Woodland Hills, CA – Nooshin Boloorian, accountant and officer of NB & Associates, provides full-service accounting, bookkeeping, payroll, and tax-preparation for her clients. Nooshin gives some key insights on how to save money in taxes by shifting income.
Nooshin says if you want to save money in taxes without working harder, a very effective way of doing so is to shift income from a higher bracket taxpayer to a lower one or even a zero rate-bracket. She further informs that splitting the income between family members by hiring them to work in the business is a tactic that can save thousands in taxes. She gives an example of this as shifting income to your kids by hiring them to work for you. Nooshin describes this as a perfectly legal action if done correctly. However, she stresses that if the children are unreasonably paid, the IRS will take notice. Below she gives an example of how this can work.
Jane owned a consulting business. She had two teenage sons that legitimately did work for the business. Some of the tasks they did included vacuuming the offices, emptying trash cans weekly, taking care of recycle and shredding documents, filing receipts, stuffing envelopes and doing yard work outside the office. Jane plans to pay her sons $5,000 each for the year. She was able to shift $10,000 from her higher tax rate to her son’s zero tax rate, which saved thousands. She plans to use this $10,000 to teach her kids about budgeting.
Also, this income shift helped with her personal cash flow because she has the kids help pay for groceries and set aside the money for college. Another thing she plans to do is to put money aside in a Roth IRA for the kids. While the company will need to pay some payroll taxes, the savings far outweigh the cost. Another benefit is that her sons will learn basic knowledge of how she runs her business.
Here are some facts and tips around income shifting that Nooshin outlined:
- The kids can be any age
- They need to keep a time card for work done – documentation is key
- The work needs to be appropriate for the age and skill level
- Depending on the situation, your child may not have to file a tax return
- Consider helping parents or grandchildren who might be in lower income brackets
Depending on the business entity, self-employment taxes can also be reduced with this strategy. For corporations, it is a great way to reduce the taxable income. For sole proprietors, there are some taxes the kids don’t have to pay in their paycheck. And, the IRS allows this, but they don’t volunteer the information to the general public.
Nooshin stresses not to get this strategy confused with gifting money to the child. When gifting, there is no work involved. Also, this shifting of income is not to be mixed up when parents move investment income like interest, dividends and capital gains to their children. That is called the “kiddie tax.”
Income shifting works well under specific situations, and not everyone can meet the requirements. Depending on the situation, anyone can take advantage of the income shifting opportunity.
Nooshin Boloorian is an accountant and officer/shareholder of NB & Associates, a full-service accounting, bookkeeping, payroll, and tax-preparation firm in Woodland Hills, California. Nooshin earned her accounting degree from California State University Northridge and is an IRS Registered Tax Professional (PTIN) licensed by the California Tax Education Council (CTEC). She provides bookkeeping, payroll, and tax services for individuals, small and medium-sized businesses, and independent professionals throughout Southern California.