2026 employer child-care credit expands workplace-care incentives

A larger federal tax credit is now available to employers that provide or arrange child care, but the change is not a direct payment to parents. Businesses may use the incentive for on-site facilities, contracted care, certain intermediary arrangements or child-care resource-and-referral services.

The Internal Revenue Service updated its Section 45F guidance on July 23, 2026. The changes apply to qualified expenses paid or incurred after Dec. 31, 2025, under provisions enacted in Public Law 119-21 on July 4, 2025.

What changed

Under the prior structure, employers generally could claim a credit equal to 25% of qualified child-care expenses, subject to a $150,000 annual limit.

For expenses paid or incurred after Dec. 31, 2025, the credit generally equals 40% of qualified child-care expenditures. An eligible small business may generally claim 50%. The annual credit limit is $500,000, rising to $600,000 for an eligible small business. The limits are scheduled to receive inflation adjustments beginning after 2026.

Qualified child-care resource-and-referral expenditures generally receive a separate 10% credit rate. The $500,000 and $600,000 figures are annual maximum credits, not amounts each employer must spend and not payments that each family receives.

Which businesses may qualify

The credit is claimed by an employer that pays or incurs qualifying child-care or resource-and-referral expenses with respect to its employees.

For the higher small-business rate and cap, the IRS generally applies the gross-receipts test in Section 448(c) over the preceding five-year period. For taxable years beginning in 2026, the IRS says a corporation or partnership generally meets that test when its average annual gross receipts over those five years do not exceed $32 million. That is the threshold for this tax test, not a universal definition of a small business.

A qualified facility must principally provide child-care assistance and meet applicable state or local laws, including licensing requirements. Enrollment must be open to the employer’s employees, and use of the facility or eligibility to use it generally cannot discriminate in favor of highly compensated employees. If child care is the taxpayer’s principal trade or business, at least 30% of enrollees must be dependents of the taxpayer’s employees.

What spending can qualify

The IRS says qualified child-care expenditures can include acquiring, constructing, rehabilitating or expanding depreciable property used as part of a qualified facility. Operating expenses may also qualify, including certain costs for training employees, scholarship programs and increased compensation for employees with higher levels of child-care training.

Employers may qualify for payments under contracts with qualified child-care facilities that provide care to their employees. For expenses paid or incurred after Dec. 31, 2025, the rules also recognize certain contracts with intermediary entities that contract with one or more qualified facilities. A facility may qualify when it is jointly owned or operated by the taxpayer and other people.

Separate contracts for child-care resource-and-referral services may qualify for the 10% credit, as long as the services or eligibility to use them do not favor highly compensated employees.

What families may see — and what they may not

Parents generally cannot claim the employer credit themselves. The practical benefit depends on whether an employer chooses to offer on-site care, reserve contracted slots, provide a subsidy or pay for referral services.

The law does not require an employer to pass the tax benefit directly to workers or reduce a family’s child-care bill. It also does not guarantee new child-care slots. Access may still be limited by location, enrollment, operating hours, eligibility rules or capacity.

A 2022 Government Accountability Office review found that employers had often been unaware of the earlier credit. Groups consulted by GAO also cited the cost and complexity of building or operating care, limited access for some shift workers and the possibility that care could remain unaffordable even when subsidized. Those findings are historical context, not a measure of 2026 participation.

How employers claim the credit

Employers claim the credit on IRS Form 8882, Credit for Employer-Provided Childcare Facilities and Services. They may not claim another deduction or credit for the portion of expenses used to calculate this credit. For certain facility-related expenditures, the facility’s tax basis must also be reduced by the credit.

Employers should review the recapture rules before making a long-term facility investment. The IRS says part or all of the credit may have to be recaptured if, before the 10th tax year after the year the facility is placed in service, the facility stops operating as a qualified child-care facility or ownership changes, subject to specified exceptions.

For parents, the immediate practical step is to ask an employer whether it offers workplace care, contracted slots, subsidies or referral services — and whether those benefits are available to all eligible workers or limited by schedule, location, enrollment or capacity.

Sources

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