How Montana farms and ranches use commodity wages, and how to do it right.

Have you ever thought about giving your employees grain or calves instead of cash to avoid taxes? You should. 

Does that line make you cringe a little, or wonder what in the heck your accountant is talking about? This is not some shady way to skirt taxes. Commodity wages are a tried and true way to pay farm and ranch employees, and they are written into the Internal Revenue Code. Done right, commodity wages are not subject to Social Security or Medicare tax for you or your employee. That is 7.65% saved on each side, 15.3% combined. 

Where it fits best: the year-end bonus 

Most farmers who use commodity wages use them the same way. It was a good year. They want to share it with the crew. And they want the bonus to go further. Here is a $13,200 bonus both ways. 

That is about $2,020 that stays with you and your crew instead of going to payroll tax. 

A bonus is also the cleanest way to use commodity wages. Your employee’s regular paycheck stays in cash, so they keep building Social Security credits and Medicare eligibility. The grain is the extra on top. 

• Timing. Transfer the grain by December 31 if you want it in this year’s wages. 

• Retirement plans. If you have a 401(k) profit sharing or SEP plan, ask whether commodity wages count as compensation. In many plans they do. 

The three pillars 

1. A real economic transfer 

Your employee has to actually get the grain, and everything that comes with owning it. If the price goes up, they win. If it drops, they lose. They decide when and where to sell, and the check comes to them. 

• The grain goes into their name at the elevator, or into a bin they rent from you at a fair rate. They pay the rent. 

• They market it themselves, through their own account. 

• You do not sell it for them, buy it back, or hand them the settlement check. 

• The bonus is set in bushels, not dollars. “2,000 bushels of spring wheat” is a commodity wage. “A $13,000 bonus paid in wheat” is a cash bonus with extra steps. 

Calves work the same way. Your employee owns them, arranges the trucking, and sells them in their own name. 

2. Documentation 

The paper proves the transfer happened. For grain, that means scale tickets or warehouse receipts in your employee’s name, or a written bin rental agreement if it stays on your place. For calves, a brand inspection documenting the change of ownership, plus a bill of sale. Either way, write a short memo stating the bonus in bushels or head, and have both of you sign it. 

Check one more thing before transfer day. If the grain is under a CCC loan or pledged to your lender, you need the loan repaid or a release before you can hand it over clean. 

3. Value and reporting 

Setting the value. The wage is the fair market value of the commodity on the day it changes hands. That means a local market price, in the state where the commodity is, on the date of transfer, from a third-party buyer your employee could actually sell to. 

• Cattle: the sale report from PAYS in Billings or Lewistown Livestock Auction for that week, matched to sex and weight class. 

• Grain: the posted cash bid that day from an elevator like Columbia Grain or United Grain, adjusted for grade and protein. 

What does not work: a buyer you hold a contract with when there is no open bid, your own forward contract price, what your employee later sells it for, or a futures price without local basis. Print or save the bid or report with the date showing, and keep it with the scale tickets or brand inspection. 

Reporting it. 

• On your books: record a sale of the grain and a wage expense for the same amount. For grain you raised, the two cancel out, so the transfer does not change your income tax. The savings is the payroll tax. If you bought the grain, you have a gain or loss on the difference between its value and what you paid. 

• On the W-2: the value goes in Box 1 as wages. It does not go in the Social Security or Medicare boxes. 

• On Form 943: file as usual. The commodity wages stay off the Social Security and Medicare lines. 

• To your accountant: tell them before year end, with the date, bushels, price, and price source. 

Owners and family: same rules, more paper 

Commodity wages work for employees. When the person receiving the grain is also an owner or a family member, the rules do not change, but the IRS looks harder and your paperwork has to carry more weight. 

• Sole proprietors and partners. You cannot pay yourself wages. Moving grain from the farm to yourself is not compensation. A partner’s guaranteed payments are self-employment income whether they are paid in cash or in kind. 

• S corporation owners. If you work in your S corporation, you are its employee, and it can pay you commodity wages for farm work. Nothing in the law requires that pay to be cash. The IRS does look hard at owner pay, though. If your commodity wage does not hold up, you may have paid yourself no wage at all, and your cash distributions can be reclassified as wages. Some owners keep a small cash paycheck as a hedge. Others rely on airtight documentation. That is a decision to make with your tax advisor. If you keep the cattle and feed them out on your own place, the gain after transfer day is your own farm income. 

