Part 1: All Forms of In-kind Wages

Most farm businesses find that they need to offer at least the minimum wage rate to attract a qualified work force, regardless of whether the law requires it. Some farmers provide in-kind benefits as an alternative to paying all or some or of the minimum wage rate in cash. Others pay all the minimum wage in cash and provide in-kind benefits as an additional incentive. Farmers who offer educational internships often compensate their interns entirely through in-kind benefits.

Whatever the case, it’s helpful for farmers to start off by identifying whether in-kind payments are being applied to meet minimum wage obligations. That’s because a different, stricter set of rules and restrictions apply when in-kind payments are included as part of a worker’s minimum wage amount. In other words, when farmers are either entirely exempt from paying their workers minimum wage, or they pay the required minimum wage owed in cash, they have more flexibility in offering in-kind payments. These details and distinctions will be discussed more in future sections.

The bottom line here is that farmers should identify and keep in mind: (1) whether they’re required to pay their workers at least the federal or state minimum wage and, if so, (2) whether any in-kind payments are being used to meet their minimum wage obligations.

First, is the farmer required to pay minimum wage? Federal law and some state laws provide limited exemptions to paying minimum wages for agricultural labor. The federal exemption is what’s often referred to as the “500 man-day exemption.” Basically, farms that have fewer than 500 man-days in each calendar quarter of the previous year are exempt from paying their workers at least the minimum wage. However, utilizing this exemption still requires farmers to do precise calculations and keep accurate records.

Farmers wanting to take advantage of the federal exemption must also look into their state’s minimum wage laws. Some states have adopted the federal “500 man-day exemption,” some states have an entirely different agricultural labor exemption, and some states have no agricultural labor exemption at all. If your state’s laws are stricter than the federal law, you must follow the stricter state law. For example, even if you meet the federal 500-man day exemption, if your state has an exemption with a higher threshold than the federal exemption, you must apply the higher threshold. Similarly, if your state does not have an agricultural labor exemption, or other applicable exemption, you must pay your state’s minimum wage. Finally, if no state exemption applies and your state’s minimum wage rate is higher than the federal rate, you must pay this higher rate!

Farmers who must meet minimum wage obligations will next need to determine whether they’ll be using in-kind payments to meet those obligations. The key point to remember here is that a different, stricter set of rules and restrictions applies when in-kind payments are included as part of a worker’s minimum wage.

Farmers Anne, Frank, and Sally each did the research. Here’s what they found:

As Anne is exempt from paying minimum wage, more flexible rules and requirements apply to her situation. Nevertheless, she still needs to understand and follow most of the requirements listed in sections 2 to 8 (and 9 to 12 if they’re providing housing). For example, Anne still needs to calculate and itemize the value of in-kind payments on the worker’s paystub, and also properly account for in-kind payments for tax purposes.

Since Frank is using only cash to satisfy minimum wage obligations, more flexible rules and requirements apply to him. Nevertheless, he still needs to understand and follow most of the requirements listed in sections 2 to 8 (and 9 to 12 if he’s providing housing). For example, Frank still needs to calculate the value of any in-kind payments he offers as additional benefits. He’ll also need to itemize them on the worker’s paystub and properly account for them for tax purposes.

Farmer Sally can only provide certain types of in-kind payments to meet her minimum wage obligations under federal law (see section 2). Her state’s laws might be even more restrictive (see section 3). In addition, farmer Sally will need to follow the federal rules for calculating and recording the value of in-kind payments (see section 4). She’ll also need to follow all the requirements listed in sections 5 to 8 (and 9 to 12 if she’s providing housing).

If you’re uncertain whether your farm is exempt from paying minimum wage, the most risk-averse approach is to: (1) assume that your workers, including interns, must be paid at least the minimum wage and (2) apply the stricter rules and restrictions outlined in this guide when using in-kind payments to meet the minimum wage amount.

