As farm families across the Midwest get busier each year, the need for part-time, hired help becomes prevalent. However, it’s not as easy as simply writing them a check every week. We need to ensure the proper steps are completed before beginning to pay an employee as well as continued compliance and reporting once the employee relationship is established. This article discusses the necessary steps to set your business up for payroll.
Employee or Contract Labor?
The first step is to determine if you are hiring an employee or if you are hiring contract labor. There are three general factors to consider when making that determination:
Behavioral Control: contract labor generally has more control over their schedules, use their own tools, control where supplies are purchased, etc. Employees will generally work when told by the business owner, are trained by the business owner and use the business owner’s tools and equipment. One example is using contract labor to custom combine soybeans using their combine and head vs. an employee operating your combine and head to harvest soybeans.
Financial Control: contractors are generally paid on a “per job” basis and have investment in their trade (equipment/tools). They also do the same type of work for other people. Employees are generally paid per hour or have a salary, have no investment in the business and do not have a profit motive.
Relationship: contractors will have an agreement with the business to complete a specific project and will not be offered a permanent position with the business. An employee typically has an ongoing relationship with the business and may be offered benefits.
Federal and State of Illinois Requirements
If you find those working for you are employees, the first thing to determine is if your business has a Federal Employer Identification Number (FEIN). If one of the following apply, you may already have a FEIN:
- You’ve previously hired labor (either in your current business or a previous business)
- You file Form 2290, Heavy Highway Vehicle Use Tax Return, with the IRS
- Your business is an entity (partnership, LLC, or corporation)
If none of the above apply, Form SS-4 will need to be submitted to IRS as your application for an FEIN; this can be done by mail, fax, or online.
For agriculture workers specifically, if the business will have annual federal payroll tax liability in excess of $2,500, it will have to make federal tax deposits throughout the year. If this is the case, the business will need to enroll and make deposits through the Electronic Federal Tax Payment System (EFTPS). It’s important to note, that while there are many businesses involved in the agriculture industry, there are strict definitions of what agricultural labor is. The IRS classifies a business as an agriculture business if the employees “raise or harvest agricultural or horticultural products on your farm (including the raising and feeding of livestock” and “work in connection with the operation, improvement, or maintenance of your farm and its tools and equipment, if the major part of such service is performed on a farm” (Internal Revenue Service). Employees of seed dealers, trucking companies (even if they are hauling grain/livestock producers by others), or any other retailer organization, that are not otherwise engaged in the act of farming generally do NOT qualify as agriculture labor. (1)
Additionally, if the business plans to withhold Illinois taxes, it will need to register with the State of Illinois by filing Form REG-1 as well as register with MyTaxIllinois to make payments and file the proper payroll tax forms. If your employees will be working in other states, you will need to follow those state specific regulations for payroll tax requirements.
Calculating and reporting payroll can be a complicated and time-consuming task but with the right resources and assistance it can be easily managed. It’s important to note that after the business has completed the initial federal and state payroll tax requirements, ALL employees of that business need to complete a Federal Form W-4, an Illinois IL-W-4 and a Federal Form I-9 to verify their citizenship status; these need to be retained in the business’ files. Follow-up posts will discuss more details regarding calculating payroll, payroll tax deposits, and payroll reporting requirements. In closing, these are general steps that will need to be taken and it is important to always consult with your accounting or tax professional to determine the complete steps for your specific situation.
1 Internal Revenue Service. 2020. Publication 51 (Circular A) can be used to assist in the distinction between agriculture and non-agriculture labor