How the One Big Beautiful Bill Act Changes the Rules

Beginning in 2026, the employer childcare tax credit becomes significantly more valuable for businesses, particularly small and mid-sized employers.

Under the One Big Beautiful Bill Act, businesses can now claim much larger tax credits for providing childcare support to employees. This change creates a meaningful planning opportunity for companies with W-2 employees.

What Is the Employer Childcare Tax Credit?

The employer childcare tax credit is a non-refundable general business credit available to employers that pay for qualified childcare expenses for their employees.

Qualified expenses include:

• Costs to acquire, construct, rehabilitate, or expand an on-site childcare facility

• Operating expenses for an on-site childcare facility

• Payments to licensed off-site childcare providers

• Contracts with third-party childcare platforms or intermediary organizations

• Childcare resource and referral services

A common misconception is that only businesses with on-site daycare facilities qualify. Contracting with licensed off-site providers also qualifies.

How Much Is the Credit Starting in 2026?

Small Businesses

For businesses with average annual gross receipts under $32 million:

• Credit equals 50 percent of qualified childcare expenses

• Maximum annual credit of $600,000

Example:
A business that spends $100,000 on qualified childcare expenses may claim a $50,000 tax credit.

Larger Businesses

• Credit equals 40 percent of qualified childcare expenses

• Maximum annual credit of $500,000

These limits will be adjusted for inflation beginning in 2027.

Comparison to Prior Years

Before 2026, the credit was limited to:

• 25 percent of qualified expenses

• Maximum annual credit of $150,000

The expanded credit increases the maximum benefit by up to four times.

New Flexibility for Small Businesses

Starting in 2026, businesses may:

• Pool resources with other employers

• Jointly contract with licensed childcare providers

• Share ownership or operation of childcare facilities

• Use third-party platforms to coordinate childcare benefits

Each participating business may claim its proportionate share of the credit, reducing both cost and administrative burden.

Eligibility for Business Owners

Sole Proprietors

Sole proprietors cannot claim the credit for themselves because they are not employees. However, they may claim the credit for qualified childcare expenses paid for W-2 employees, including a spouse who is legitimately employed by the business.

S Corporations

S corporations may qualify for the credit when the shareholder is treated as a W-2 employee. Even when childcare benefits are taxable to the owner, the tax credit can still produce a net tax savings.

Are Childcare Benefits Taxable to Employees?

In most cases, employer-provided childcare benefits are taxable compensation and must be reported on the employee’s Form W-2.

An exception exists through a Dependent Care Assistance Program under Internal Revenue Code Section 129, which allows employers to provide up to $7,500 per year in tax-free childcare benefits starting in 2026. These plans are subject to strict non-discrimination rules that many small businesses cannot meet.

Even when tax-free treatment is unavailable, the childcare tax credit often makes the benefit financially worthwhile.

Business Advantages Beyond Tax Savings

Providing childcare support can help businesses:

• Improve employee retention

• Reduce absenteeism

• Attract qualified talent

• Increase workplace productivity

• Strengthen long-term workforce stability

The tax credit helps offset costs while allowing employers to offer a valuable benefit.

Key Takeaways

• Starting in 2026, small businesses can claim a 50 percent tax credit up to $600,000

• Off-site childcare and third-party providers qualify

• Businesses may collaborate and share childcare arrangements

• Even when benefits are taxable, the credit can still result in net tax savings

Planning Ahead for 2026

Businesses with W-2 employees should evaluate this credit well before 2026. Proper structuring and documentation are essential to maximize the benefit and ensure compliance.