Employer’s Guide to Child Care Assistance and Tax Credits

Childcare is a critical element in alleviating the labor shortage crisis. Below are four things employers can do now to help their employees access childcare. The following sections provide more detailed information on the relevant tax credit and benefit options.

1. Research existing child care options in the community and provide a child care directory to employees.

Many states have child care networks or early childhood education associations. Contact organizations that specialize in child care in your state to help identify the different types of quality care in your community. Be sure to include traditional childcare and daycare, nonprofit and faith-based providers, as well as Head Start and Early Head Start programs for eligible families.

2. Contract with a third-party company to help employees connect with childcare providers.

A third-party company can facilitate a range of services that will bolster benefits and provide substantial assistance to employees to meet dependent care needs.

A third party company can:

  • Provide direct advice and services to employees to help them find the type of child care that meets their needs.
  • Facilitate a “back-up care” program where a company establishes a relationship with a specific provider who will be able to provide care if a working parent’s usual childcare arrangement is disrupted.
  • Set up and manage an employer subsidy program where employers help cover the cost of care for employees by providing vouchers.
  • Manage partnerships with child care providers. For example, arranging access to a certain number of reserved places at a childcare service specifically for this employer, often at special negotiated rates.

Examples of third party intermediaries include KinderCare, Care.com and TOOTRiS.

Did you know? Employers can recover some of the costs of third-party intermediaries through a tax credit. Learn more about the employee child care tax credit below.

3. Offer a Dependent Care Flexible Spending Account (DCFSA).

Employers may offer a Dependent Care Flexible Spending Account (DCFSA) – a pre-tax benefit account used to pay for eligible dependent care services. More on this in the section below.

4. Educate employees on their tax options.

Do your employees know that parents can reduce their tax burden by claiming childcare expenses? An example – the Child and Dependent Care Tax Credit (CDCTC) – is highlighted in a section below.

The employer-provided child care credit can save employers more tax on eligible expenses than using a deduction alone, and employees can exclude certain child care benefits from their taxable wages. For employers, the credit can offset federal income tax payable.

What are the parameters?

Any size of employer or type of business can claim this credit. The tax credit for employer-provided child care allows employers to claim 25% of eligible expenses, including:

  • When a business builds or acquires and then operates an in-house child care center
  • Amounts paid to enter into a contract with a licensed child care program (including in-home providers)

Employers can also claim a 10% credit for costs associated with entering into a contract with a third-party referral service.

Source: GAO-22-105264
Source: GAO-22-105264

The credit is capped at $150,000.

How to claim this credit?

To benefit from the tax credit, the employer must complete a short half-page form (Form 8882). The credit is part of the general business credit and an employer can claim the credit at any time within three years of the due date of your return on an original or amended return.

Learn more and see examples of how the tax credit works here.

In addition, state tax credits for employer-provided child care services are available in 18 states. Learn more here.

A Dependent Flexible Spending Account (DCFSA) is a pre-tax benefit account used to pay for an employee’s eligible dependent care services.

A full list of eligible expenses can be viewed here.

How it works?

Like a flexible healthcare spending account, with a DCFSA, funds are withdrawn from an employee’s paycheck before taxes are deducted, reducing an employee’s overall tax burden. At the end of the year, employees who have contributed to a DCFSA can submit receipts and be reimbursed for those qualifying expenses. Employees can contribute up to $5,000 per year by filing as individuals or with a joint tax return, or $2,500 for married couples by filing separately.

Only certain expenses can be reimbursed and they must be directly related to professional homemaking services enabling an employee to work, seek work or attend school full time. Employees pay the cost of care out of pocket and are reimbursed by the DCFSA scheme. DCFSA funds are use-or-lose, which means funds that have not been spent at the end of the year are not carried over for use the following year.

Some plans allow certain unused funds to be carried forward to the end of the year. Employers can choose one of two ways for account holders to let unused funds roll:

  1. Account holders can carry over up to $550 from one plan year to the next.
  2. The grace period option, which allows unlimited funds to be carried over to be spent in the first two and a half months of the following plan year. At the end of this period, any unspent carry forward funds are forfeited.

To note: If an employer plans to claim the child care tax credit, they must subtract any expenses paid through an FSA. If an employer provides money to pay for child care expenses, or if money is withheld from an employee’s wages on a pre-tax basis, those dollars received must be subtracted from allowable expenses when CDCTC’s request.

The Child Care and Dependent Care Credit (CDCTC) is a tax credit that helps parents and families pay for the care of their children and other dependents while they work, seek work or go to school.

If you qualify for the Child Care and Dependent Care Tax Credit, the credit will reduce the amount of federal income tax you have to pay.

Who is eligible?

Families can claim a tax deduction for childcare expenses as long as they meet the following conditions:

  • The care must concern a child under 13 years of age.
  • The family must need child care because both caregivers are working, looking for work, or studying full time.
  • The family must have eligible expenses related to the care of a child or dependent.

What are the parameters?

For 2022, the maximum amount of child care expenses that can be claimed is $3,000 if there is one eligible person and $6,000 if there are two or more eligible people. For taxpayers with an adjusted gross income (AGI) greater than $43,000, the maximum credit is $600 (for one child and expenses of at least $3,000) and $1,200 (for two children or more and expenses of at least $6,000). For those earning less than $43,000, the credit may be higher, but no more than $1,050 for one child and $2,100 for more than one child.

To note: Due to legislation enacted during the pandemic, the Child and Dependent Tax Credit amount was significantly increased for calendar year 2021 expenses. The increased credit expired on December 31, 2021 and will not was not renewed by Congress.

How to claim this credit?

To claim the credit, you will need to complete Form 2441(note that this form may change for the 2022 tax year) and include it when you file your federal income tax return. You must identify all people or organizations who care for your child or dependent.

In addition, dependent care tax credits are available in 25 states. Learn more here.