Federal Child Care Tax Benefits for Employers

Considering adding a child care benefit or looking for more ways to save for your company? There are a few tax incentives available for employers who invest in child care solutions for their working parents. We've outlined the federal tax incentives that you might qualify for, but don't forget to check out your state tax credits as well.

Offering a DCFSA

By offering a dependent care flexible savings account, employers are able to avoid the 7.65% payroll tax on whatever amount your employees contribute to their DCFSA.

Learn more about which child care expenses for employees to use their DCFSA.

Contributing to employees’ DCFSA

All contributions from both the employer and employee are capped at $5,000 for individuals and $2,500 for a couple filing separately.

Provide information and referral services to employees

The Employer-Provided Child Care Credit, under the Internal Revenue Code Section 45F, allows employers to claim up to 10% of qualified child care resource and referral expenditures.

Employers can contract with resource and referral services on a per use basis or to create an internal referral network that provides employees with information on child care options in the community. These services often include an education component that informs parents about the characteristics of quality child care. In some cases services provide training and support for providers. Employers may be eligible for additional state tax credits for resource and referral services.

Additional eligible expenses

The Employer-Provided Child Care Credit, under the Internal Revenue Code Section 45F, also offers employers to receive a tax credit of up to 25% of qualified child care expenditures. The credit is capped at $150,000, meaning employers would have to spend around $430,000 to receive the full credit, and any further spending exceeding that amount would not be reimbursed.

Qualified child care expenditures include:

• Costs associated with acquiring, constructing, rehabilitating, or expanding property to be used as part of a child care facility.
• Operational costs of such a facility, including supporting child care workers through training, scholarships, and wages.
• Employers may also contract with licensed child care programs, including home-based providers, in addition to operating on-site child care facilities, to offer child care services to their employees.

These services must be accessible to all employees and cannot favor those who make
higher wages or by ranking within the company.

For more information and to determine which expenses are eligible, please see Form
8882 from the IRS.

Offering a child care benefit is a great way to help your employees take care of a costly and essential expense, so that they can thrive at work and at home.