How Farmer Estimated Tax Payments Work

The U.S. tax system operates on a pay-as-you-go basis, meaning the Internal Revenue Service (IRS) requires individuals to pay income tax as they earn income. For most self-employed individuals, this is accomplished through quarterly estimated tax payments. However, special rules apply to the farming industry, recognizing the unique and often unpredictable nature of their income streams. These provisions alter the standard payment schedule, providing farmers with different timelines and calculation methods to meet their tax obligations.

Qualifying as a Farmer for Tax Purposes

To use the special estimated tax rules, an individual must first meet the IRS definition of a farmer. This determination is based on a mathematical test related to income, not occupation alone. The requirement is that at least two-thirds (66 2/3%) of a taxpayer’s total gross income for either the current or the preceding tax year must come from farming activities. This lookback provision allows someone who has a down year in farm income to still qualify if they met the threshold in the prior year.

Gross income from farming is a broad category including proceeds from cultivating land or raising agricultural products. This covers income from the sale of crops, grain, and vegetables, as well as revenue from livestock, dairy, poultry, and bees. It also includes income from operating a stock, dairy, fruit, or truck farm, plantation, ranch, or orchard.

Certain income sources do not count toward this test. Wages earned as a farm employee, income from contract harvesting without a financial stake in the crop, and cash rent from leasing farmland are all excluded. Crop share rent only qualifies if the landlord materially participates in the farm’s operation.

For example, a person with a total gross income of $120,000, where $90,000 came from grain sales, would qualify. The farm income represents 75% of their total gross income, which is above the 66 2/3% threshold, making them eligible for the special rules.

Calculating the Required Annual Payment

After qualifying as a farmer, the next step is to calculate the minimum estimated tax payment required to avoid a penalty. The IRS provides two methods for this calculation, and a farmer only needs to satisfy one of them.

The first option is to pay at least 66 2/3% of the total tax liability for the current year. This method requires projecting income and deductions to estimate the final tax bill. This can be advantageous in a year where income is expected to be significantly lower than the prior year.

The second option, the “safe harbor” rule, is to pay 100% of the total tax shown on the tax return for the preceding year. This method offers certainty because the prior year’s tax liability is a known figure, ensuring no underpayment penalty will be assessed.

For instance, if a farmer’s prior-year tax was $12,000, they could pay that amount to satisfy the safe harbor rule. If they project their current year’s tax to be $15,000, they could instead pay 66 2/3% of that amount, which is $10,000. In this case, paying $10,000 would be the better choice.

Payment Deadlines and Options

A qualifying farmer has two distinct choices for when to make their payment, offering more flexibility than the standard quarterly schedule.

The first option is to make a single estimated tax payment that covers the entire required amount. This payment is due by January 15 of the year immediately following the tax year. For example, the estimated tax payment for the 2024 tax year would be due by January 15, 2025. If this date falls on a weekend or holiday, the deadline shifts to the next business day.

The second option allows the farmer to bypass the January 15 estimated payment. To do this, the farmer must file their complete federal income tax return and pay the full tax liability by March 1 of the year following the tax year. By meeting this early filing deadline, the requirement to make a separate estimated tax payment is waived, but it requires completing the tax return much earlier than the general April 15 deadline.

How to Make the Payment

Farmers who opt to make the January 15 estimated tax payment can use several methods for submission.

• Mail a check or money order accompanied by a payment voucher from Form 1040-ES, which ensures the payment is correctly applied.
• Use IRS Direct Pay, a free service that allows payments directly from a checking or savings account.
• Pay through the Electronic Federal Tax Payment System (EFTPS), a government service also available for individual taxpayers.
• Use a debit card, credit card, or digital wallet, which are processed through third-party payment processors that charge a fee.

Underpayment Penalties

Failing to meet the required payment thresholds and deadlines can result in an underpayment penalty. This penalty applies if a qualifying farmer neither pays the required estimated tax amount by the January 15 deadline nor files their return and pays the full tax liability by the March 1 deadline.

The IRS calculates this penalty using Form 2210-F, “Underpayment of Estimated Tax by Farmers and Fishermen.” The penalty amount is based on the underpayment amount multiplied by an interest rate that the IRS sets quarterly.

A farmer will not owe a penalty if the total tax shown on their return, after subtracting any withholding, is less than $1,000. If a penalty is due, Form 2210-F must be completed and attached to the tax return. The IRS may waive the penalty in some specific circumstances.