Year End Series 7: Income Shifting Through Hiring Your Children

Income shifting by hiring your children can be a tax-efficient strategy for families, providing parents with tax savings while giving children income they can use for their own expenses. By moving income to a child in a lower tax bracket, parents may be able to lower their overall tax liability. This approach, however, requires thorough documentation and a clear, compliant structure. Our app supports these requirements by providing tailored contracts, defensible NIL (Name, Image, and Likeness) agreements, and compensation reports that help ensure the arrangement meets IRS standards.

Example Tax Savings from Income Shifting

Assume a business owner hires their child, shifting $14,600 of income to the child. If the business owner is in the 37% federal tax bracket and a 5% state tax bracket, here’s how income shifting can lead to potential tax savings:

• Shifted Income: $14,600

• Federal Tax Savings (37% bracket): $5,402

• State Tax Savings (5% bracket): $730

Item	Amount
Shifted Income	$14,600
Federal Tax Savings (37%)	$5,402
State Tax Savings (5%)	$730
Total Tax Savings	$6,132

Total Benefit: By shifting $14,600 to their child, the parents save $6,132 in taxes at these rates, while the child can use their income for various personal expenses​(bradfordtaxinstitute.co…).

Eligible Uses for the Income

The income earned by the child can be used for any legitimate expenses the child would normally have, including educational expenses, extracurricular activities, or personal savings. Alternatively, parents can help their child set aside funds for future use, such as a college savings plan or Roth IRA contributions (if the child has earned income).

Compliance Requirements for Hiring a Child

The IRS requires that all payments to family members meet strict documentation and valuation standards, especially in family businesses. When hiring a child, the business owner should ensure:

1. A Legitimate Employment Agreement that specifies the job description, compensation rate, and terms.

2. Fair Market Value (FMV) Justification for the compensation amount, showing that pay aligns with similar work.

3. Clear Records of Payment and hours worked if the child is an hourly employee.

4. Defensible NIL Contract if hiring the child under an NIL arrangement, where compensation is based on name, image, or likeness usage rights.

Our app helps simplify each of these compliance areas by offering tailored agreements, FMV support, and NIL contracts where appropriate.

Benefits of Using NIL Contracts for Income Shifting

An NIL contract allows the business to pay the child for the use of their name, image, and likeness, aligning with IRS standards on defensible rights purchases. NIL contracts are especially useful for businesses in areas like social media, marketing, or advertising, where the child’s image or likeness contributes to the business’s brand.

Advantages of an NIL Contract

• Defensible Compensation: With an NIL contract, the app calculates compensation based on market rates for similar rights purchases, providing an FMV report to support the arrangement.

• Expanded Uses: NIL compensation may not be tied to hours worked, offering flexibility if the child’s role is project- or campaign-based rather than hourly employment.

• Additional Compliance Support: The app provides tailored NIL contracts with customized compensation reports, helping ensure that each payment aligns with market values and reduces audit risks.

How Our App Supports Compliance for Hiring a Child

Our app is built to simplify income-shifting strategies like hiring a child, providing tools that align with IRS requirements. Here’s how each feature supports compliance:

1. Employment and NIL Contracts

The app includes templates for both traditional employment contracts and NIL agreements, allowing parents to choose the arrangement that best fits their needs. Each contract specifies job responsibilities, pay rate, and purpose, creating a clear paper trail.

Feature	How It Helps with Compliance
Employment/NIL Contracts	Offers tailored templates for employment or NIL arrangements, ensuring compliant documentation for each type of role.

2. Fair Market Value (FMV) Compensation Report

Our app generates a Comparable Compensation Report that provides FMV justification for both hourly pay and NIL compensation. For NIL contracts, the report calculates comparable rates based on similar name, image, or likeness rights purchases, supporting a defensible pay rate.

Feature	How It Helps with Compliance
FMV Compensation Report	Provides a defensible market rate for pay, aligning with IRS requirements for fair market valuation.

3. Payment Records and Tracking

For hourly roles, our app tracks hours worked and records payments, helping establish that compensation aligns with hours worked and agreed-upon rates. For NIL agreements, payments can be set as per-use or periodic, with records generated for each transaction.

Feature	How It Helps with Compliance
Payment Records	Tracks and records payments according to IRS requirements, supporting a clear audit trail.

Summary of App Features and Their Compliance Benefits

App Feature	Compliance Requirement	Compliance Support
Employment/NIL Contracts	Documented employment terms	Provides customizable templates for traditional employment or NIL arrangements, ensuring clear documentation and role clarity.
FMV Compensation Report	Justification for compensation	Generates a comparable compensation report, providing fair market value support for defensible pay rates.
Payment Records	Documentation of work and pay	Tracks hours worked, payment records, and transfer records, creating a clear audit trail and supporting IRS compliance.

Making Income Shifting Compliance Simpler

By using our app, business owners can efficiently manage and document each aspect of hiring a child, whether through an employment agreement or an NIL contract. With customizable agreements, FMV reports, and payment tracking, our app supports full compliance with IRS standards.

Interested in Learning More?

If you’re considering hiring a child for your business, our app can simplify the compliance process and help you establish a clear, defensible structure. Schedule a demo to see how our app can help you manage income-shifting strategies with confidence.

Contact us to learn more and get started!