The types of in-kind payments farmers can offer their workers depends on a couple of factors. Under federal law, farmers can provide in-kind payments in lots of different forms – farm products, lodging, all kinds of different goods and services – IF the employee agrees to it in writing AND if any relevant minimum wage obligation is being met with dollars first. As #1 highlights, a key distinction is whether the in-kind payments are being made to meet minimum wage obligations. If the employee is not receiving at least the applicable minimum wage in dollars, then additional restrictions apply in terms of the form and valuation of in-kind payments (see below).

Yes. Under federal law, a farmer may use meals, housing and transportation to meet their minimum wage obligations.

However, two conditions must be met for these items to be deducted from minimum wage owed. First, meals, housing and transportation must be offered primarily for the benefit or convenience of the employee. Meals, housing, and transportation are considered to be for the benefit of the employee if there are no other practical options within a reasonable distance of the farm. If meals, housing or transportation are being offered primarily for the convenience of the employer, the cost cannot be deducted from the workers’ minimum wage. Meals, housing, and transportation are considered to be primarily for the convenience of the employer if the employer offers a short lunch break that leaves employees no time to purchase lunch in town or if the employer expects employees to be available in the evenings to care for animals, to name just two examples.

Secondly, housing and transportation cannot be a condition of employment. In other words, the farmer cannot coerce a worker to accept living quarters or rides to work in-lieu of cash for minimum wage owed. Except for meals, the worker must voluntarily agree to the in-kind wage payment upfront in writing.

Let’s take a closer look at each item:

Meals: If the farmer regularly provides meals to their workers primarily for the convenience of the workers, the cost of the meal can be deducted from the minimum wage owed. This is the case where workers are working long hours in remote areas and there are no other options to get a proper meal. The farmer might provide meals for the workers’ convenience before, after or during working hours. (Note that the amount deducted from minimum wage for meals can be no more than the actual cost that the farmer incurs.)

Housing: The housing a farmer provides to a worker cannot be a condition of employment. In other words, it must be primarily for the benefit of the worker. For example, if the farmer requires a worker to leave an existing home and live on the farm, or to live on the farm to be on call to meet the farmer’s needs, a minimum wage deduction for housing would not be permitted.

Farmers who provide housing to their employees must also be sure to pay attention to a set of state and federal laws that could come into play, including zoning ordinances, health codes, the federal Occupational Health and Safety Act (OSHA), and state and federal migrant worker laws. See sections 9- 12 for more details.

Transportation: Deducting the cost of transportation that a farmer provides workers to and from their home to the farm or worksite is permitted. Of course, the worker must voluntarily agree to the transportation and it must be primarily for the worker’s benefit.

This might be the case if a group of workers lives in the nearby town and the farmer offers to provide them a farm vehicle so they can coordinate a carpool and come together. Or, perhaps the farmer picks them up and drops them off on certain days when the farmer herself needs to go into town. The farmer could deduct the reasonable costs of transportation provided from the workers’ wages—again, so long as the workers voluntarily agree to it and it’s for their primary benefit.

That would not be the case, for example, if the worker already has access to and wants to drive his own car yet the farmer still insists that the worker use the transportation the farmer provides. In addition, transportation expenses cannot be deducted from the wages of H-2B employee. That’s because the Wage and Hour Division of the federal Department of Labor has concluded that, under the FLSA, the transportation expenses of H-2B employees are primarily for the benefit of the employer because they significantly help the employer recruit workers.

The law is uncertain on this issue. Some courts have concluded that groceries are properly included under the definition of meals, but other courts have concluded they are not. The most risk-averse approach is not to include the cost of groceries when applying in-kind payments to meet minimum wage obligations.

Sometimes, farms are offering seconds-quality produce or leftover product from farmers’ market stands or other modest perks as opportunity presents itself. Is it legal to offer these items to workers? Yes, it’s legal to give these things to workers; the issue at hand is whether and how these items are considered wages. If a farmer wishes to advertise to potential employees that farm product may be available to them, that’s different than providing someone with at least the minimum wage in the form of farm product.

