Substantial tax reliefs available for employing farm family members
Registering family members who help out or indeed work full-time on the farm can be very beneficial from a tax point of view.
In many instances, a son or daughter will not pay income tax or universal social charge as the amount they are likely to earn will fall under the threshold that would give rise to a liability.
The current single person's tax credit will enable a son or daughter earn up to €8,250 free of income tax and Universal Social Charge provided that they do not have any other taxable income.
Most employees are liable to pay PRSI but exceptions to this general rule may apply in the case of certain family employments.
A family employment describes a situation in which a farmer either employs, or is assisted in the running of the business, by a spouse or by other family members. There is a requirement that the son or daughter resides with their parents on the farm to be exempt from PRSI.
However, it should be noted that if the business does not operate on a sole trader basis, for example if it is a Limited Company or a Partnership - it is not family employment and any wages paid will be liable to PRSI ant 4pc.
Revenue will require that the wages are actually seen to be paid and are not simply an adjustment to personal drawings. Under labour law a young person between 14 and 15 years may be employed for light work provided it does not interfere with their schooling.
Children aged 15 may do eight hours a week light work in school term time. The maximum working week for children outside of school term time is 35 hours. The maximum working week for young people aged 16 and 17 is 40 hours with a maximum of eight hours a day.
Generally these rules will not impact on family employments but they do set a basis for the amount of wages that can be paid and deducted from profits, particularly in the case of children under 16 years.
Son or daughter employed full-time
A son or daughter employed full-time on the farm can earn up to €16,500 per annum or €317 per week free of income tax provided that they do not have any other taxable earnings. He/she will not be liable to PRSI if they are residing at home and the parent is operating as a sole trader.
They will however be liable to Universal Social Charge on all their earnings once those earnings exceed €12,012. Where the parent is paying tax at the 20pc band, the net overall tax saving in employing a son or daughter and paying them, say €300 per week, is €4,373.
If the parent were a 40pc tax payer, the saving would be €7,494 in tax PRSI and USC. This represents just under half of the actual wage.
Typically wages to family employees fall far short of what could be justified, so in certain family situations it may be worth the parent's while considering paying a higher wage that could be set aside for some future cost that the son or daughter might incur such as a house, wedding, car and so on, a cost that the parent may have to contribute towards.
While the increased wage may result in the son/daughter paying tax at the 20pc rate, the savings for the parent would be 40pc in income tax and 4pc in PRSI.
The Universal Social Charge cost would be neutral as the added cost to the son or daughter would be saved by the parent.
Most farming spouses contribute in no small way to the operation of the farm business whether dealing with the myriad of administration tasks and/or out in the yard. Accordingly they could well justify a wage where they do not already have a taxable income.
One option is to create a partnership but perhaps a simpler one may be to pay a wage. The benefit of paying a wage is that it will extend the 20pc tax band. Currently a married individual whose spouse has no income, can earn up to €42,800 at the 20pc rate of tax.
However, the 20pc band could be extended by up to €19,800 by paying the spouse a wage of up to that amount. This could represent a reduction of up to €4,950 in the family's income tax bill.
It should be noted that where the spouse qualifies for the home carer's tax credit of €1,000 they are not entitled to earn more than €7,200 per annum to avail of the credit. This may be very relevant where the farm profits attract a moderate liability at the high rate as it may be beneficial to confine the wage to €7,200 or less whereby the home carer's tax credit is preserved.
Paying a wage to the spouse will generally not affect the family income as a wage of this nature can be legitimately funded out of their spouse's drawings thereby creating no additional drain on the farm cash flow.
Spouses who are paid a wage where their partner is a sole trader are note covered under the PRSI system but spouses who assist on the farm and do not receive a wage can be covered under Class S PRSI. In many instances this may prove a benefit in terms of eligibility to a contributory pension and it does not represent any additional cost as the farm profit that is liable to PRSI will be reduced by the amount of the spouse's wage.
In order to claim tax relief on any wages paid it is absolutely necessary to register as an employer with the local Inspector of Taxes. This is a simple procedure and involves completing an application form or it can be done online. An annual return of family wages paid will generally be accepted.
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