Expanded child care tax credit a game-changer

Companies have long been utilizing tax credits for R&D, clean energy and hiring that are substantial enough to influence corporate decision-making. Child care, however, was never in that category. 

The Employer-Provided Child Care Tax Credit (Section 45F) has historically been too overlooked and too narrowly structured to make a meaningful dent in costs. Only about 18 million was claimed each year, representing just 0.03% of eligible filers. 

But that's changed this year. The 45F employer child care tax credit has been significantly expanded to reduce child care costs while boosting talent retention and productivity. The credit rate increased to 40 cents per dollar for large businesses and 50 cents per dollar for small businesses — and the changes go beyond just the rates. 

The cost of care for working families is higher than ever. Recent studies estimate that parents would need to earn roughly $400,000 a year for care for two children to meet the federal definition of "affordable." The majority of working families are now paying as much for child care as they pay for rent or mortgage.

Read more: Child care surpasses retirement as top work perk

We support employers across every kind of workplace. What we're seeing consistently is that child care breakdowns don't just affect individual employees, they impact entire teams and operations.

The data backs this up. KPMG's Parental Work Disruption Index shows there are 23% more workers affected by child care problems compared to pre-pandemic levels. This translates to up to 26 million hours of potential work lost due to child care problems in any given week for U.S. employers.

When parents can't find or afford care, they miss shifts, arrive late or leave entirely. Employers that have invested in child care support see real improvements in retention and productivity, but until now, the tax code barely rewarded it.

That's what makes the 2026 changes to Section 45F a genuine game-changer. 

The ROI now compares to other major tax credits

Employers can now receive up to four times the previous benefit:

• The maximum annual credit jumped to $500,000 from $150,000 for large businesses and $600,000 for small businesses.
• The reimbursement rate nearly doubled to 40% or 50% from 25% of qualified expenditures. 

These caps will be indexed to inflation, meaning the benefit will grow over time rather than erode.
To put this in perspective: under the old rules, a company that spent $600,000 on child care expenses would hit the maximum credit of $150,000. Now, that same company could receive $240,000 to $300,000 back, depending on their size.

The ROI of investing in employer-sponsored child care was already compelling. A Boston Consulting Group and Moms First study estimates that U.S. employers investing in childcare benefits see a positive return on investment ranging from 90% to 425%. When you layer the enhanced tax credit on top of that baseline ROI, the financial case becomes even stronger. Yet most employers still don't realize the value they're leaving on the table. Benefit brokers and advisers, no doubt, can help change that for their employer clients. 

Read more: From child care desert to on-campus school: An employer's solution for working parents

"If your company isn't using the expanded employer child care tax credit, you're leaving money and talent, on the table," according to Reshma Saujani, founder and CEO of Moms First. "This tax credit lets employers support working parents and boosts their bottom line at the same time — every dollar invested in child care comes back many times over. Not using it is just bad business."

Employers don't need to build an on-site center

A common misconception about the old 45F credit was that employers needed to build and operate a costly on-site child care facility to qualify. The expanded credit allows third-party administration and covers a much broader range of expenses, including: 

• Direct child care subsidies paid to licensed providers.
• Reserved slots in child care centers.
• Backup care programs.
• Contracts with licensed third-party platforms that connect employees with care.
• Child care facility improvements (if they operate or support a facility).
• Resource and referral services (eligible for a 10% credit).

What doesn't qualify:

• Direct reimbursements to employees.
• Contributions made through DCFSA.
• Informal or unlicensed care arrangements.

This is a critical distinction. Employers can't simply reimburse employees directly and claim the credit. The law requires working with licensed providers or specialized benefits vendors that ensure payments are properly documented and go directly to qualified care providers, maintaining the oversight needed for a federal tax incentive program while supporting licensed, quality care.

Not just for large businesses

Small and medium-sized businesses actually receive the highest credit rate under the new law: 50 cents on the dollar compared to 40 cents for larger companies.

The law also permits small business pooling, allowing multiple employers to band together and jointly administer programs. A small manufacturer with 75 employees or a regional retail chain with 200 workers can now offer child care benefits that were previously only accessible to Fortune 500 companies — and receive proportionally greater tax benefits for doing so.

Read more: Exclusive research: How to help parents stay present and productive at work

The tax code is finally rewarding what employers already know: supporting working parents is good business. Now is the time for HR and finance teams to evaluate how child care benefits fit into a total compensation strategy and to avoid leaving hundreds of thousands of dollars in tax credits on the table.