Now, that isn’t to say that offering seconds-quality produce or leftovers to employees is completely unregulated! These kinds of “perks” are often called “no additional cost benefits” because they don’t cost the employer anything additional to provide and are not substantial. State and federal laws govern when these perks are subject to withholding for income tax purposes, when they are to be included in wages for determining unemployment insurance tax obligations and whether those items are deductible from the employer-farm’s income tax. See #3 for state-specific details.

Tools and uniforms are considered to be for the primary benefit or convenience of the employer. Therefore, a farmer cannot deduct the cost from a worker’s minimum wage under federal law.

Training and education provided to workers also falls into the category of something that’s primarily beneficial to the farmer. Sure, the workers benefit from learning general farming practices as they go about completing their daily tasks. But it’s really the farm that benefits most by having well-trained, efficient workers. The farmer could certainly put a value on the education and training she’ll provide in the course of employment and use that added value as a marketing piece to attract good workers. Another option would be to run a separate educational series and charge their workers tuition for it. However, the farm cannot force its workers to participate in these trainings. That would, for all intents and purposes, be the same thing as deducting it from their wages!

The bottom line is that offering anything other than meals, lodging, and transportation as an in-kind payment to meet a minimum wage obligation is risky. Technically, federal law allows an employer to count as wages “the reasonable cost … to the employer of furnishing such employee with board, lodging, or other facilities” that “primarily benefit” the employee and are “customarily furnished” by such an employer. Items that meet these conditions are considered “equivalent to cash” and their value can be applied as a “wage credit” to the minimum wage.

So, what are the “other facilities” that employers may offer? Courts have interpreted that phrase to mean meals, lodging, and transportation, which doesn’t end up broadening the types of allowable in-kind goods and services at all. While a case could be made for including other types of in-kind payments, risk-averse farmers will want to stick to these explicitly permitted items.

If the farmer is either exempt from paying minimum wage or pays the worker at least the minimum wage in cash (or other form of money, e.g., a check) any item or service may be provided in lieu of cash. In other words, where minimum wage obligations do not apply or have been met already, the farmer can deduct the reasonable cost of any item or service from the employee’s paycheck.

This basically means that farmers who don’t intend to apply in-kind payments to meet minimum wage obligations have more flexibility under federal law. For one thing, these farmers could deduct the reasonable cost for things like groceries, uniforms, tools and training from their workers’ paychecks. In addition, while they still have to account for the “reasonable cost” of any deduction for in-kind payments, these farmers don’t have to follow strict requirements for calculating the value.

But some words of caution!

• Education and/or training is not a “service” provided unless the farmer is running a separate educational series of classes for which they charge tuition, and the employee voluntarily chooses to attend the classes and also agrees in writing to have the tuition cost be included as a part of their wages.
• Stricter requirements might apply under your state’s law. See section 3.
• You’ll still need to account for the reasonable value of these in-kind deductions for purposes of payroll taxes, and following the federal valuation rules might be the most straightforward and risk-averse approach. See section 4.
• If overtime requirements apply, you’ll need to follow a separate set of conditions and include these in-kind payments when calculating the “regular rate.” See section 5.
• Getting the worker to agree to the in-kind arrangement in advance will not only help build a respectful working relationship but will also show that these payments were actually made, which could reduce legal liability risks. See section 6.
• You’ll still need to keep records and account for the value of these in-kind deductions as well as include itemizations on the workers’ paystub. See section 7.
• You’ll still need to properly account for these in-kind payments for tax purposes. See section 8
• If you’re providing housing, you’ll still need to abide by applicable requirements. See sections 9- 12.

The rules described in section 2 outline the types of in-kind payments are permitted by federal law. State laws can be more restrictive.

Some states prohibit employers from paying in-kind payments altogether, or prohibit certain types of in-kind payments. Some states prohibit in-kind payments altogether if doing so will reduce cash wages below the minimum wage. Other states allow in-kind payments so long as certain factors are met, including that it’s voluntarily accepted by the worker and not a condition of employment. In other words, in some states the workers must ultimately have the choice whether to receive cash or non-cash wages.

