The IRS says 2026 brings a larger Section 45F credit, making employer child care support a more practical way to cut hiring and retention costs.
Why this matters for small employers
The IRS says the employer-provided child care credit under Section 45F is expanded for amounts paid or incurred after Dec. 31, 2025, which makes 2026 the first tax year many small businesses can use the larger rules. For owners trying to keep workers without relying only on wage increases, that matters because child care support can now be modeled as a tax-backed retention expense rather than a pure benefit cost.
Under the updated IRS guidance, the credit equals 40% of qualified child care expenditures, or 50% for eligible small businesses, plus 10% of qualified child care resource-and-referral expenditures. The annual cap rises from $150,000 to $500,000, or $600,000 for eligible small businesses, with inflation adjustments beginning after 2026. That does not make child care cheap, but it can materially improve the after-tax economics of offering a benefit that helps workers stay and reduces recruiting churn.
What small businesses can actually use it for
The IRS says qualified child care expenditures can include amounts paid or incurred to acquire, construct, rehabilitate, or expand property used as part of a qualified child care facility, to operate such a facility, or under a contract with a qualified child care facility to provide child care services to employees. The guidance also says amounts paid or incurred after Dec. 31, 2025, under a contract with an intermediate entity are treated as qualified child care expenditures.
That gives owners several practical paths. A business may be able to support on-site care, contract with a nearby provider, or use a referral service model instead of building a facility from scratch. The IRS also says qualified child care resource and referral expenditures are amounts paid or incurred under a contract to provide child care resource and referral services to employees. For many small firms, that may be the lower-friction option if they want to offer family support without taking on real estate or staffing complexity.
Eligibility and structure matter
The IRS says a taxpayer is eligible if it paid or incurred qualified child care expenditures or qualified child care resource and referral expenditures during the taxable year with respect to its employees. For this credit, an eligible small business is one that meets the Section 448(c) gross receipts test over the preceding five-year period. For taxable years beginning in 2026, the IRS says that generally means average annual gross receipts of no more than $32,000,000.
The credit is useful only if the underlying program is structured correctly. The IRS says a qualified child care facility must principally provide child care assistance and comply with applicable state and local laws, including licensing. It also says enrollment must be open to employees during the taxable year, and if the facility is the taxpayer’s principal trade or business, at least 30% of enrollees must be dependents of employees. The facility or service also cannot discriminate in favor of highly compensated employees.
How to turn the credit into a business strategy
For BizTipper readers, the opportunity is not just tax savings. The expanded credit can help offset the cost of a benefit that may improve hiring, reduce turnover, and make a business more competitive for labor. That is especially relevant for service businesses, local employers, and firms competing with larger companies that can already offer family-friendly perks.
Because the credit applies to amounts paid or incurred after Dec. 31, 2025, 2026 is a planning year as much as a filing year. Owners should decide whether direct child care support, referral services, or a partnership with a provider best fits their workforce and budget, then document eligible costs in the correct tax year. The IRS says taxpayers claim the credit on Form 8882, Credit for Employer-Provided Childcare Facilities and Services, and that no double benefit is allowed for the same expenditures. Businesses considering facility investments should also remember the IRS says the basis of the facility must be reduced by the amount of the credit determined.
