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Federal Tax Credit – 26 U.S. Code § 45F – Employer-Provided Childcare Credit
(As amended under OBBBA, effective January 1, 2026)
Childcare refers to a licensed program, whether center-based or home-based, that provides care for children from birth through age 13 so that their parents can work. This includes full-day care and after-school programs for school-age children.
“Employer-provided childcare” includes any of the following:
• The employer operates its own childcare program.
• The employer contracts with an outside childcare provider.
• The employer contracts with an intermediary that, in turn, contracts with one or more outside providers (for example, Perquity).
It does not include reimbursing employees for childcare costs.
The federal tax credit equals 50% of the amount paid for childcare, up to a maximum credit of $600,000.
Example: A company that pays $100,000 toward employee childcare receives a $50,000 federal credit.
For companies with revenue exceeding $31 million, the credit equals 40% of the amount paid, up to $500,000.
The federal credit is not refundable. If the credit exceeds the company’s federal tax liability, the excess cannot be refunded but may be carried back one year or forward for up to 20 years.
The federal credit is part of the IRC §38 General Business Credit (GBC), which limits the credit to the portion of regular income tax that exceeds the Alternative Minimum Tax (AMT). This restriction typically limits the §45F credit to about 15% of the regular tax liability for most companies.
Because of this limitation, many low- and mid-income businesses are better off skipping the federal credit and instead deducting the full childcare expense as a regular business expense on their federal return. This approach generally provides greater savings.
C corporations are not subject to the AMT, so this limitation does not apply to them.
Business Expense Deduction
The remaining 50% of the childcare amount that does not qualify for the credit can still be deducted as a regular business expense, reducing taxable income. Amounts paid above the $600,000 maximum credit cap can also be deducted as a regular business expense.
(Source: Congress.gov CRS Product IF12379)
New York State Tax Credit – Tax Law Section 44
New York State follows the same federal definition of employer-provided childcare.
The NYS tax credit equals 50% of the amount paid for childcare, up to a maximum credit of $500,000.
The NYS credit is refundable, meaning that if the credit exceeds the taxpayer’s NYS tax liability for the year, the excess amount is refunded to the taxpayer.
How the 75% to 125% Tax Savings Calculation Works
75% to 100%: If a company skips the federal credit (as explained above), it can still deduct the full childcare expense on the federal return and half on the NYS return. This results in tax savings of approximately 25% to 50% of the childcare amount, depending on the company’s tax bracket and whether NYC tax applies.
When the NYS 50% refundable credit is added, total savings typically range from about 75% to 100% of the childcare amount.
100% to 125%: For higher-earning companies that also benefit from the federal credit, savings include 50% from the federal credit, 50% from the NYS credit, plus additional deductions for half the amount spent on both the federal and state returns.
When to Use the Federal Credit (and When Not To)
Using the federal tax credit disallows half the amount as a regular business expense. If the GBC rules then block the credit, the company loses on both sides.
The rule of thumb is: if the federal credit allowed under the GBC (regular tax in excess of AMT) is greater than half the marginal federal tax rate multiplied by the childcare amount spent, use the credit. Otherwise, skip the credit and deduct the entire expense.
Amount Spent on Childcare: $100,000
Federal Credit Allowed (under GBC): $22,000
Half of Federal Marginal Tax Rate: 17.5%
Rate Multiplied by Amount Spent: $17,500
Decision: Use credit
Amount Spent on Childcare: $100,000
Federal Credit Allowed (under GBC): $15,000
Half of Federal Marginal Tax Rate: 17.5%
Rate Multiplied by Amount Spent: $17,500
Decision: Do not use credit
Other States
Due to limitations under federal law, the federal credit alone does not provide a strong enough incentive for employers to offer childcare benefits. Therefore, the focus is on states that provide generous refundable credits that align with this model. Additional states will be added once confirmed.
Taxable Fringe Benefits
Payments made by an employer directly to childcare providers on behalf of employees are treated as taxable income to those employees and are subject to both income and payroll taxes for both the employer and the employee.
However, under IRC §129, an employee may exclude up to $7,500 from taxable income. Only the portion above $7,500 is taxable. To qualify for this exclusion, if the employee is married, their spouse must also work and earn at least $7,500 for the year.
In many cases, it may be more beneficial for employees to forgo this exclusion, as explained below.
Employee Child Care Tax Credit
In addition to the employer tax credit, the employee can also claim the federal and state Child Care Tax Credits on their personal tax returns, provided they do not elect the $7,500 exclusion. In that case, the amount paid by the employer is treated as if the employee paid the provider directly, qualifying the employee for the credit.