After confirming that a good or service is eligible to be considered a wage credit under federal law, farmers should be sure to confirm whether it’s permitted in their state and, if so, whether specific limitations or requirements apply that are above and beyond what federal law requires.

Farmers can start by contacting their state’s Department of Labor.

Farmers who are exempt from paying minimum wage, or farmers who pay the going minimum wage amount in cash, can offer in-kind payments to their workers without following the federal rules for valuing and recording the costs of what’s being provided. Note, however, that these farmers must still account for the reasonable cost of all in-kind payments and itemize them as deductions on the worker’s paystub. Following the federal rules and guidelines for determining the “reasonable cost” might be the most straightforward and risk-averse way of doing so. It’s best to still read this section and decide for yourself the approach you want to take.

The federal rules set out a very specific method for determining the value of in-kind payments when they’re being applied to meet minimum wage obligations. Here’s the rule:

Farmers can deduct the lesser of two things:
(1) The fair market value or
(2) The actual cost to the farmer in providing it

This is easier to understand through an example. Let’s say that Farmer Sally has a mobile home on her property that’s completely paid off. She wants to let one of her workers stay there in exchange for work. How much can she deduct for this lodging?

The first step is to determine the fair market value. The question to ask is, “What do mobile homes in Sally’s area rent for?” If she’s in a rural area, it might not be much. If she’s near the heart of a big city or some bustling small town, it will, of course, be more. Let’s say the going rate is $400 a month for Sally’s area. The next step is to determine what it actually costs Sally to have this mobile home. Let’s say she’s already paid it off in full, so her costs are minimal. Perhaps Sally is only paying utilities for operation, which run her about $75 a month. This is the lessor of the two. Therefore, $75 a month for lodging is all that Sally can deduct from the minimum wage she owes her worker.

Basically, the farmer cannot profit from offering in-kind payments as wages. If Sally deducted more than it cost her to provide housing, she would profit. Farmers providing lodging will need to do some research on rent prices in their specific area to provide evidence of the going rate. They’ll also have to be honest about what the lodging actually costs them. Bottom line, they’ll need to keep records to support the value that is being deducted in case an issue or discrepancy about wages paid were to ever arise, such as a tax audit or a wage claim.

This same formula applies to meals. Let’s say that Sally offers lunches and dinners for her workers. What can she deduct for these meals? First, she’ll need to determine what the fair market value is for lunch and dinner in her area. Let’s say it’s $8 for lunch and $10 for dinner for a comparable meal at the diner down the road. Now, Sally needs to figure out how much it costs her to make the meal. This includes her costs of the ingredients, including any products from the farm, as well as her time to make the meal. If it’s less, say $5 a meal, she can deduct only $5 per meal as in-kind wages. Farmers will need to keep records of how they valued the meals provided in case a dispute or discrepancy arises.

Most farmers are probably thinking: “This is way too cumbersome! Is it even worth it?” That question can only be answered by each individual farmer. The best route is to play it safe and be conservative by following the required method for valuing in-kind payments as well as keeping records sufficient to show you are complying with the requirements. Alternatively, a farmer may decide it’s just not worth all the headache, and simply pay any minimum wage owed in cash and provide in-kind payments as a bonus.

Generally speaking, an employee who works more than 40 hours in a given work week must be paid one-and-a-half times their regular rate unless an exemption applies (this is referred to as “time-and-a-half” pay). While federal law exempts agricultural labor from overtime requirements, farmers will still need to follow federal overtime rules for workers who perform non-agricultural labor tasks in a given workweek. In addition, some states do not provide exemptions from overtime requirements.

Farmers who are required to pay their workers overtime need to pay particular attention when they are offering any form of in-kind payments. That’s because a rather complex set of requirements applies to in-kind payments when calculating the “regular rate” for purposes of overtime requirements.

