When in-kind wages are paid to cover minimum wage owed, additional rules apply. Federal law has strict guidelines and limitations on how to value and account for in-kind payments made to cover minimum wage requirements. Before we dive into the legal requirements, we need to reframe the lingo that we’ll be using. Most folks think of an in-kind payment as just that, a payment. Typically, when making in-kind farmers add up all the in-kind payments and then top it off with cash to cover anything remaining. However, the law thinks of it differently. The law assumes that a cash payment is being made to cover the minimum wage. So it thinks of the payment of in-kind wages as a deduction from the cash wage. Along these lines, the farmer would say: “I owe you $200 in minimum wage. I’m offering you lodging that is equivalent to $100 and meals that are equivalent to $50, so I’m deducting the $150 from the $200 in cash owed.” It’s really all the same in the end. However, this guide is using the phrase “deduction from wages” because that’s how the law thinks about it.
Deduct only in-kind payments that are allowed by the law and authorized and agreed to by the employee
The law specifically sets out what can and cannot be deducted from an employee’s paycheck. Specific types of in-kind wage deductions that are permitted by the law include meals, housing, and transportation. Nevertheless, the farmer cannot make deductions for these items unless the worker willingly authorizes it and actually uses or takes these items when offered. For example, if the farmer prepares daily lunches for her workers, she cannot automatically deduct the value of these meals from all her workers’ paychecks. She can only make the deduction for employees that actually eat each of the meals offered. Farmers providing meals will therefore have to keep track of who eats what, whether through a log book or some other system.
Also, the farmer cannot deduct items that would simply be for her own convenience or benefit—even if the employee authorizes it. Examples of such items include tools and equipment used on the farm or uniforms or attire that can only be worn at work. Requiring the employee to pay for these items essentially benefits the farmer as she’s passing on a necessary business expense. Note that the farmer can make a deduction from wages for these items if, and only if, the farmer has already fulfilled her obligation of paying any minimum wage owed AND the employee willingly authorizes it.
Education and training provided to workers falls into the category of something that’s primarily beneficial to the farmer. Sure, the worker benefits from learning general farming practices. But it’s really the farm that benefits the most by having well trained, efficient workers. Therefore, the farmer can only make a deduction from wages for education and training if the farm has already fulfilled its obligation of paying any minimum wage owed AND the employee willingly authorizes. The farmer could certainly put a value on the education and training she’ll provide 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 employees 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!
Have the worker sign an agreement acknowledging the in-kind payment arrangement
Any in-kind arrangement that the farmer has with an employee to fulfill the minimum wage obligation must be in-writing and signed by employee at the get go. 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. In addition, it provides written proof that wages were in fact paid if an issue were to ever arise.
Properly assess the value of the lodging and meals
The federal rules set out a very specific method for determining the value of in-kind payments. Here’s the rule: Farmers can deduct the lesser of two things (a) the fair market value, OR (b) the actual cost to the farmer in providing it.
This is easier to understand through an example.
Let’s say that Farmer Amanda 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 Amanda’s area rent out for? If she’s in a rural area of Wisconsin, it might not be much. If she’s near the heart of Madison or some bustling small town, it will, of course, be more. Let’s say the going rate is $400 a month for Amanda’s area. The next step is to determine what it actually costs Amanda to have this mobile home. She’s already paid it off in full, so her costs are minimal. She’s only paying utilities, which run her about $75 a month. This is the lessor of the two. Therefore, $75 a month for lodging is all that Amanda can deduct from the minimum wage she owes her worker.
Basically, the farmer cannot profit from offering in-kind wages. If Amanda 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—including a tax audit or a wage claim.
This same formula applies to meals. Let’s say that Amanda 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 Amanda 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 simply decide it’s not worth it and simply pay any minimum wage owed in cash and provide in-kind payments as a bonus.
Itemize deductions on each pay stub
Any deductions made for in-kind wages must be itemized on the pay stub that is provided to the employee at each pay period. This is required by law as it provides the employee the opportunity to see what has been taken each time. In addition, it provides yet another way to prove that in-kind payments were in fact made.
Investigate tax obligations
Wages paid in anything other than cash for agricultural labor are exempt from FICA (i.e. social security and Medicare tax) as well as federal income tax withholding obligations. This means that the farmer would not need to withhold federal income tax on the non-cash wages. In addition, neither the farmer nor the employee would need to pay social security and Medicare taxes on non-cash wages. However, taking advantage of this exemptions comes with a whole new set of limitations and recordkeeping obligations. What’s more, it raises a huge risk for an audit. For more details on the risks and requirements of utilizing this exemption, see the Farmers’ Guide to In-Kind Wages.