Wages Paid to Your Under-18 Child Skip Payroll Tax — Unless Your Salon Is an LLC

Wages paid to your own child under 18 are exempt from Social Security and Medicare tax, and stay exempt from federal unemployment tax until age 21 — but only if your salon is a sole proprietorship or a partnership made up entirely of the child's parents. Leticia Skrabut, Esq., of Azarvand Tax Law, walks through the rules, and the savings turn on three questions: who the relative is, how old they are, and how the business is organized.

"Miss one and you are paying full payroll tax on wages you thought were exempt," the analysis warns. Here is what salon owners need to know before adding a family member to the payroll.

Where does the biggest break apply?

The under-18 child exemption covers Social Security and Medicare; FUTA exemption runs to 21. The trigger is when the work is performed, not when the check is cut — a pay period straddling the birthday splits between the two treatments. Income tax withholding applies at any age, and a child can claim exemption on Form W-4 only by certifying no liability last year and none expected this year, refiled annually.

The entity rules are strict:

• Sole proprietorship — exemption applies
• Partnership where every partner is the child's parent — exemption applies
• S corporation or C corporation — full payroll tax, same as any stylist
• Partnership with any non-parent partner — no exemption

Why does the single-member LLC trap matter most?

The single most common failure point is the single-member LLC. Although a disregarded LLC is ignored for income tax, it is treated as a corporation for employment tax purposes — making the LLC, not you, the employer. That breaks the parent-child relationship the exemption requires. A solo salon LLC gets nothing unless payroll runs through a sole proprietorship instead. Skrabut's advice: confirm the entity structure with counsel before counting on the savings.

The numbers can be significant. A child earning $5,000 in tax year 2025 had a standard deduction of $5,450 (earned income plus $450) and owed no federal income tax, while the salon deducted the full $5,000. At $20,000 of wages, the child was taxed on only $4,250 against the $15,750 single-filer cap. Wages are earned income, so they also sit outside kiddie tax rules.

Where can the child's paycheck go?

• 529 plan — tax-deferred growth, tax-free qualified withdrawals; front-load five years of gift exclusions, up to $95,000 from one parent or $190,000 from a couple for 2025. Student loan repayment is capped at $10,000 lifetime per beneficiary; K-12 distributions rise from $10,000 to $20,000 per beneficiary under the One Big Beautiful Bill Act for distributions after December 31, 2025.
• Roth IRA — contributions limited to earned income; contributions (not earnings) can come out tax- and penalty-free. Retirement balances are not reported on FAFSA, but distributions can hit the aid calculation through income.
• UGMA/UTMA custodial account — most flexible, no distribution schedule; the $19,000 per-donor figure for 2025 is the gift tax exclusion, not a statutory cap. The child controls the money at the age of majority.

Is a spouse on payroll worth it?

Not as a payroll tax play. A spouse's wages carry full Social Security and Medicare tax; paying a spouse $30,000 costs the household roughly what earning it as self-employment income would. Only FUTA is excluded, and that relief fails where the employer is a corporation or LLC.

The payoff sits in benefits: an employer health plan covering the spouse can extend to the family, converting medical expenses into a business deduction, plus retirement plan participation and a Social Security earnings record. Two cautions apply. If the spouse is really a co-owner, the business is a partnership — a partner cannot be a W-2 employee — though a married couple filing jointly can elect qualified joint venture treatment as two sole proprietors, unavailable to a state-law LLC. And the IRS has targeted spousal health plans where employment existed on paper only.

What about grandchildren, parents and everyone else?

Grandchildren, siblings, nieces, nephews, in-laws and non-custodial stepchildren get no special break: full Social Security, Medicare and unemployment tax. A grandmother who owns the salon and hires her 16-year-old grandchild owes full payroll tax on wages that would be exempt if the child worked for their own parent. Your own parents are exempt from FUTA only. Family hires are also excluded from the Work Opportunity Tax Credit entirely.

What must be true before the first paycheck?

Legitimacy is the through-line. The deduction survives only as a reasonable allowance for services actually rendered, and the burden of substantiation sits with the taxpayer. In practice: a written job description, timesheets, a defensible market pay rate, and payment through payroll with a Form W-2 — not the household account.

Two hard limits apply. Federal law sets a general minimum working age of 14, and states may require work permits, restrict school-year hours or bar minors from certain salon chemicals and equipment. And licensing law does not bend: an unlicensed minor cannot touch a client's hair, so the honest job description covers front desk, laundry, restocking, sweeping, inventory and social media.

The same $12,000 paid to the same 15-year-old is exempt from Social Security and Medicare in a sole proprietorship and fully taxable in an S corporation — a difference that surfaces on audit, not at filing. Owners can book a complimentary 30-minute consultation at AzarvandTaxLaw.com to check their structure before the first family payday.