In short, unless a particular set of conditions is met, the value of all in-kind payments that a worker receives in any given work week must be included as wages when calculating the “regular rate” for overtime. This includes the value of in-kind payments that are offered above and beyond minimum wage obligations (e.g., tools, uniforms, training, as well as meals, transportation, and housing that aren’t applied to minimum wage obligations). In other words, the value of these items can be excluded from the “regular rate” only if the farmer meets a certain set of requirements, including that the worker agrees in writing to the specific in-kind payments in advance and the farmer makes no profit from the in-kind payments. This might best be explained by an example.

Any in-kind arrangement that the farmer has with an employee should be in-writing and signed by employee at the get go.

What should be included in the writing? At the very least it should include the value of the item being offered (or a description of how the item is being valued), a brief explanation of how the identified value is being deducted from the worker’s wages, and a timeframe (i.e., one time only, daily, once a week, once a month, etc.).

While a signed agreement is not generally “required” under federal law, it is helpful to show that the worker voluntarily agrees to the specifics of the in-kind arrangement (i.e., that what’s being offered is not a “condition of employment”). The agreement also provides written proof that compensation was in fact paid if an issue were to ever arise. In addition, state law might require that the in-kind arrangement be in writing.

Fundamentally, getting the arrangement in writing helps ensure that the farmer and the employee have a shared understanding of the details. This alone can help prevent unmet expectations or disagreements.

The value for any “deductions” made for in-kind payments must be itemized on the pay stub that is provided to the employee at each pay period. This is required by both federal and state law. The itemized deductions provide the employee the opportunity to see exactly what has been taken each time. In addition, it provides yet another way to prove that in-kind payments were in fact made, which can help reduce a farmer’s legal liability if a doubt or question about compensation provided to a worker was ever raised.

A number of tax implications come into play when farmers pay employees through in-kind payments. These can be grouped into two categories: (1) the payroll taxes the employer pays for each worker (e.g., social security and Medicare taxes, or the “FICA” taxes, federal and state income tax withholdings and federal and state unemployment insurance taxes), and (2) the farm business’s expenses for its own income taxes.

Workers’ payroll taxes: Whether a farmer has to pay minimum wage and whether a farmer has to remit payroll taxes are two different questions entirely. Even if a farm is not subject to the federal minimum wage, the farm is likely providing some compensation to workers. Thus, the farm must determine if the compensation they provide is subject to payroll taxes.

As a general rule, in-kind payments, including fringe benefits, are considered “wages” and are subject to federal payroll taxes, unless a specific exclusion applies. In other words, unless the non-cash or in-kind payment falls under a specific exclusion, it must be tallied up and included as taxable income for payroll tax purposes.

Appendix A lists state rules regarding whether meals and lodging are considered wages for the purposes of income tax withholding and state unemployment insurance taxes. The short answer is that each of the states addressed follow the federal rule, above. Meaning, in-kind payments are considered “wages” and are subject to federal payroll taxes unless a specific exclusion applies.

Yes. Payroll tax exemptions are part of an array of tax advantages that exist specifically for farmers. Several small farm exemptions apply to farmers who have few employees and/or pay very little in total wages each year. In other words, farmers are not obligated to pay federal payroll taxes on wages paid, whether cash or in-kind, until certain thresholds kick in. For more details on utilizing these small farm exemptions see Part I of Appendix B.

A few in-kind wage exclusions that are particularly relevant for farmers include: (1) in-kind payments for agricultural labor (aka, “the commodity wage exception”), (2) lodging and meals provided for the farmer’s convenience, and (2) “de minimus” meals. Let’s take a brief look at each.

In-kind wages or “commodity wages” for agricultural labor

Any non-cash or in-kind payments that a farmer pays a worker for agricultural labor—including meals, housing, transportation, CSA shares, farm products, etc.—are deemed to be excluded from “wages” for payroll tax purposes if certain conditions are met. This is commonly known as the commodity wage exception. However, taking advantage of this exception comes with a whole new set of limitations and recordkeeping obligations (Sigh!). What’s more, it raises a huge risk for an audit. For more details on the risks and requirements of utilizing the commodity wage exception, including how to properly report the applicable in-kind wages for federal tax filings, see Part II of Appendix B.

