Episode 14: Why We're Calling BS on Every 'Best Places to Work' List That Ignores This $600K Credit

We dive into the enhanced employer-provided child care tax credit hidden in the "One Big Beautiful Bill Act" and why ignoring this opportunity is benefits malpractice for employers seeking to attract and retain talent.

• The employer-provided child care tax credit (45F) is increasing from $150,000 to $500,000 for large businesses and $600,000 for small businesses starting January 1, 2026
• Large businesses can now receive 40% back and small businesses 50% back on qualified child care expenditures
• The new legislation clarifies that employers can use third-party intermediaries and don't need to build or operate their own facilities
• Small businesses can pool resources to implement shared child care programs
• Payments must go directly from employer to provider, not through employee accounts
• Properly structured benefits can help reduce an employee's annual child care costs from $15,000 to $5,900 with just a $3,000 employer contribution
• The program can be stacked with state tax credits, Dependent Care FSAs (now $7,500), and the Child and Dependent Care Tax Credit
• Companies have roughly six months to design and implement programs to take advantage of this credit starting in 2026

Chapters

• 0:00 Welcome to Tax Break Breakdown
• 4:15 Enhanced Child Care Tax Credit Explained
• 5:45 From $150K to $600K: What Changed
• 10:10 How the Tax Credit Works
• 13:30 Requirements and Implementation Strategies
• 17:10 Real-World Examples and Cost Savings
• 22:50 Stacking Benefits for Maximum Impact

Transcript

Speaker 1: 0:02

Welcome to the Tax Break Breakdown with your hosts, greg and Doug. Sit back and relax while they review current and upcoming child care tax credit programs employers can take advantage of. And now on to the show.

Speaker 2: 0:18

Welcome everybody. Welcome everybody To episode 14 of the Child Care Tax Break Breakdown with your hosts, greg and Doug. Episode 14 went through a couple variations of headlines and titles, but we came up with why we're calling Bios on every best places to work list. That ignores the $600,000 credit. A little bit of a hook, a little bit of a teaser. We're going to try to make this a short episode because after this, doug and I actually get to talk about this with a specific city. And I think one thing that I wanted to call out and point out we've talked about this type of things, these types of things happening and they're finally happening. So, like years ago, even before we did this podcast, we were like, oh, wouldn't it be cool if they expanded the dependent care account and if they like $150,000 for the uh, the tax credit, the 45F tax credit, that's like it's not substantial, so they should increase that. And then, hey, shouldn't all these states start doing programs Like in, all of this shit is happening.

Speaker 1: 1:38

Yeah, and the numbers go up. And I think that's one of the things we've heard, we've had conversations externally is is that number isn't compelling? Well, now, it should be compelling. Yes, and I think that's the exciting piece here, before we even get to layering it, just on the federal side, where everybody can take advantage of this, it should be compelling.

Speaker 2: 2:01

I think so. So today we're going to talk specifically about the um impacts of the big beautiful bill. I think it was around 900 pages, and tucked away into it is support for child care tax credits for employers, which, fittingly, our podcast is called child care tax break breakdown. This is like so up. Our alley doug like this is yeah, we exist 100 um. So, uh, we're going to talk about that. Um, what's included in it? What is that? What is what it's at currently? What does it go to? Um? But then also some examples on, and I've ran some numbers to show what if an employee, what if you, as the hr leader, benefit leader, could help employees slash their child care costs from 15 000 down to 5,900. So you, as an employer, by helping support, this can actually reduce an employee's childcare costs by 61% and it would only cost you $1,500.

Speaker 1: 3:15

Talking about one of the most.

Speaker 2: 3:20

I know you're saying this is crazy.

Speaker 1: 3:22

No, it's one of the most impactful benefit strategies you can take. And again, remember we've been at this for a long time trying to get organizations to take advantage of it Like there's opportunity to be on the leading edge of what you're looking at as a talent attraction and retention tool. When you have these generations upcoming that are saying it's too expensive to start families, this is an incredible edge to wedge into some of these employment markets.

Speaker 2: 3:53

One of the things I came up with said this is going to be part of our opener Today. We're diving into the enhanced employer-provided child care tax credit, so that's called 45F. So we're going to talk about 45F. The form that you use is IRS 8882. But the regulation, legislation, we're going to talk about all of that. But we're diving into Enhanced Employer-Provided Child Care Tax Credit hidden in the one big beautiful bill act and why, ignoring it is benefits malpractice. There you go, I mean, it's so true. So we're going to cover how the credit jumped from 150 000 up to 600 000 so that the total 500 000 for enterprises Small businesses get an even better deal at up to $600,000. We're going to go through some real examples that you can share with your director of benefits, your VP of benefits, your CFO, and things that you can do to implement and then take advantage of this in 2026. So, doug, why don't you share a little bit about the overview?

Speaker 1: 5:10

of the legislation timelines.

Speaker 2: 5:11

Let's get the facts.

