Publication 51
Circular A, Agricultural Employer's Tax Guide
(Revised: 1/2003)

(Including 2003 Wage Withholding and Advance Earned Income Credit Payment Tables)

2. Who Are Employees?

Generally, employees are defined either under common law or under special statutes for certain situations.

Employee status under common law.   Generally, a worker who performs services for you is your employee if you can control what will be done and how it will be done. This is so even when you give the employee freedom of action. What matters is that you have the right to control the details of how the services are performed. Get Pub. 15-A, Employer's Supplemental Tax Guide, for more information on how to determine whether an individual providing services is an independent contractor or an employee.

You are responsible for withholding and paying employment taxes for your employees. You are also required to file employment tax returns. These requirements do not apply to amounts you pay to independent contractors. The rules discussed in this publication apply only to workers who are your employees.

In general, you are an employer of farmworkers if your employees:

• Raise or harvest agricultural or horticultural products on a farm.
• Work in connection with the operation, management, conservation, improvement, or maintenance of your farm and its tools and equipment.
• Handle, process, or package any agricultural or horticultural commodity if you produced over half of the commodity (for a group of up to 20 unincorporated operators, all of the commodity).
• Do work related to cotton ginning, turpentine, or gum resin products.
• Do housework in your private home if it is on a farm that is operated for profit. (You may report the taxes for household employees separately. See sections 3 and 8.)

For this purpose, the term farm includes stock, dairy, poultry, fruit, fur-bearing animal, 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.

Farmwork does not include reselling activities that do not involve any substantial activity of raising agricultural or horticultural commodities, such as a retail store or a greenhouse used primarily for display or storage.

The table on page 19, How Do Employment Taxes Apply to Farmwork?, distinguishes between farm and nonfarm activities, and also addresses rules that apply in special situations.

Crew Leaders

If you are a crew leader, you are an employer of farmworkers. A crew leader is a person who furnishes and pays (either on his or her own behalf or on behalf of the farm operator) workers to do farmwork for the farm operator. If there is no written agreement between you and the farm operator stating that you are his or her employee and if you pay the workers (either for yourself or for the farm operator), then you are a crew leader.

3. Taxable Wages

Cash wages you pay to employees for farmwork are subject to social security and Medicare taxes. If the wages are subject to social security and Medicare taxes, they are also subject to income tax withholding. You may also be liable for Federal unemployment (FUTA) tax, which is not withheld by you or paid by the employee. FUTA tax is discussed in section 10. Cash wages include checks, money orders, etc. Do not count the value of food, lodging, and other noncash items.

For more information on what payments are considered taxable wages, see Circular E (Pub. 15).

Commodity wages.   Commodity wages are not cash and are not subject to social security and Medicare taxes or income tax withholding. However, noncash payments, including commodity wages, are treated as cash payments if the substance of the transaction is a cash payment. These payments are subject to social security and Medicare taxes and income tax withholding.

Family members.   Generally, the wages you pay to family members who are your employees are subject to social security and Medicare, 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?, on page 19.

Household employees.   The wages of an employee who performs household services, such as a maid, babysitter, gardener, or cook, in your home are not subject to social security and Medicare taxes if you pay that employee cash wages of less than $1,400 in 2003.

Social security and Medicare taxes do not apply to cash wages for housework in your private home if it was done by your spouse or your child under age 21. Nor do the taxes apply to housework done by your parent unless:

• You have a child living in your home who is under age 18 or has a physical or mental condition that requires care by an adult for at least 4 continuous weeks in a calendar quarter; and
• You are a widow or widower, or divorced and not remarried, or have a spouse in the home who, because of a physical or mental condition, cannot care for your child for at least 4 continuous weeks in the quarter.

For more information, see Pub. 926, Household Employer's Tax Guide.

Wages for household work may not be a deductible farm expense. See Pub. 225, Farmer's Tax Guide.