Lodging and Meals Provided for the Farmer’s Convenience

The value of meals and lodging provided to a worker may be excluded from the worker’s federally taxable income IF the farmer can meet the following tests:

• The lodging or meals are provided on the farm business premises. This generally means where the worker works, which would include anywhere on the farm.
• The lodging or meals are provided for the farmer’s convenience. Whether lodging or meals are provided for the farmer’s convenience depends on the circumstances. For example, if there’s insufficient housing nearby because of the remote location of the farm, the farmer would likely meet this test for lodging. Similarly, if there are insufficient eating places near the farm, the farmer would likely meet this test for meals. This is also true if the worker needs to work long hours or only has a short meal period because of the nature of the particular farm work. Basically, there must be a very good reason, rather than just preference, to have employees living on the farm and/or eating meals on the farm for these to be considered as provided for the farmer’s convenience. Generally, meals provided before or after work hours, on non-work days, or to promote goodwill, boost morale, or attract workers are not considered for the farmer’s convenience. Note, however, farmers may be able to exclude the value of such meals from the worker’s income as de minimus meals (see below).
• The worker must accept the lodging or meals as a condition of employment. This basically means that the worker must accept the lodging or meals as part of their pay if they want the job. Lodging meets this test if the farmer requires their workers to accept the lodging because the workers need to live on the farm to properly perform their duties. For example: they need to be available at all times. This applies to meals too.

De Minimus Meals

Farmers can exclude any occasional meal they provide a worker if it has so little value (taking into account how frequently the farmer provides meals to their workers) that accounting for it would be unreasonable and administratively impracticable. The de minimus exclusion applies, for example, for coffee and meals provided to be sure a worker can work overtime, as well as occasional parties or picnics for workers and their guests.

Meals and lodging provided for the farmer’s convenience and de minimus meals are considered non-taxable fringe benefits. The value of these items can be deducted from the farmer’s income as business expenses. If this approach is taken, the value must not also be included as wages for the worker. That means the worker should not be taxed on the value of those in-kind benefits and the value of the lodging or meals will not count toward meeting minimum wage obligations. To learn more about these non-taxable fringe benefits and others, farmers can take a look at IRS Publication 15-B, Employer’s Tax Guide to Fringe Benefits (2019).

Some words of caution. What’s provided here is just a sampling and is not an exhaustive list of available exclusions. In addition, the tax code is subject to change at any time. Farmers must also keep in mind that there are corresponding rules for their state’s payroll taxes, including income tax withholding and unemployment insurance taxes.

Ultimately, Farm Commons strongly recommends that any farmer choosing to take advantage of a tax exemption or exclusion seek the help of an attorney or accountant along the way. The time with the attorney or accountant can be far more efficient and cost-effective if the farmer first becomes familiar with the issues and factors involved. Building farmers’ knowledge and awareness of these issues is the fundamental purpose of this guide.

The farm’s business expenses

When a farmer provides its workers in-kind payments that the law considers wages or employee income, it cannot also deduct the costs of paying those in-kind wages as a business expense. That’s basically deducting it twice. For example, if a farmer provides lunches to its workers as an in-kind wage, the farmer cannot also deduct the costs of growing or purchasing ingredients used to make the lunches as a business expense.

With that said, as just highlighted, meals or lodging may be treated as non-taxable fringe benefits in certain scenarios. If the required test is met, a farmer may exclude the value of in-kind payments from a worker’s income and instead deduct it from the employer’s income as a business expense. In other words, if the lodging and meals are provided for the farmer’s convenience or the value of the meals is “de minimus,” then the farmer can deduct the value of the applicable in-kind payment as a business expense. Of course, it cannot also include it as part of the worker’s income!

Note that if the commodity wage exclusion applies, the farmer can deduct the fair market value of the in-kind product and services paid on their Schedule F as wages. The farmer must also show the value of the product and services paid as commodity sales on their Schedule F. See Part II of Appendix B for more details on properly reporting commodity wages for federal tax purposes.

For state rules on whether the costs associated with providing meals and lodging are deductible from state income taxes, see Appendix A.