By Sarah Mills
Vice President, Government Affairs

Starting with costs paid or incurred after December 31, 2025, employers can get back up to 40% of what they spend on child care for employees. Small businesses can get back up to 50%.

The federal employer-provided child-care credit (Section 45F of the tax code) has been around since 2002. The 2025 federal tax law known as the One Big Beautiful Bill Act made it larger and more flexible.

A tax credit cuts your tax bill dollar for dollar. It is worth more than a deduction of the same size. For employers thinking about helping staff with early education and care, the math now works much better.

What changed: old credit vs. new credit

The new law raises the credit rate, more than triples the yearly cap, and makes it easier to work with partners.

The $150,000 cap had not changed since the credit began. Higher rates plus a higher cap mean larger employers can now claim far more, and smaller employers recover half of their qualifying costs.

How the credit is calculated

Your credit is a percentage of what you spend, added together, up to a yearly cap.

1. Take 40% of your qualified child-care costs (50% if you are an eligible small business).
2. Add 10% of your child-care resource and referral costs.
3. If the total is more than $500,000 ($600,000 for small businesses), your credit stops at the cap.

Example: a small business. A local company pays a licensed child care center $200,000 to reserve spots for employees’ children. It also pays $10,000 for a service that helps workers find care.

Example: a larger employer. A company spends $1.5 million building and running an on-site center. Forty percent of that is $600,000, so its credit is capped at $500,000. Under the old rules, it would have been capped at $150,000.

Who can claim it

Any employer that pays for qualifying child care or referral services for its employees during the tax year can claim the credit.

To get the higher small-business rates (50% and $600,000), your business must pass a gross receipts test over the past five years. For tax years beginning in 2026, a corporation or partnership generally qualifies if its average yearly gross receipts over the previous five years were $32 million or less.

The benefit also has to be fair. Use of the care, or the chance to use it, cannot favor highly compensated employees as defined in the tax code.

Three ways to qualify

You don’t have to build a child care center to use this credit. There are three main paths.

1. Build or run your own facility (40% or 50%). Costs to buy, build, fix up, or expand a child-care facility count, as long as the property is depreciable and isn’t anyone’s home. Costs to run the facility count too, including staff training, scholarships, and higher pay for staff with more child- care training.
2. Pay a licensed provider for employee care (40% or 50%). You can contract with a qualified child-care facility to serve your employees. New for 2026, you can also contract with a middleman (an “intermediate entity”) that arranges care with one or more licensed providers. This makes it easier for smaller employers to take part.
3. Offer a resource and referral service (10%). You can pay for a service that helps employees find and choose child care.

Rules to watch

No double dipping. Costs you use for this credit can’t also be used for another deduction or credit. If your credit comes from building or expanding a facility, you must lower the facility’s tax basis by the amount of the credit.

Keep it running for 10 years. If your facility stops operating as a qualified child-care facility, or ownership changes, before the tenth tax year after it opens, you may have to pay back some or all of the credit. A sale won’t trigger payback if the buyer agrees in writing to take on that responsibility.

What we’re still waiting on

The IRS has explained the new rules but has not yet released full implementation guidance. Questions it may answer include:

• How contracts with intermediate entities should be set up and documented
• How credits are split when businesses jointly own or run a facility
• The inflation-adjusted caps for years after 2026
• Any updates to Form 8882 and its instructions

The bottom line

The expanded credit makes employer support for early education and care much more affordable, especially for small businesses. If you have thought about helping employees with child care, 2026 is a good time to take a fresh look.

Sources

• IRS, “Employer-provided child care credit” (Section 45F, as amended by the Working Families Tax Cuts Act).

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