The IRS Will Give You Back 50% of What You Spend on Employee Childcare

Most business owners have never heard of Section 45F. That’s understandable — for most of its life, the employer-provided childcare credit had a $150,000 annual cap and paid back just 25% of qualifying expenses. The math didn’t move the needle for most small businesses, so it got ignored.

The One Big Beautiful Bill Act changed the math completely, effective January 1, 2026. If you’re a small business — under roughly $32 million in average annual gross receipts — you now get back 50% of what you spend on employee childcare, up to $600,000 per year. You don’t need to own a childcare facility. A contract with a childcare provider or platform counts.

That’s a real credit. Not a deduction. A dollar-for-dollar reduction in your tax bill.

What changed under the OBBBA

Before 2026, the Section 45F credit worked like this:

• Credit rate: 25% of qualifying childcare expenses
• Annual cap: $150,000
• Maximum possible credit: $37,500 per year

After 2026, for eligible small businesses (under $32M in average gross receipts):

• Credit rate: 50% of qualifying childcare expenses
• Annual cap: $600,000
• Maximum possible credit: $300,000 per year

For larger businesses above the $32 million threshold, the rate is 40% with a $500,000 cap — still a massive improvement over the old rules.

That $600,000 ceiling is per year. If your business spends $1.2 million on employee childcare — contracts, subsidies, on-site facilities — you get $600,000 back in credits. Starting in 2027, the caps adjust for inflation.

Who qualifies

Any business with W-2 employees can potentially qualify. Sole proprietors, partnerships, LLCs, S-corps — doesn’t matter how you’re structured. The credit is available to whoever is paying the tab for employee childcare.

The small business threshold — the one that gets you the 50% rate — is $32 million in average annual gross receipts over the prior five years. Most of my clients are nowhere near that number, which means they qualify for the better rate.

The employees who receive the benefit have to use it for a qualifying dependent child — a child under age 13 who counts as their dependent.

What counts as a qualifying expense

This is where it gets practical. You don’t need to build or operate a childcare center.

Direct facility costs — if you do run or subsidize an on-site childcare center, those operating costs qualify.

Contracts with childcare providers — if you enter into a contract with a licensed childcare center or in-home provider on behalf of your employees, that counts. You pay the provider; the IRS gives you back half.

Childcare networks and platforms — starting in 2026, contracts with intermediate entities, like childcare benefit platforms that work with networks of local providers, count as qualifying expenses. No need to set up individual contracts with 50 different daycares.

Resource and referral services — a smaller credit (10%) applies to amounts paid to help employees find and access childcare. Hiring a service to help your employees navigate their options qualifies.

What this actually looks like for a small business

Say you have 15 employees and you decide to offer a childcare subsidy — you’ll pay $500 per month per employee toward childcare costs. Not all 15 have young kids, but say 8 of them do.

8 employees × $500/month × 12 months = $48,000 per year in childcare subsidies.

Your credit: 50% of $48,000 = $24,000 off your tax bill. Not a deduction — a credit.

Now say you go bigger. You contract with a regional childcare network and contribute $800 per month for each of 20 employees who have children under 13.

20 × $800 × 12 = $192,000 in qualifying expenses.

50% credit = $96,000. Again, directly off your federal tax liability.

There’s one interaction to know about: the credit reduces the deduction you’d otherwise take for the same childcare expenses. You can’t get a deduction and a credit on the same dollar. But a 50% credit beats a deduction at most marginal tax rates — even for high-bracket owners — so in most cases you want the credit.

Why this is actually worth structuring around

The pre-OBBBA version of this credit — 25%, capped at $150,000 — wasn’t worth redesigning your HR around. The post-OBBBA version is. A 50% credit with a $600,000 ceiling changes the math on whether it makes sense to offer childcare benefits at all.

If you’ve been thinking about adding employee benefits to attract and retain people, childcare is now one of the most tax-efficient tools you have. You’re not just offering a perk — you’re funding it at 50 cents on the dollar from the IRS.

The IRS has to be happy with how you structure it: the childcare arrangement has to meet their requirements, there are substantiation rules, and the contract format matters. A simple subsidy paid through payroll looks different on a return than a direct vendor contract. Set it up right from the start.

This post is for general informational purposes only and does not constitute tax, legal, or financial advice. Every situation is different. Consult a qualified tax professional before making decisions based on this content. Geiger Tax & Accounting serves clients nationwide — (631) 532-5622 · info@geigertax.com.