RS 01402: Wage Exclusions
TN 17 (09-96)
A. Policy - General
SSA Ruling 95-3P, published August 7, 1995, changes the way certain transactions involving noncash transfers for agricultural labor are treated by SSA for wage purposes. Prior to the ruling, noncash transfers were excluded from wages by SSA. Effective August 7, 1995, certain noncash transfers are wages under Section 209(a) of the Act. This noncash remuneration, generally referred to as in-kind payments, includes lodging, food, clothing, agricultural or horticultural commodities such as livestock, grain and milk products, and other noncash items.
Some employers provide cash or credit for food, clothing, etc., and later deduct the amount from the farmworker's share of the net proceeds of the commodity. In this situation, the farmworker's cash wages for the year is his/her share of the net proceeds before reduction for the amount owed.
REFERENCES: Section 209(a)(7)(B) of the Act; 20 CFR 404.1055.
B. Policy - Background
Some farmers have attempted to use commodity payments as remuneration for agricultural services to avoid paying FICA tax. This practice can prevent workers from accumulating the quarters of coverage needed to qualify for Social Security benefits or can result in reduced benefits. However, if at the time such payments are made, it is reasonably understood that the remuneration shall be converted to cash or is, in reality, equivalent to a payment in cash, it shall be treated as wages.
C. Policy - Cash Payments
1. Beginning 1988
Beginning in 1988, cash payments of less than $150 in any calendar year are excluded from wages if the employer paid less than $2,500 for agricultural labor in a year.
EXCEPTION: The $2,500 a year test does not apply to certain seasonal employees (see RS 01402.025).
2. 1957 through 1987
From 1957 through 1987 cash payments of less than $150 in a calendar year are not wages unless the employee worked for the employer for 20 or more days during the year, and was paid cash wages computed on a time basis (hour, day, week, month, etc).
3. 1955 through 1956
From 1955 through 1956 cash payments of less than $100 in a calendar year by the employer are not wages.
4. 1951 through 1954
From 1951 through 1954 cash payments of less than $50 are not wages. Prior to 1951, agricultural labor was excluded from coverage.
D. Policy - Determination of In-Kind Payments
The agreement or understanding (verbal or written) between the farm operator and the employee is a deciding factor in determining whether the payment represents payment-in-kind or cash wages. When payment-in-kind is involved, it is now necessary you determine if it is readily convertable to cash and, therefore, to be considered cash wages.
When a noncash transfer occurs, it is wages if:
1. Employer and Employee Relationship
A bona fide employer-employee relationship exists.
If no employment relationship exists, there are no wages. To determine employer-employee relationship see RS 02101.020.
2. Equivalent to Cash
The in-kind payment must be equivalent to cash.
Although Section 209(a)(7)(A) of the Act excludes from the definition of wages remuneration paid in any medium other than cash for agricultural labor, if a bona fide transfer of the noncash medium from the employer to the employee has not occurred and the transaction is, in economic reality, equivalent to a payment in cash, the wage exclusion does not apply.
3. Employers Dominion and Control
The employer must exercise dominion and control over the noncash item.
In determining whether the transaction involving a noncash medium is, in economic reality, a payment in cash, SSA will consider the extent to which the employee exercises dominion and control over the noncash item. Among those things to be considered are:
Has the employer transferred a readily identifiable portion of an item?
Does documentation of the transfer exist?
What is the length of time between the receipt of the item by the employee and the sale of the item?
Does the employee negotiate the subsequent sale of the item?
Does the risk of gain or loss shift to the employee?
Does the employee bear costs incident to ownership of the item, e.g., storage, feeding, or maintenance costs?
E. Procedure - Development of In-Kind Payments
Review the following kinds of evidence.
Documentation of the existence of an employer-employee relationship and,
Information concerning the terms of the agreement and,
-
Evidence of the transfer of commodities.
Written evidence must be obtained. This includes receipts, contracts, bills of sale, and other instruments of conveyance that may vary depending on the type of commodity involved.
F. Examples
Example 1: A farm operator agrees to give an employee 30 head of cattle for services performed on the farm. The farm operator sells 100 head of cattle to a commodity purchaser. The commodity purchaser gives the farm operator a check for 70 head of cattle and the employee a check for 30 head of cattle. These facts indicate that the cash proceeds from the sale are wages because the employee did not exercise dominion and control over the cattle.
Example 2: A farm operator pays an employee $50 a month plus 10 head of cattle per month for services performed on the farm. The employee pays the farmer rent to maintain the cattle on the farm property in an area separate from the farm operator's livestock. The employee assumes the costs of feeding, maintaining, and transferring the cattle to the market for sale. The employee is paid directly by the commodity purchaser for the cattle. These facts indicate that the commodity payments are not wages because the employee exercises dominion and control over the cattle subsequent to receipt and bears the cost incident to ownership of the cattle.
Example 3: An employment agreement provides that a farmer will compensate his wife in cash wages of $100 per month and transfer 100 head of cattle each year. The wife's cattle are raised and maintained with the husband's cattle. Under the employment agreement, the farmer delivers the cattle to a market location agreed upon by the wife and at the market transfers ownership to the wife. The wife's cattle were not distinguishable or readily identifiable from the other cattle taken to market. The wife receives a check directly from the market for the cattle. Since the sale of the cattle occurs almost simultaneously with their delivery to the wife, these facts indicate that the in-kind transfer is, in substance, equivalent to a cash payment and therefore wages for Social Security purposes.