Tax Strategy Watch: How Business Owners and Parents Can Lower IRS Liabilities

Business owners can significantly reduce their taxable income by hiring their children to perform legitimate work for the company. Under IRS rules, wages paid to children are deductible business expenses, and if the business is an unincorporated solo proprietorship or partnership where both parents are partners, the wages paid to children under 18 are often exempt from Social Security and Medicare taxes. This strategy not only shifts income to a lower tax bracket but also allows children to start contributing to a Roth IRA early.

In addition to family hiring, the second quarter is the ideal time for business owners to review entity treatment and estimated tax payments. Identifying which decisions can materially change deductions or credits before the end of the fiscal year allows for proactive rather than reactive accounting. For those involved in real estate, exploring options like 1031 exchanges into Delaware Statutory Trusts (DSTs) can offer a way to diversify portfolios while deferring capital gains taxes, provided owners ask the right questions about sponsor track records and fee structures.

Summer also provides a window for families to reassess 529 college savings plans. Tax benefits for these plans vary significantly by state; for instance, Pennsylvania allows residents to receive a tax deduction even when investing in another state’s plan. Reviewing these contributions alongside gift tax rules—which require reporting for large sums but rarely result in actual tax owed for most families—can help optimize the transfer of wealth to the next generation.