Think about the round baling being done this summer. The custom operator who waits in the field for the check and cashes it promptly  now doesn't care about a 1 March bankruptcy but the operator that avoids conflict and waits to send bills until December may be writing a check to the bankruptcy trustee for the work they did and collected on. If someone who owes you money files bankruptcy and you receive the notice or read it in the paper, stop contacting them at once. You have the opportunity to do some investigation into whether any you are going to get paid, but calling the debtor to ask is not the way to handle it.

If you inherit property with your brothers and sisters, you just got thrown in to business together with no business plan, no body in charge and perhaps, wildly different goals for the business. This form of ownership is called:

  • Tenancy in Common – , in which the two or more parties own an undivided fractional interest in the property, but when one of the “tenants in common” dies, that person’s fractional interest passes via probate (with or without a will) to the dead tenant’s heirs. This allows for a “step up” in the tax basis of the property for capital gains purposes, and can be used to bring in the next generation as a co-owner with the surviving spouse.

That’s why it gets complicated. Corn or beans. Hay ? CRP? Sunflowers? Multiple owners have multiple biases, goals and desires. If a co owner is deep in debt, they are motivated to maximize revenue while a well off co owner might consider things like land conservation, long term development potential or other agenda items that will bring conflict to the front burner.

Iowa law says people in these situations have the right to get paid from a cotenant who is in control of the property, their respective shares of the “rental value” of the property. Easy to figure when one co tenant got a rent check, not so easy when that co tenant is farming the ground.

The Iowa Supreme Court has pointed out that lease of executed by one tenant in common Is not binding on other tenants in common unless they okay it, like cashing a rent check.

Wednesday, June 19, 2019
  • Patrick B. Dillon
  • Jill Dillon
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Patrick B. Dillon enjoys finding solutions to legal issues and catching problems for clients. Pat practices in the Sumner office regularly represents clients in district, associate district and magistrate courts for agricultural, real estate, criminal and collection issues. He drafts wills and trusts, creates estate plans and helps clients through the probate process.
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Jill Dillon focuses on family law, estate planning and IRS matters. Jill is a University of Northern Iowa undergraduate (Political Science Cum Laude) and a Drake University Law School graduate. Jill spent extensive time advocating for low income tax payers in front of the IRS and the State of Iowa Department of Revenue while at Drake.

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