President Biden has proposed making almost all operating farm income subject to SE tax even S corporation earnings. We go over the details.
Many farmers have structured their farm operation as an S corporation or manager managed LLC to save on Self-Employment taxes. About the only reason to have an S corporation is to reduce SE tax.
The IRS has and will continue to challenge S corporation farmers for not paying enough compensation to their owners. Compensation does not result in any extra income tax but rather is subject to the combined 15.3% FICA and Medicare tax.
President Biden’s Green Book has a proposal to essentially make all operating farm income subject to SE tax even if you farm as an S corporation. Additionally, if you have self-rental income that exceeds the current net investment income tax (NIIT) threshold, all of that excess self-rental income will be subject to the 3.8% NIIT.
This proposal may have a chance to succeed since it is not raising income taxes and helps shore up social security. However, farm S corporations do have a way to eliminate this tax and that is by paying commodity wages. Commodity wages under current rules is not subject to SE / Payroll taxes.
However, will that rule remain in effect. We shall see and we will keep you posted.