Last updated: March 2026
Your child's 18th birthday is a tax milestone. The payroll tax exemptions you've been enjoying shift, new filing requirements kick in, and the strategy needs to evolve. But it doesn't end; it just changes shape.
Here's exactly what happens and how to adapt.
What Changes at 18
FICA taxes kick in. This is the big one. When your child turns 18, their wages are no longer exempt from Social Security and Medicare taxes, even if they work for your sole proprietorship or qualifying LLC. You'll owe the employer share (7.65%) and your child will owe the employee share (7.65%) on every dollar of wages.
On $15,000 in wages, that's $2,295 in FICA taxes that didn't exist before. The income tax benefit still works (you still get the deduction, they still get the standard deduction), but the payroll tax savings disappear.
FUTA stays exempt until 21. Here's a silver lining most people miss. The federal unemployment tax exemption extends to age 21 for children working in a parent's sole proprietorship or partnership. So while FICA kicks in at 18, FUTA stays exempt for three more years.
Income tax withholding doesn't change. You were always required to withhold income tax regardless of age. If your child earns under the standard deduction and claims exempt on their W-4, the withholding is still $0. This part stays the same.
What Stays the Same
The business deduction. Wages paid to your adult child are still deductible as a business expense, just like any other employee. This doesn't change at any age.
The income shifting benefit. Your child still has their own tax bracket. If they're earning under the standard deduction, they still owe zero federal income tax. Even above it, they're likely in the 10% bracket while you're at 24% or higher.
Roth IRA eligibility. Earned income at any age qualifies for Roth IRA contributions. In fact, your adult child may be able to contribute even more if they're earning higher wages.
Dependent status (maybe). You can still claim your child as a dependent through age 18, or through age 23 if they're a full-time student. The employment doesn't change this.
The Decision Point: W-2 Employee or 1099 Contractor?
At 18, you have a new option worth considering. When your child was a minor, W-2 employment was almost always the right move. Now the calculus shifts.
Keep them as a W-2 employee if they work regular hours on a consistent schedule, you direct their work, and they use your tools and workspace. This is the standard arrangement and the simplest to manage. You'll pay FICA, but it's straightforward.
Consider 1099 contractor status if your adult child does project-based work independently, controls their own schedule, uses their own tools, and essentially operates as a freelancer. A 1099 means you don't pay employer FICA, but your child pays 15.3% self-employment tax, so the total tax is similar. The advantage is they can deduct business expenses against that income.
The entrepreneurship play: If your child is 18+ and working in your business, consider helping them set up their own LLC. Your business can hire their LLC as a vendor for specific services. They can then deduct their own business expenses (computer, phone, software, home office), potentially reducing their taxable income below what a W-2 would allow.
This is how you transition from "child employee" to "young entrepreneur," and it's a much more powerful long-term strategy.
The Family Management Company Angle
If you're running an S Corp and were using a Family Management Company to pay your under-18 child FICA-free, the FMC still works for the FUTA exemption until age 21. But for FICA purposes, once your child turns 18, the exemption is gone regardless of which entity pays them.
At this point, many families reassess whether the FMC complexity is still worth it. For some, the FUTA savings alone justify keeping it running until 21. For others, simplifying by moving the child onto the S Corp payroll directly makes more sense.
Planning Ahead
If your child is approaching 18, here's a simple gameplan:
Before their birthday: Maximize the FICA-free year. If your child turns 18 in September, the wages they earn from January through their birthday are still FICA-exempt (as long as they were under 18 when the services were performed).
After their birthday: Decide between W-2 and 1099. If they're heading to college, a 1099 arrangement for project work during breaks might make more sense than year-round payroll.
Consider the Roth IRA contribution limit increase. In 2026, the Roth IRA contribution limit is $7,000 (up from earlier years). An 18-year-old with earned income can max this out, and every dollar grows tax-free for 45+ years.
FAQ
Does the change happen on their birthday or January 1 of the year they turn 18?
The FICA exemption applies to services performed while the child is under 18. If they turn 18 in July, wages for work done January through June are FICA-exempt. Wages for work done July through December are subject to FICA.
Can I still pay my 18-year-old through my LLC FICA-free?
No. Once your child is 18, FICA taxes apply regardless of entity type. The exemption is specifically for children UNDER 18.
What if my child is in college and only works during breaks?
They can still be your employee (or contractor) for the periods they work. Many families pay their college-age kids for project work during summer and winter breaks. Track the time and pay accordingly using proper documentation.
Is it still worth hiring my child after they turn 18?
In most cases, yes. You lose the FICA exemption, but you keep the income tax deduction, the income shifting benefit, and the Roth IRA opportunity. For a family in the 24% bracket, the math still works, just not as dramatically.
Keep the Strategy Going
Kids Payroll helps you navigate the transition from FICA-exempt to standard payroll. Track tasks, log hours, and maintain the records you need at every stage.
Use our Tax Savings Calculator to see how the numbers change after 18.
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.