IT is a common occurrence for family members to assist in running the family farm.
All members of the family are usually brought in to assist at various busy times, and particularly at holiday periods. It’s often common that young family members are not paid directly for their farm work, but they may get college fees paid, diesel for the car, and some pocket money for the weekend.
Likewise, traditionally the farmer’s wife worked in the home and also assisted in the farm, but would not have been formally recognised as being actively involved in the farm business, either as a partner in the business or as a salaried employee.
This week we look at how family members can be rewarded in a tax-efficient manner, such that the overall tax paid by the family is reduced.
Paying for personal expenses of family members from the farm account is not a tax-efficient strategy. Technically, there is no tax deduction for the personal expenses.
In contrast, wages paid for work done by family members are tax-deductible.
Ireland has what is known as an individualised tax system, with some transferability between spouses, unlike for example France, where families’ incomes are assessed on a household basis.
Here, every individual is entitled to a single person tax credit, which means they can earn up to €9,150 tax free. For a relatively high earning farmer, paying a salary to a son or daughter can reduce the overall tax paid by the family by up to 41% of the salary.
The farmer is required to register as an employer, and there will be a monthly tax return to be completed. Where the son or daughter works on a full-time basis, they can earn up to €18,300 tax free, where the child devotes substantially the whole of their working week. The tax saving, from an overall family position, can be over €7,500 in these circumstances.
As mentioned, there is some transferability of tax credits between husband and wife, and therefore the advantages of formally recognising a spouse’s contribution through salary or partnership in the business are limited. The advantages kick in where the farmer has farm profits over €45,400, with his or her spouse having income below €27,400. The payments to the son or daughter or spouse may be subject to PRSI (employers and employees PRSI).
The PRSI legislation for family employment is particularly tricky. In some circumstances, no PRSI can apply, for example, salary up to €500 per week paid to a son or daughter by a farmer, where the son or daughter is living with the farmer. In some cases, normal PRSI can apply at a combined rate of up to 18.75%.
There are other tax and non-tax considerations which should be taken into account – for example, the payment of wages to a family member may help in adding to their PRSI record, entitling them to social welfare benefits.
As always, each individual’s circumstances should be looked at for the best advice. Your questions on this and other farm tax issues are welcome.
© Irish Examiner Ltd. All rights reserved