Share farmers and alien workers.   You do not have to withhold or pay social security and Medicare taxes on amounts paid to share farmers under share farming arrangements or on wages paid to alien workers admitted under section 101(a)(15)(H)(ii)(a) of the Immigration and Nationality Act on a temporary basis to perform agricultural labor (H-2(A) workers).

4. Social Security and Medicare Taxes

Generally, you must withhold social security and Medicare taxes on all cash wage payments you make to your employees.

The $150 Test or the $2,500 Test

All cash wages you pay to an employee during the year for farmwork are subject to social security and Medicare taxes and 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 you employ. If you employ a family of workers, each member is treated separately. Do not count wages paid by other employers.
• The total 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 do not apply to the following situations:

1. Wages you pay to a farmworker who receives less than $150 in annual cash wages are not subject to social security and Medicare taxes, or income tax withholding, even if you pay $2,500 or more in that year to all your farmworkers, if the farmworker:
   1. Is employed in agriculture as a hand-harvest laborer,
   2. Is paid piece rates in an operation that is usually paid on a piece-rate basis in the region of employment,
   3. Commutes daily from his or her home to the farm, and
   4. Had been employed in agriculture less than 13 weeks in the preceding calendar year.

   Amounts you pay to these seasonal farmworkers, however, count toward the $2,500-or-more test to determine whether wages you pay to other farmworkers are subject to social security and Medicare taxes.

2. Cash wages you pay a household employee are counted in the $2,500 test, but are not subject to social security and Medicare taxes unless you have paid the worker $1,400 or more in cash wages in 2003. See the table, How Do Employment Taxes Apply to Farmwork?, on page 19.

Social Security and Medicare Tax Rates

For wages paid in 2003, the social security tax rate is 6.2% for both the employee and employer, on the first $87,000 paid to each employee. You must withhold at this rate from each employee and pay a matching amount. The Medicare tax rate is 1.45% each for the employer and the employee on all wages. Multiply each wage payment by this percentage to figure the amount you must withhold.

Employee share paid by employer.   If you would rather pay the employee's share of the social security and Medicare taxes without deducting them from his or her wages, you may do so. If you do not deduct the taxes, you must still pay them. Any employee social security and Medicare taxes you pay is additional income to the employee. Include it in the employee's Form W-2, box 1, but do not count it for social security and Medicare wages, boxes 3 and 5. Do not count the additional income as wages for FUTA tax purposes.

Social security and Medicare taxes apply to most payments of sick pay, including payments made by third parties such as insurance companies. For details, get Pub. 15-A.

5. Income Tax Withholding

Farmers and crew leaders must withhold Federal income tax from the wages of farmworkers if the wages are subject to social security and Medicare taxes. The amount to withhold is figured on gross wages without taking out social security and Medicare taxes, union dues, insurance, etc. You may use one of several methods to determine the amount of income tax withholding. They are discussed in section 13.

Form W-4.   To know how much income tax to withhold from employees' wages, you should have a Form W-4, Employee's Withholding Allowance Certificate, on file for each employee. Ask each new employee to give you a signed Form W-4 when starting work. Make the form effective with the first wage payment. If a new employee does not give you a completed Form W-4, withhold tax as if he or she is single, with no withholding allowances. A Form W-4 remains in effect until the employee gives you a new one. If an employee gives you a replacement Form W-4, begin withholding no later than the start of the first payroll period ending on or after the 30th day from the date you received the replacement Form W-4.

Use Form W-4 only to determine income tax withholding. It has no effect on social security, Medicare, state income tax, or any other form of withholding.

The amount of income tax withholding is based on marital status and withholding allowances. Your employees may not base their withholding amounts on a fixed dollar amount or percentage. However, the employee may specify a dollar amount to be withheld in addition to the amount of withholding based on filing status and withholding allowances claimed on Form W-4.

Employees may claim fewer withholding allowances than they are entitled to claim. They may do this to ensure that they have enough withholding or to offset other sources of taxable income that are not subject to withholding.

