The Employer Childcare Credit Has Changed
Beginning in 2026, the employer provided childcare credit increases in ways that may materially impact closely held businesses.
Under prior law, the credit was modest and rarely justified the administrative burden. That changes in 2026.
For qualifying small businesses, the credit may now cover up to 50 percent of eligible childcare expenses, with a maximum credit of $600,000 per year.
For many firms, this moves employer funded childcare from a secondary benefit to a strategic planning tool.
What Changed for 2026
Key updates include:
• Credit percentage increases to as much as 50 percent for smaller employers
• Maximum annual credit increases to $600,000
• Expanded support for childcare resource and referral services
• Broader access for businesses participating in shared childcare arrangements
The expansion is significant enough that businesses previously uninterested in the credit should reassess.
Who Should Be Paying Attention
This credit may be particularly relevant for:
• S corporation owners paying W 2 wages
• Professional service firms with growing staff
• Closely held family businesses
• Businesses competing for skilled employees
• Owners with young children seeking structured benefits
The credit applies to qualified childcare expenses paid by the employer. Wages must be properly structured, and entity type matters.
Ownership structure and compensation strategy affect eligibility.
Strategic Considerations Before Implementation
Before establishing a program, businesses should evaluate:
• Discrimination rules and eligibility requirements
• Interaction with dependent care assistance programs
• Whether the entity structure supports qualification
• Whether pooled arrangements improve efficiency
• Related party ownership considerations
Improper implementation can eliminate eligibility. Proper structuring can significantly reduce the after tax cost of providing childcare benefits.
Why This May Now Make Financial Sense
Historically, the credit was too small to justify compliance complexity.
At up to 50 percent reimbursement potential, that changes.
For example, a $200,000 annual employer childcare program could generate a $100,000 credit, materially offsetting costs while strengthening employee retention.
For many closely held businesses, this warrants a fresh review in advance of 2026.
Planning Ahead
The expansion creates an opportunity to evaluate:
Talk to us today.• Compensation structure
• Entity planning
• Employee retention strategy
• Long term benefit positioning
Tax law evolves. Planning should evolve with it. Talk to us today.
About Brothers Tax
Brothers Tax LLC provides strategic tax planning for business owners and high income families.
All returns include up to $1,000,000 in tax audit defense coverage.
Schedule a private review to evaluate how upcoming law changes may affect your business.