Farm Income Expense - Labor Hired

When reporting farm income and expenses, labor hired is a deductible business expense if it is ordinary and necessary for farming operations. You may deduct reasonable wages paid for regular farm labor, piecework, contract labor, or other forms of labor hired to perform farming activities. This includes cash or noncash compensation such as inventory, capital assets, or business-use assets. The cost of boarding farm labor is also deductible, but the value of farm products used by employees is not.

Deductible Labor Expenses

• Spouse as an employee: You can deduct reasonable wages paid to your spouse if a true employer-employee relationship exists. These wages are subject to Social Security and Medicare taxes. For more details, see “Family Employees” in IRS Publication 225.
• Child as an employee: Wages paid to a child for farmwork are deductible if a true employer-employee relationship exists. Wages for children aged 18 or older are subject to Social Security and Medicare taxes. A Form W-2 must be issued to the child employee.
• Property for services: If you pay an employee with property, you can deduct the fair market value of the property on the date of transfer. If the employee pays you for the property, deduct the fair market value minus the payment made by the employee.
• Employment credits: Reduce your deduction for wages by any employment credits claimed, such as the Work Opportunity Credit (Form 5884), Empowerment Zone Employment Credit (Form 8844), or other applicable credits.

Nondeductible Labor Expenses

• Maintaining your home: Wages paid for work maintaining or repairing your personal residence are nondeductible personal expenses. For example, if an employee spends 5% of their time on home maintenance, 5% of their wages and employment taxes are not deductible.
• Household workers: Wages paid to household workers (e.g., cleaning, cooking) are not deductible unless their services are used in boarding or caring for farm laborers.
• Construction labor: Wages paid for constructing new buildings or improvements must be capitalized and are not deductible as current expenses.

Reporting on Schedule F

• Line 22 – Farm labor: Enter total amounts paid for farm labor, excluding payments to yourself. Reduce the deduction by any employment credits claimed (e.g., Form 5884, Form 8844). Include boarding costs but exclude the value of farm products used by employees.
• Line 13 – Custom hire/machine work: Report amounts paid for custom hire or machine work (where the operator provides equipment). Do not include rental or lease payments for equipment you operated yourself—those go on Line 24a.

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Disclaimer: Always verify details with current Federal or State Department of Revenue Forms and Instructions. For complex situations, consult a CPA or tax attorney.