Note:   A Form W-4 that makes a change for the next calendar year will not take effect in the current calendar year.

Pub. 505, Tax Withholding and Estimated Tax, contains detailed instructions for completing Form W-4. Along with Form W-4, you may wish to order Pub. 505 and Pub. 919, How Do I Adjust My Tax Withholding?, for your employees.

When you receive a new Form W-4, do not adjust withholding for pay periods before the effective date of the new form; that is, do not adjust withholding retroactively. Also, do not accept any withholding or estimated tax payments from your employees in addition to withholding based on their Form W-4. If they want additional withholding, they should submit a new Form W-4 and, if necessary, pay estimated tax by filing Form 1040-ES, Estimated Tax for Individuals.

Exemption from income tax withholding for eligible persons.   An employee may claim exemption from income tax withholding because he or she had no income tax liability last year and expects none this year. However, the wages are subject to social security and Medicare taxes.

An employee must file a Form W-4 each year by February 15 to claim exemption from withholding. Employers should begin withholding after that date for each employee who previously claimed exemption from withholding but who has not submitted a new Form W-4 for the current year. Withhold tax as if the employee is single with zero withholding allowances.

Withholding on nonresident aliens.   In general, if you pay wages to nonresident aliens, you must withhold income tax (unless excepted by regulations), social security, and Medicare taxes as you would for a U.S. citizen. However, income tax withholding from the wages of nonresident aliens is subject to the special rules shown in Form W-4 below. You must also give a Form W-2 to the nonresident alien and file a copy with the SSA. The wages are subject to FUTA tax as well. However, see Pub. 515, Withholding of Tax on Nonresident Aliens and Foreign Entities, for exceptions to these general rules.

Form W-4.   When completing Form W-4 nonresident aliens are required to:

• Not claim exemption from income tax withholding.
• Request withholding as if they are single, regardless of their actual marital status.
• Claim only one allowance. However, if the nonresident alien is a resident of Canada, Mexico, Japan, or Korea, he or she may claim more than one allowance.
• Request an additional income tax withholding amount, depending on the payroll period, as follows:

For more information, see Pub. 515.

Sending certain Forms W-4 to the IRS.   You must send the IRS copies of certain Forms W-4 received during the quarter from employees still employed by you at the end of the quarter. Send copies when the employee claims (1) more than 10 withholding allowances or (2) exemption from withholding and his or her wages would normally be more than $200 per week. You are not required to send any other Forms W-4 unless the IRS notifies you in writing to do so.

Each quarter, send to the IRS copies of any Forms W-4 that meet either of the above conditions. Complete boxes 8 and 10 on any Forms W-4 you send in. You may use box 9 to identify the office responsible for processing the employee's payroll information. Also, send copies of any written statements from employees in support of the claims made on Forms W-4. Do this even if the Forms W-4 are not in effect at the end of the quarter. You can send them to your IRS service center more often if you like. Include a cover letter giving your name, address, employer identification number, and the number of forms included. In certain cases, the IRS may notify you in writing that you must submit specified Forms W-4 more frequently to the IRS. Send the copies to the IRS office where you file your Form 943.

Base withholding on the Forms W-4 that you send in unless the IRS notifies you in writing that you should do otherwise. If the IRS notifies you about a particular employee, base withholding on the number of withholding allowances shown in the IRS notice. You will get a copy of the notice to give to the employee. Also, the employee will get a similar notice directly from the IRS. If the employee later gives you a new Form W-4, follow it only if (1) exempt status is not claimed and (2) the number of withholding allowances is equal to or less than the number in the IRS notice. Otherwise, disregard it and do not submit it to the IRS. Continue to follow the IRS notice.

If the employee prepares a new Form W-4 explaining any difference with the IRS notice, he or she may submit it either to the IRS or to you. If submitted to you, send the Form W-4 and explanation to the IRS office shown in the notice. Continue to withhold based on the notice until the IRS tells you to follow the new Form W-4.

