03/25/2026
Tuesday Tax Tip: Keep it in the Family—The Power of Income Shifting 👨👩👧👦
One of the most effective ways to lower your household’s total tax bill is a strategy called Income Shifting.
By moving a portion of your business income to family members in lower tax brackets, you can significantly reduce the amount of "high-tax" dollars your family pays to the IRS.
The Strategy: Hiring Your Children
If you have children who can perform legitimate work for your business—whether it’s cleaning the office, assisting with social media, or data entry—you can pay them a reasonable wage.
Why this is a "win-win":
* In 2026, the standard deduction for a single filer is $16,100. This means your child can earn up to this amount tax-free at the federal level.
* Business Deduction: Your business gets a tax deduction for the wages paid, effectively shifting that income from your high tax bracket to your child’s 0% bracket.
* Payroll Tax Perks: If your business is a sole proprietorship or a partnership owned only by parents, wages paid to your children under age 18 are typically exempt from Social Security and Medicare taxes.
💡 Pro-Tips for Compliance:
* Legitimate Work: The tasks must be age-appropriate and necessary for the business.
* Market Rate: You must pay them what you would pay a third party for the same work. No "$500/hour" for taking out the trash!
* Paper Trail: Treat them like any other employee. Keep timesheets, have a clear job description, and pay them by business check or direct deposit.
* Roth IRA Opportunity: Since this is "earned income," your child can also contribute to a Roth IRA. Starting a retirement fund for a teenager can lead to massive tax-free growth over their lifetime.
