As part of the One Big Beautiful Bill Act (OBBBA), the employer-provided childcare tax credit has been permanently expanded, offering higher credit percentages, increased annual caps, and new options for small businesses to participate.
It’s a move that rewards businesses for investing in childcare access and positions family-friendly benefits as a competitive differentiator in today’s labor market.
Under prior law, the employer-provided childcare tax credit allowed businesses to claim up to 25% of qualified childcare facility expenditures and 10% of childcare resource and referral service expenditures, with a total cap of $150,000 per year.
Qualified expenses included the cost of operating an on-site childcare facility or contracting with a licensed third-party provider. Resource and referral services included tools to help employees locate childcare, often offered through external networks or intermediaries.
Effective for expenditures made on or after January 1, 2026, the OBBBA significantly enhances the benefit. The credit percentage increases to 40% for large businesses and 50% for small businesses, defined as those with $31 million or less in gross receipts in 2025. The 10% credit for childcare resource and referral services remains unchanged.
Additionally, the annual credit cap increases from $150,000 under prior law to $500,000 for large businesses and $600,000 for small businesses, with both caps set to adjust annually for inflation starting in 2027. The law also introduces more flexibility in how businesses can offer care, allowing them to contract with third-party intermediaries or jointly operate childcare facilities with other employers.
These updates not only make the credit more generous, but also more accessible, especially for smaller businesses that may not be in a position to operate on-site care facilities on their own.
This is a significant expansion to a tax credit that has historically been underutilized.
The increased percentage and expanded cap make it far more valuable, especially for employers already subsidizing childcare in some form. It also creates new opportunities for small businesses to participate by partnering with other employers or using third-party childcare providers.
In industries struggling to attract and retain workers, offering meaningful family support can make a big difference. Employers who build or fund access to childcare now have a much stronger financial incentive to do so and a powerful tool to differentiate themselves in a competitive labor market.
While the changes take effect in 2026, business owners can begin planning now to maximize the potential benefit. Here are some suggested next steps:
| 1. Review Current Offerings | Take stock of any existing childcare-related spending that may qualify for the credit. |
| 2. Explore Third-Party Partnerships | If on-site care isn’t feasible, consider partnering with licensed providers or pooling resources with other local businesses. |
| 3. Consult With a Tax Advisor | The credit is claimed using IRS Form 8882, and documentation is important. Work with your advisor to understand eligibility, estimate your potential credit, and prepare for compliance. |
| 4. Use Strategically in Recruiting | Enhanced childcare support is a strong message to communicate to both current staff and job candidates. This can be a differentiator for your business to attract and retain talent. |
With increased credit percentages, higher annual caps, and expanded flexibility, the employer-provided childcare tax credit has become a significantly more powerful tool for businesses of all sizes.
If childcare support isn’t yet part of your benefits package, now is the time to act. This isn’t just a tax-saving opportunity, it’s a strategic investment in your workforce. Start exploring how your business can leverage this credit to attract talent, support employees, and stand out in a competitive labor market.
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