Sole Proprietor FICA Exemption for Child Employees Under 18
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Under IRC §3121(b)(3)(A), services performed by a child under 18 in a trade or business owned by their parent are exempt from FICA — meaning neither the parent-employer nor the child-employee pays Social Security or Medicare taxes on those wages. For sole proprietors operating an STR, this exemption saves up to 15.3% of wages paid, while the child still earns documented income that qualifies for a Roth IRA contribution.
What the FICA Exemption Covers
FICA stands for Federal Insurance Contributions Act — the combined Social Security (6.2%) and Medicare (1.45%) taxes that normally apply to wages. In a standard employment arrangement, both employer and employee pay their half:
| Tax | Employee Pays | Employer Pays | Total |
|---|---|---|---|
| Social Security | 6.2% | 6.2% | 12.4% |
| Medicare | 1.45% | 1.45% | 2.9% |
| Total FICA | 7.65% | 7.65% | 15.3% |
When you employ your own child under 18 in your sole proprietor STR business, neither the 7.65% employee side nor the 7.65% employer side applies. On $16,100 in wages, that saves $2,463 in FICA taxes that would otherwise be paid to the government.
Requirements for the Exemption
- Parent-owned sole proprietorship: The business must be a sole proprietorship (or single-member LLC treated as a sole proprietorship) — not a partnership, S-corp, or C-corp
- Child must be under 18 at the time wages are earned
- Parent and child: The exemption applies only when the employing parent is the child's actual parent — not other family members
- Legitimate work: The child must perform genuine services appropriate to their age and ability
- Reasonable compensation: Pay must be what you'd pay an unrelated person for the same work
Does the Exemption Apply to Single-Member LLCs?
Yes. A single-member LLC owned by a parent is a "disregarded entity" for federal employment tax purposes — the IRS treats it as a sole proprietorship. Therefore, the FICA exemption under §3121(b)(3)(A) applies when the sole-member parent employs their child under 18 through a SMLLC.
The exemption does NOT apply to multi-member LLCs taxed as partnerships, S-corps, or C-corps. If you converted your sole proprietorship to a partnership by adding your spouse or another investor, the child FICA exemption is lost. Verify your entity structure before relying on the exemption.
FUTA Exemption: An Additional Benefit
The Federal Unemployment Tax Act (FUTA) exemption also applies. Services performed by a child under 21 in a parent's sole proprietorship are exempt from FUTA taxes — saving the employer an additional 0.6% (after credit) on the first $7,000 of wages. This is a smaller benefit but adds to the overall tax efficiency.
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The Child Still Earns Roth IRA-Eligible Income
Despite the FICA exemption, the wages your child earns count as earned income for Roth IRA contribution purposes. In 2026, a child can contribute up to $7,000 (or their total earned wages, whichever is less) to a Roth IRA — and those funds grow completely tax-free for decades.
You as the parent can fund the Roth IRA contribution on your child's behalf. They don't have to use their own paycheck — only their wages need to be genuine and documented. See our guide on funding your child's Roth IRA from STR wages for the full strategy.
When the Exemption Ends
The FICA exemption ends the day your child turns 18. From that point forward:
- Their wages are subject to normal FICA withholding (both employee and employer shares)
- The wages remain deductible as a business expense
- The income tax treatment doesn't change (the standard deduction still shelters up to $16,100 in 2026)
- The Roth IRA eligibility continues (earned income still qualifies)
Many STR hosts keep employing their children after 18 — you just lose the FICA exemption but retain all other benefits of family employment.
Employing two children ages 12–17 (6 years each) at $16,100/year (the 2026 single standard deduction; it adjusts annually): $16,100 × 2 kids × 6 years = $193,200 in total wages. FICA savings: $193,200 × 15.3% = $29,560. Income tax savings (at 24% bracket): $193,200 × 24% = $46,368. Total family tax savings: roughly $75,000 over 6 years — from legitimate, documented work.
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Disclaimer
This article is for informational purposes and does not constitute tax, legal, or financial advice. Tax rules vary based on your specific situation, filing status, entity structure, and jurisdiction. Always consult a qualified CPA or tax professional for guidance on your specific tax situation. IRS rules and thresholds are subject to change — verify current requirements at irs.gov before filing.
Frequently Asked Questions
What is the FICA exemption for child employees of sole proprietors?
Under IRC §3121(b)(3)(A), wages paid by a sole proprietor to their own child under 18 are exempt from FICA (Social Security and Medicare taxes). Neither the employer nor the employee pays the 15.3% FICA tax on those wages. This exemption applies only to sole proprietors (not LLCs taxed as partnerships or corporations) and only to children under age 18.
Does the FICA exemption apply if my STR is in an LLC?
If your STR is in a single-member LLC (disregarded entity), the FICA exemption still applies because the LLC is treated as a sole proprietorship for employment tax purposes. However, if the LLC is taxed as a partnership (multi-member LLC) or S-corp, the exemption does not apply and the child's wages are subject to normal FICA withholding.
Does the FICA exemption end when my child turns 18?
Yes. The FICA exemption applies only to children under 18. Once your child turns 18, their wages become subject to normal FICA withholding — the employer must withhold employee FICA and pay the employer's matching share. The wages remain deductible as a business expense, and your child can still receive tax-free income up to the standard deduction, but the payroll tax savings no longer apply.