The IRS issued a reminder to businesses about the employer-provided childcare tax credit, which offers up to $150,000 annually to companies that provide childcare services to their employees. The announcement comes as significant changes to the credit are set to take effect in 2026 under recent tax legislation.

The current credit allows employers to offset 25% of qualified childcare facility costs and 10% of childcare resource and referral expenses. A qualified childcare facility must meet all state and local government requirements and be primarily used for providing childcare services to employees.

“The credit is worth up to $150,000 per year to offset 10% of qualified childcare resource and referral costs and 25% of qualified childcare facility costs,” according to the IRS announcement. Business owners and high earners who employ staff may find this credit particularly valuable as part of their overall tax strategy.

The credit is part of the general business credit system, meaning unused portions can be carried back one year or carried forward for 20 years. Employers must complete Form 8882 to claim the credit, with the amount flowing through to Form 3800.

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Major Expansion Coming in 2026

Starting with tax years beginning after December 31, 2025, the One Big Beautiful Bill Act will dramatically increase the credit’s value. The maximum credit will jump from $150,000 to $500,000 for most businesses, with eligible small businesses able to claim up to $600,000.

Policy analysts describe the 2026 changes as one of the largest federal investments in employer-supported childcare in decades. The expanded credit rates will increase from 25% to 40% of qualified facility expenses for most employers, and up to 50% for qualifying small businesses.

The new maximum credit amounts will be indexed for inflation beginning in 2026, providing additional value over time. This expansion is designed to make it more financially attractive for businesses to offer childcare benefits and partner with childcare providers.

Qualifying Expenses and Requirements

Qualified childcare costs include capital expenses for acquiring, constructing, or expanding childcare facilities, as well as operating expenses such as training programs and increased compensation for trained childcare workers. Resource and referral costs paid under contracts with qualified childcare facilities also qualify.

The facility must be open to all employees during the year and cannot discriminate in favor of highly compensated employees. If the childcare facility is the taxpayer’s principal business, at least 30% of enrollees must be dependents of employees.

Importantly, this credit is distinct from individual childcare tax benefits like the Child and Dependent Care Credit. Employees cannot claim the same childcare costs under both the employer credit and individual credits.

Implementation and Documentation

Employers should maintain detailed records showing facility licensing, compliance with state and local laws, and the percentage of enrollees who are employee dependents. The credit requires a basis reduction in property when claimed, preventing double tax benefits through both the credit and depreciation.

Pass-through entities like partnerships and S corporations can claim the credit at the entity level and pass it through to owners via Schedule K-1. The credit offsets income tax liability, not payroll taxes.

Businesses can access additional information about claiming the credit and requirements for qualified expenditures on the IRS employer-provided childcare credit page. The credit represents a significant opportunity for business owners to reduce tax liability while providing valuable employee benefits.

Source: Employer-provided childcare credit | IRS