Last updated: February 2026
If you're a business owner and you hire your child who is under 18, you may not have to pay Social Security or Medicare taxes on their wages. This is known as the FICA exemption for family employment, and it's one of the most valuable (and underused) tax provisions available to small business owners.
FICA taxes normally cost 15.3% of wages, split between employer and employee. When you qualify for this exemption, that 15.3% goes to zero. On $15,000 in annual wages, that's $2,295 your family keeps instead of sending to the government.
How the Exemption Works
Under IRC Section 3121(b)(3)(A), wages paid to a child under age 18 by a parent are exempt from Social Security and Medicare taxes when the parent operates as a sole proprietor or through a partnership where all partners are parents of the child.
The exemption extends to FUTA (Federal Unemployment Tax) for children under 21 under IRC Section 3306(c)(5).
This isn't a deduction or a credit. The taxes simply don't apply. You don't withhold them from your child's paycheck, and you don't pay the employer's share. It's as if those taxes don't exist for this specific employment relationship.
Who Qualifies
Sole Proprietors: Full exemption. If you run your business as a sole proprietor and hire your child under 18, FICA does not apply.
Single-Member LLC (Disregarded Entity): Full exemption. The IRS treats a single-member LLC the same as a sole proprietorship for employment tax purposes.
Spousal Partnership or Qualified Joint Venture: Full exemption, as long as both partners are parents of the child.
S Corporation or C Corporation: The exemption does NOT apply when the child is hired directly by the corporation. The corporation is the employer, not the parent, so the family employment exemption doesn't kick in. However, S Corp owners can achieve the same result by routing employment through a Family Management Company (a separate sole proprietorship owned by one parent).
For a full comparison of entity types and their impact on paying your kids, see: Sole Prop vs S Corp: Which Is Better for Paying Your Kids?
The Actual Savings
Let's put real numbers on this. Say you pay your child $14,000 for the year.
Without the exemption, FICA would cost $2,142 ($14,000 x 15.3%), split between the employer paying $1,071 and the employee paying $1,071.
With the exemption, both shares are $0.
If the child earns under the standard deduction of $16,100, they also pay $0 in federal income tax. The combined family savings on $14,000 in wages: the full FICA exemption of $2,142 plus the income tax savings from the business deduction (at a 24% rate, that's another $3,360).
Total estimated savings: over $5,500 on $14,000 in wages. Use our Tax Savings Calculator to see the exact numbers for your situation.
What the Exemption Doesn't Cover
Income tax withholding. Even though FICA doesn't apply, wages paid to your child are still subject to income tax withholding rules. However, if your child will earn less than the standard deduction for the year, they can claim exemption from withholding on their W-4 so that nothing is actually withheld from their paycheck.
State taxes. Some states have their own rules about family employment and state unemployment taxes. Check your state's requirements or consult your CPA.
Wages paid after age 18. Once your child turns 18, the FICA exemption ends and Social Security and Medicare taxes apply. The FUTA exemption continues until age 21.
Our Experience
When I started paying my daughter Dylan at age six, the FICA exemption was one of the first things that made this strategy make financial sense for our family. Instead of paying her from after-tax personal money (and then the government taking another 15.3% in payroll taxes on top of that), her wages flow through my business as a deductible expense with zero payroll tax burden.
Over six years of documented employment, the FICA savings alone have been meaningful. Combined with the income tax deduction and the Roth IRA contributions we've been able to make with her earned income, the financial impact for our family has been substantial.
See how we document everything: What Records to Keep for the IRS When Hiring Your Kids.
How to Claim the Exemption
There's no special form to file. The exemption is automatic when the employment relationship qualifies. You simply don't withhold or pay FICA taxes on your child's wages. When you process payroll (or when your CPA processes it), the FICA line items are zero.
The documentation burden is on you to prove the employment is legitimate and that the exemption applies. That means keeping records of your business structure, your child's work, and the payments made. Kids Payroll helps with the work documentation side, making it easy to generate the records that support the exemption.
At year end, your child receives a W-2 showing wages paid and zero FICA withheld. This is normal and expected for qualifying family employment. For a full overview of year-end filing requirements, see our Kids Payroll Checklist.
Frequently Asked Questions
Does this exemption apply to adopted children or stepchildren?
The IRS defines "child" broadly for this exemption, including biological children, adopted children, and stepchildren. Foster children may also qualify in some circumstances.
What if my child turns 18 during the year?
Wages paid before their 18th birthday are exempt from FICA. Wages paid after they turn 18 are subject to normal FICA withholding. You'd split the year at their birthday.
Can I still contribute to a Roth IRA if no FICA was withheld?
Yes. The Roth IRA contribution eligibility is based on earned income, not on whether payroll taxes were paid. As long as your child has documented earned income from employment, they can contribute to a Roth IRA up to the annual limit ($7,500 in 2026) or their total earned income, whichever is less. Learn more: Roth IRA for Kids: Rules, Limits and How to Start.
Is this exemption at risk of being eliminated?
The family employment FICA exemption has been part of the tax code for decades and has survived multiple rounds of tax reform. While nothing in tax law is permanent, there's no current legislation targeting this provision.
What if I have multiple children working in my business?
Each child qualifies independently. If you have three children under 18, all three are exempt from FICA on wages earned from your qualifying business. The savings multiply with each child.
Disclaimer: This article is for educational purposes only and does not constitute tax or legal advice. Consult a qualified CPA or tax professional for guidance specific to your situation.