Filing Form W-4 magnetically or electronically.   Form W-4 information may be filed with the IRS magnetically or electronically. If you wish to file magnetically or electronically, you must submit Form 4419, Application for Filing Information Returns Electronically/Magnetically, to request authorization. See Pub. 1245, Specifications for Filing Form W-4, Employee's Withholding Allowance Certificate, Magnetically or Electronically, for information on filing Form W-4 magnetically or electronically. To get additional information about magnetic or electronic filing, call the IRS Martinsburg Computing Center at 1-866-455-7438 (toll free).

Note:   Any Forms W-4 with employee supporting statements that you must submit to the IRS must be submitted on paper. They cannot be submitted on magnetic media.

Invalid Forms W-4.   Any unauthorized change or addition to Form W-4 makes it invalid. This includes taking out any language certifying that the form is correct. A Form W-4 is also invalid if, by the date an employee gives it to you, he or she indicates in any way that it is false.

If you receive an invalid Form W-4, do not use it to figure withholding. Tell the employee it is invalid and ask for another one. If the employee does not give you a valid one, withhold taxes as if the employee were single and claiming no withholding allowances. However, if you have an earlier Form W-4 for this worker that is valid, withhold as you did before.

Amounts exempt from levy on wages, salary, and other income.   If you receive a Notice of Levy on Wages, Salary, and Other Income (Form 668-(W)(c) or 668-W(c)(DO)), you must withhold amounts as described in the instructions for these forms. Pub. 1494, Table for Figuring Amount Exempt From Levy on Wages, Salary, and Other Income - Forms 668-(W)(c) and 668-W(c)(DO)(2003), shows the exempt amount. If a levy issued in a prior year is still in effect, use the current year Pub. 1494 to compute the exempt amount.

How To Figure Income Tax Withholding

There are several ways to figure income tax withholding:

• Percentage method (see pages 20-21).
• Wage bracket tables (see pages 22-41). Also see section 13 for directions on how to use the tables for employees claiming more than 10 allowances.
• Alternative formula tables for percentage method withholding (see Pub. 15-A).
• Wage bracket percentage method withholding tables (see Pub. 15-A).
• Other alternative methods (see Pub. 15-A).

Employers with automated payroll systems will find the two alternative formula tables and the two alternative wage bracket percentage method tables in Pub. 15-A useful.

If an employee wants additional tax withheld, have the employee show the extra amount on Form W-4.

Supplemental wages.   Supplemental wages are compensation paid to an employee in addition to the employee's regular wages. They include, but are not limited to, bonuses, commissions, overtime pay, accumulated sick leave, severance pay, awards, prizes, back pay and retroactive pay increases for current employees, and payments for nondeductible moving expenses. Other payments subject to the supplemental wage rules include taxable fringe benefits and expense allowances paid under a nonaccountable plan.

If you pay supplemental wages with regular wages but do not specify the amount of each, withhold income tax as if the total were a single payment for a regular payroll period.

If you pay supplemental wages separately (or combine them in a single payment and specify the amount of each), the income tax withholding method depends partly on whether you withhold income tax from your employee's regular wages:

1. If you withhold income tax from an employee's regular wages, you can use one of the following methods for the supplemental wages:
   1. Withhold a flat 27% from each payment.
   2. Add the supplemental and regular wages for the most recent payroll period this year. Then figure the income tax withholding as if the total were a single payment. Subtract the tax already withheld from the regular wages. Withhold the remaining tax from the supplemental wages.
2. If you did not withhold income tax from the employee's regular wages, use method 1b above. (This would occur, for example, when the dollar amount of the employee's withholding allowances claimed on Form W-4 is more than the wages.)

Regardless of the method you use to withhold income tax on supplemental wages, supplemental wages are subject to social security, Medicare, and FUTA taxes.

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