Set Your Family Up for Success with Income Shifting Strategies
For business owners, there are a variety of ways to reduce your tax liability, but it’s hard to know which of these strategies best apply to you. One such strategy that our Business Services team recommends to many of our clients is income shifting, which can help set your family up for success and open the door for potential tax savings.
What is income shifting?
Income shifting enables business owners to transfer income from high to low-tax bracket taxpayers. In turn, this reduces the overall tax burden on oneself as well as enables your child to take the standard deduction amount tax-free (for federal taxes, not state). This technique is also known as income splitting and can be used to shift unearned investment income from a parent to a child as well. (Click here to learn more about income shifting.)
How Income Shifting Applies to You
In 2025, a business owner can employ and pay their children up to $14,600 and consider this as a business expense. In effect, this lowers the net income of the business and therefore lowers the taxable federal income as well. That said, the IRS does have certain requirements for income shifting, which include:
- You must set up payroll for your child. This includes sole proprietors who cannot pay themselves through payroll; they can, however, pay employees through payroll.
- You can pay other dependents as employees as well, including a spouse, partner, step-child, adopted child, elderly parent, grandparent, or someone else who lives in your household for whom you are financially responsible.
- You must pay them what is considered a reasonable wage. The IRS is prone to flagging any excessive pay spotted.
- The work you assign must be directly related to the business. (Ex: Easy admin work, cleaning offices, etc.).
- Make sure you keep good records of the pay received for your family and the taxes paid.
- You do not have to be an S Corp to utilize income shifting. However, if you have enough income to consider this strategy to begin with, it may be wise to discuss with our Business Services team whether transitioning to an S Corp would be a good tax-advantaged step to take.
Pave the Way for Your Family’s Financial Success
By shifting your taxable income to your child, you can reinvest this money into your family’s future. For instance, you might be eligible to fund a 529 Direct Savings Plan or a Roth IRA under the child’s name. Additionally, if you put your money into a 529 plan for a child, you’re reducing your income and still receiving the tax credit. Thus, you can plan for your children’s college, lower your taxable income, and start retirement planning early on. Click here to learn more about enrolling for an Indiana 529 Direct Savings Plan.
Our Business Advisory Program Incorporates Income Shifting and Other Strategies
Learning the ins and outs of income shifting can be overwhelming. That’s why we have a Business Advisory Program that works to incorporate this tax-saving strategy and others, explain the stipulations surrounding them, and walk you through the process. Through this forward-thinking program, our team of professionals works with you to reduce your tax liability, examine your current tax entity, analyze your financials, create and fine-tune your succession plan, and more. Our ultimate mission is to guide businesses to success by creating a roadmap for how to achieve their goals. Click here to learn more about our Business Advisory Services.
Interested in learning more about how to get started? Contact us now to schedule an introductory call. (Click here for contact information.) Or interested in learning more about other Business Services? (Click here to learn more.)
Blog by Erika Lewis – Business Services Director
Learn more about Erika and the rest of the Storen Financial team here.
Prior to investing in a 529 Plan, investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.