AS YOU KNOW, DOCUMENTATION IS VERY IMPORTANT.
A recent Tax Court decision dealing with a farm proprietor and a spousal employment arrangement emphasizes the importance of properly completing a written employment agreement and also keeping detailed records regarding the actual hours worked and services performed by the spousal employee.
In particular, the case involved a farm proprietor in southwestern Minnesota who employed his spouse under a written employment agreement. The farmer established an employer-provided accident and health plan for the spousal employee, using AgriPlan/BizPlan.
However, the employment agreement that existed between the farm proprietor and the spouse did not specify the number of hours the spouse was required to work, nor did it establish the days or times she was required to be available to work. Additionally, neither the farm proprietor nor the spouse recorded how many hours, if any, the spouse actually worked, nor did they document the nature and extent of the services the spouse may have performed. Accordingly, given the lack of detail in the employment agreement and in recording the hours worked and services performed, the court disallowed the deduction on the Schedule F for the employee medical fringe benefits.
In this particular case, the spouse had received about $2,000 of direct compensation and nearly $10,000 of health, insurance and medical reimbursement fringe benefits, for a total compensation package of about $12,000. But the taxpayer was unable to provide documentation of hours worked and a reasonable hourly pay rate to support this $12,000 compensation amount.
This case emphasizes the importance of paying attention to detail both in the completion of employment agreements and in the recordkeeping of spousal hours worked and services performed.
Based on this adverse Tax Court decision, we recommend that farmers with farm spousal employment arrangements immediately address the following two steps:
1. Review the written employment agreement between the farm proprietor and the spousal employee and be certain that the employment agreement specifies the number of hours the spouse is required to work, the days and times the spouse is required to be available for work, and in general, the duties of the spousal employee.
2. Similar to other employees, have the spousal employee document the number of hours the spouse actually works and the nature and extent of the services performed. This could be accomplished with a simple notebook, detailing the date, hours worked, and the nature of services performed during that particular day.
With a pro-IRS Tax Court case on their side, we can expect IRS examiners to give increased attention to these issues on farm audits. Please be sure that you review your current employment agreement, and complete the steps recommended in this correspondence.
A recent Tax Court decision dealing with a farm proprietor and a spousal employment arrangement emphasizes the importance of properly completing a written employment agreement and also keeping detailed records regarding the actual hours worked and services performed by the spousal employee.
In particular, the case involved a farm proprietor in southwestern Minnesota who employed his spouse under a written employment agreement. The farmer established an employer-provided accident and health plan for the spousal employee, using AgriPlan/BizPlan.
However, the employment agreement that existed between the farm proprietor and the spouse did not specify the number of hours the spouse was required to work, nor did it establish the days or times she was required to be available to work. Additionally, neither the farm proprietor nor the spouse recorded how many hours, if any, the spouse actually worked, nor did they document the nature and extent of the services the spouse may have performed. Accordingly, given the lack of detail in the employment agreement and in recording the hours worked and services performed, the court disallowed the deduction on the Schedule F for the employee medical fringe benefits.
In this particular case, the spouse had received about $2,000 of direct compensation and nearly $10,000 of health, insurance and medical reimbursement fringe benefits, for a total compensation package of about $12,000. But the taxpayer was unable to provide documentation of hours worked and a reasonable hourly pay rate to support this $12,000 compensation amount.
This case emphasizes the importance of paying attention to detail both in the completion of employment agreements and in the recordkeeping of spousal hours worked and services performed.
Based on this adverse Tax Court decision, we recommend that farmers with farm spousal employment arrangements immediately address the following two steps:
1. Review the written employment agreement between the farm proprietor and the spousal employee and be certain that the employment agreement specifies the number of hours the spouse is required to work, the days and times the spouse is required to be available for work, and in general, the duties of the spousal employee.
2. Similar to other employees, have the spousal employee document the number of hours the spouse actually works and the nature and extent of the services performed. This could be accomplished with a simple notebook, detailing the date, hours worked, and the nature of services performed during that particular day.
With a pro-IRS Tax Court case on their side, we can expect IRS examiners to give increased attention to these issues on farm audits. Please be sure that you review your current employment agreement, and complete the steps recommended in this correspondence.
