This is the second in a three-part series on social security and its impact on farmers and ranchers. The first can be viewed HERE.
If you own or manage a farm, ranch, orchard, or other place where you grow fruits, vegetables, or flowers for sale, you should know what you’re paying for with your Social Security and Medicare taxes. You should also know how to report your income to Social Security and why it’s important that you do so.
Workers are entitled to Social Security benefits based on how much income they’ve earned and reported to us. That’s why it’s so important to know more about Social Security. Last time, we talked about how to accurately report all income and wages. We're now going to talk about various types of farm arrangements and how to report earnings.
Here are examples of common types of farm arrangements, and how to report earnings.
On a family-operated farm, the head of household is self-employed and receives credit for farm income. This is true even though other family members help. Sometimes, family members have a partnership, and all earn Social Security credit based on the farm income. If a husband and wife run a farm as a partnership, they must report their share of the profits for Social Security purposes separately, even though they file a joint income tax return.
When two or more people manage a farm together, they must form a farm partnership. Partners usually sign a written agreement, but they can have a verbal agreement.
Signs that a partnership exists include:
- Each contributes land, money, or services;
- The right of each partner to take part in management;
- Shares profits or losses;
- Mutual agency, where they can act for one another; or
- Joint liability, where each partner is liable for debts incurred through the partnership. Each partner is responsible for reporting their own share of profits to Social Security.
Farm rental agreements
No two farm rental agreements are exactly alike. But in all, the landlord lets the tenant use the farm to produce farm products, and the tenant agrees to pay the landlord in cash or crop shares. If you own or rent land from someone, and rent or lease it to another person, you’re a “landlord.” Arrangements between landlords and tenants can be in writing or verbal. The advantage of a written arrangement is that it’s easier to prove intent. A verbal agreement may make it necessary to get statements from the tenant and others about how the two planned to operate. A landlord’s cash or crop share can only be farm income for Social Security purposes if the landlord has an active role in production or management. This is called “material participation.” Both the “materially participating” landlord and the renter or tenant share farmer must report their own earnings to Social Security.
Next time, we’ll discuss who should report farm income and how to report it.