The Expanded Employer Childcare Credit: Worth It for Your Small Business?

Childcare can make it hard for employees to stay at work. A federal tax credit became more generous in 2026, giving small employers another reason to consider helping with that cost.

The credit may be useful, but a childcare contract alone doesn't guarantee a tax benefit. Before offering anything to employees, compare the employer credit with a dependent care flexible spending account and check how the arrangement would work for your team.

What the employer childcare credit covers

The employer-provided childcare credit, often called the Section 45F credit, covers certain costs of providing childcare to employees. Eligible arrangements can include operating a qualified facility or contracting for care at one. Qualifying resource and referral services have a separate, smaller credit.

For qualifying childcare costs paid or incurred after December 31, 2025, the credit rate is generally 40%, with an annual credit limit of $500,000. Eligible small businesses can receive a 50% rate and a $600,000 limit. Resource and referral services receive a 10% credit.

For 2026, a business generally qualifies for the higher rate if its average annual gross receipts for the five tax years ending with 2025 were $32 million or less. The $32 million figure is the same one used in the usual small business test, but this credit averages five years instead of three. Related businesses may need to be counted together, so check eligibility before relying on the higher rate.

You may be able to work with an existing provider

You don't necessarily need an on-site childcare center. Contracts with qualified providers were already an option, and the expanded rules now expressly allow certain intermediaries to arrange care. Employers can also share qualifying childcare facilities.

The facility must meet applicable state and local requirements, including licensing. The arrangement also needs to meet employee-access rules and cannot favor highly paid employees. If the childcare facility is your principal trade or business, at least 30% of the children enrolled must be dependents of your employees. For an Ohio business, checking the provider's licensing is an early step.

What the credit could look like

Suppose a dental practice pays $1,200 a month for each of two childcare slots. That's $28,800 a year. The table shows how small-business eligibility changes the potential credit on that same spending.

This example assumes all costs qualify and are otherwise deductible payments for care at a qualified provider. It excludes facility construction and resource or referral services. Each employer meets the eligibility rules for the rate shown, and the credit figures are before limits on how much can be used this year.

The final row is the expense left for a deduction after the required reduction for the credit. It is not an after-tax cost. The deduction's value, credit use, payroll treatment, administration costs, and state taxes affect the result. Run the full projection before comparing this benefit with a pay raise or another retention expense. See the IRS guidance on the employer childcare credit.

A dependent care FSA may be simpler

A dependent care flexible spending account, or FSA, lets eligible employees set aside part of their pay before tax for qualifying care expenses. The employer can offer it without paying the childcare bill, although plan administration still costs money.

An employee-funded FSA alone does not create the employer childcare credit. That credit requires qualifying employer childcare spending. It works the other way too. Claiming the credit doesn't make the care tax-free to employees. That requires a written dependent care assistance plan under Section 129, which has its own eligibility and nondiscrimination rules.

For 2026, the dependent care assistance exclusion is generally $7,500, or $3,750 for married employees filing separately. This is a combined limit for qualifying employer assistance and employee FSA contributions, with coordination required between spouses. Earned income and other eligibility rules can reduce the amount an employee can exclude.

The plan must allow the higher limit. Ask the administrator to confirm the documents and employee notices before enrollment. Benefits also need to pass rules designed to prevent owners and highly paid employees from receiving a disproportionate share. Owners should have their own eligibility checked separately.

Choose the arrangement your employees can use

For many small employers, a dependent care FSA is a sensible starting point. It gives employees access to a tax benefit without requiring the business to commit to childcare slots.

The employer credit deserves a closer look when several employees need care and a qualified provider can meet that need. An employer-funded benefit and an FSA can work together, but they don't create two separate tax-free allowances for the employee.

If you're considering childcare benefits, contact Schultz CPA, LLC before announcing a plan. We can compare the cost, tax treatment, and practical requirements with you and your benefits administrator.

This article provides general information. Tax and benefit rules change, and eligibility depends on the arrangement and the people using it. Get advice before putting a plan in place.