• C corporation owners. The same idea applies, and nothing requires the pay to be cash. The corporation deducts the wage, so it has to be reasonable for the work you actually do. Pay that runs too high can be treated as a dividend, which the corporation cannot deduct. As with an S corporation, any gain after transfer day on cattle you feed out on your own place is your own farm income. 

• Spouses. A spouse can be a true employee of the farm, with real duties and real pay. If the two of you own and run the farm together, you may be partners instead, and partners are not employees. 

• Children. A child under 18 working for a parent’s sole proprietorship already pays no Social Security or Medicare, so commodity wages add less there. In a corporation that exemption does not apply, and commodity wages can matter more. Either way, when your child sells the grain later, the gain may be taxed at your rate under the kiddie tax. 

Which hat are you wearing? 

When you are on both sides of the transfer, it has to be clear which hat you are wearing. The corporation is the employer. You are the employee. The grain has to leave the corporation and become yours, with your risk and your decisions. If the price drops, you take the loss like any other employee would. 

• Put it in writing. A board resolution or memo states the wage in bushels or head, for services performed. Grain moved to an owner without one looks like a distribution, not wages, and a distribution is treated very differently. 

• Land it in something you own. A small bin you own personally, or pasture you own or lease in your own name, works well. The grain or cattle land there, and no storage or pasture rent is needed because it is already yours. If it stays in the corporation’s bin or on its pasture, pay the corporation a fair rent and actually pay it. 

• Keep the marketing separate. Sell through your own account, and deposit the check into your personal account. 

• Keep a journal. A simple dated log of exactly what happened: when the grain moved, which bin, the bid you used, who you called, and when you sold and why. Notes made at the time are far more convincing than a story told two years later. 

This is a strategy to talk through with your tax advisor for your own operation before you do it. The savings can be real. So is the documentation. 

The year-end timeline 

• By mid-November: decide the bonus in bushels or head, and confirm there is an open local bid for the commodity. 

• Before transfer day: clear any lender lien or CCC loan, schedule the brand inspector for cattle, and sign the bonus memo. 

• Transfer day: move it into your employee’s name and save that day’s bid or sale report. 

• By December 31: finish the transfer if you want it in this year’s wages. 

• January: give your accountant the date, quantity, price, and source for the W-2. 

What happens if you get it wrong

• It becomes cash wages after all. Selling it for your employee, buying it back, or setting the bonus in dollars turns it into a cash bonus. That means back Social Security and Medicare for both halves, plus penalties and interest. 

• The value cannot be backed up. If you pick a number with no third-party support, the IRS gets to pick a different one. 

• It gets left off the W-2. Commodity pay is still wages. Leaving it off does not make it tax free. It makes it unreported. 

• Your employee gets a surprise tax bill. Nothing is withheld on commodity pay. Tell your employee to set money aside or increase withholding on their cash paychecks. If prices drop before they sell, they still owe tax on the transfer-day value. 

• You go all in. Paying all wages in commodities saves the most tax today. It also leaves your employee with no Social Security credits, no disability coverage, and no Medicare record from that work. Keep a cash paycheck and put commodities on top. Where federal minimum wage applies, it has to be paid in cash anyway. 

  
  

Want the templates? 

Swanson Agency sets up commodity wage bonuses for our clients every year. We also built a Commodity Wage Toolkit for farms that want to do it themselves: a one-page bonus memo, a livestock bill of sale, a grain transfer and bin agreement, a checklist, a workbook that does the math, an employee handout, and a Montana pricing guide. 

Email us at hello@swansonmt.com and ask about the Commodity Wage Toolkit. Or if you want a second set of eyes before transfer day, one phone call and we walk you through the rest. 

Figures are illustrative and rounded. Social Security and Medicare rates: 6.2% and 1.45% for each of employer and employee. This toolkit is general information for Montana agricultural employers. It is not legal, tax, or accounting advice for your situation, and using it does not make you a client of Swanson Agency. Templates should be reviewed by your own attorney and tax adviser before use.