The Tax Court found recently that an S corporation had failed to treat two agricultural workers, who lived on the horse farm where they performed their duties, as employees. The court upheld the IRS determination that the S corporation owed employment taxes.

Farm employment tax reporting

Wages paid to farm workers are subject to Social Security and Medicare taxes and federal income tax withholding for any calendar year that the employer either pays an employee cash wages of $150 or more in a year for farm work; or total (cash and noncash) wages paid to all farm workers are $2,500 or more. Employers must report the income tax withheld and Social Security and Medicare taxes on Form 943, Employer's Annual Federal Tax Return for Agricultural Employees.

The S corporation and workers

The S corporation operated a horse farm and engaged the services of two workers, who also lived on the farm. Their duties included cleaning stalls, the barn area, the barn offices, the rest room, and the tack room; grooming horses; watering the horses; and moving the horses between pastures. The tools used to care for the horses and barn were all owned by the taxpayer.

The S corporation paid each worker by check every week. The S corporation also obtained workers' compensation and employer's liability insurance for the two workers.

Court's analysis

The court first noted that the term employee, for purposes of employment taxes, includes any individual who, under common law rules, has the status of an employee. The determination of whether an individual is an employee turns on the facts and circumstances of each case. Relevant factors, the court observed, include degree of control exercised by the principal; which party invests in the work facilities used by the worker; opportunity of the individual for profit or loss; whether the principal can discharge the individual; whether the work is part of the principal's regular business; permanency of the relationship; and the type of relationship the parties believed they were creating.

Here, the court found that the S corporation exercised control over the activities of the workers. The S corporation's owner personally supervised the workers. The workers also used equipment provided by the S corp. Moreover, the court observed that the workers resided on the farm in housing provided by the S corp. Because the individuals were long-term workers who actually resided on the farm, the relationship between the workers and the S corporation could not be characterized as transitory or temporary. The court concluded that the relationship between the S corporation and the workers was that of employer and employees.

If you own or operate a farm and have workers on the farm, you can contact this office for assistance on the treatment of your workers.

Twin Rivers Farm, TC Memo. 2012-184