The South Dakota Farm Bureau is encouraging Senator John Thune to support efforts to clarify that CRP payments are not subject to self-employment tax. 

Recently, the IRS issued a proposed ruling that all CRP payments will be subject to self employment taxes.  Currently, the IRS does not collect the taxes on CRP payments to farmland owners who don’t materially participate in farming operations.

Michael Held, SDFB Administrative Director, explains that most farmers and ranchers are self-employed and pay a 15.3 percent “self-empoyment” tax on earned income for Social Security and Medicare.  The self-employment tax does not ordinarily apply to income from cash rent because cash rental income represents a return on investment.

In 1996, the Tax Court ruled in Wuebker vs. Commissioner, that CRP payments were considered rental payments and therefore not subject to the self-employment tax.  However, in March 2000, the Sixth Circuit Court of Appeals reversed the Tax Court's opinion, allowing the IRS to collect the 15.3 percent self-employment tax on CRP payments from landowners engaged in the business of farming.

“Because of the Circuit Court ruling, farmers and ranchers are treated differently from non-farm taxpayers for purposes of collecting self-employment taxes on rental income,” said Held.  “Non-farm landlords and even farmland owners who receive CRP payments but don’t materially participate a farming operation don’t pay self-employment taxes on cash rent.”

If the IRS proposal were to be finalized, all CRP payments would be subject to self-employment taxes, regardless of whether or not the landowner was actively engaged in farming.