Speaker 1: 5:13

Absolutely so. This is the one big, beautiful bill act which is officially HR One, public law number one, 19, dash 21, signed on the 4th of July. Huge, massive budget reconciliation bill. Obviously, I think most people are aware of it. A lot of not so great press around it, a lot of things that maybe aren't so exciting for people.

Speaker 1: 5:38

But there is at least one exciting thing in there for us and for you as a listener and somebody who's invested in your employees' child care, your own child care needs and your organization, because it expands 45F significantly and also clears up some provisions. That gives you flexibility as an employer, as a benefits leader to support your employees, benefits leader to support your employees. And so this came about was introduced on May 20th, passed the House on the 22nd, passed the Senate on the 1st and then was signed into law on the 4th. The effective date for the changes to the tax credit will be January 1st of 2026. So you have roughly six months, a little less than, to get a program in place to maximize taking advantage of the enhanced task credit. So unfortunately, not retroactive to this year, but an opportunity to plan for the future and get things in place for 26.

Speaker 2: 6:35

One thing, too, even though that seems like a short timeline, I mean, we're going to have to shout out to all the companies, moms First, even our leadership team and countless other companies that have tried to push for this for decades yes so, but it finally happened it finally happened and it matters because the support has not been there.

Speaker 1: 7:07

This issue continues to grow and grow and grow, um, and it's an opportunity for companies to make investments and benefits that actually impact their employees lives. You're getting away from, you know, just free lunches and some of the other things that we've seen become really attractive perks to hey, there's an opportunity to really affect somebody's life and their ability to start a family and grow communities. This isn't just about the employer itself, it's about the community health as well.

Speaker 2: 7:39

One interesting stat that I saw and I wasn't able to find recent data. I also didn't spend as much time, so I probably could have found it, but there was something back in 2016. So let's you know nine years ago, where the analysis showed that companies only took advantage of the existing 45F, $18 million was claimed under the 45F tax credit, which this year and prior years it was, employers can get up to $150,000 annually if they support their employees with child care. There are requirements, but only $18 million was claimed back then. I don't know what it is today, but I did find something where the IRS said there was a quote somewhere. I forget who it was, but they said employees are overlooking this.

Speaker 1: 8:32

Yeah, I think employers overlook it. I think a lot of folks historically thought it only applied if they were building and maintaining a child care facility. If they were building and maintaining a childcare facility and I think that some of the changes in the language and the emphasis of the 45F credit that really will help. I think companies understand that you don't have to build an on-site center, you don't have to take on all of that liability. You can take advantage of this by getting a program spun up very quickly that supports folks.

Speaker 2: 9:06

Want to share a little bit more about it. Businesses, small businesses. What are some of the flexible features they have?

Speaker 1: 9:13

Yeah, so the maximum credit has gone from $150,000 up to $500,000 for large businesses and potentially up to $600,000 for small businesses. The coverage percentage of eligible expenditures so there's on Form 8882 and under 45F there's two areas of eligible expenditures. One is resource and referral services. That was at 10%. That stays at 10%, so there's no changes there. Where we've seen the changes is in the child care expenditures and this is where the language used to be relatively specific to operating and kind of like running an on-site center or contracting with a specific center. There was more flexibility of the program but the language wasn't super clear and so this used to be at 25%. This is now at 40% for large businesses and 50% for small businesses. So you're talking about 40 cents on the dollar to 50 cents on the dollar coming back as a tax credit, up to $500,000 for helping employees afford childcare. It is now going to be indexed for inflation and so to max this out at the 40% level, you need about $1.25 million in spending $1.2 million in spending at the small business level to hit the maximum cap. Million in spending at the small business level to hit the maximum cap.

Speaker 1: 10:48

The new flexibility items that came in first small businesses you can now pool together to put a program in place, so no longer is a small business having to go it alone.

Speaker 1: 10:56

This actually raises really interesting opportunities in tri-share programs that are springing up across the country at both the state and the municipal level.

Speaker 1: 11:05

But also working with companies such as Upwards, like we do, is to help pull together groups of small businesses, pull together micro-networks and really put something in place where they're going to be able to make an impact not only for the small business but also their communities that small businesses are obviously very reliant upon.

Speaker 1: 11:27

The next part is we've clarified language around the third party intermediaries. So language historically made companies feel like they had to be the ones doing all the work with child care centers, things of that nature that you can contract again a company like Upwards or others to come in and help build relationships with child care centers and facilities and home daycares in an area that are qualified and help you administer those programs, making it almost zero touch on the employer and really easy to run. Take advantage of and you're reaping the benefits of providing an amazing and differentiated benefit in your area while not having the heavy administrative burden of actually running a facility. So again, multiple businesses can utilize these facilities. They don't have to be dedicated, and so those are the really huge things that now make this very simple to get a program in place and to maximize the impact of it.

Speaker 2: 12:27

But you said the two types right. A company could offer resource and referral services, so that's like a navigation program. You as the employer are saying, hey, employee, I give you access to this platform that's going to help you connect and find it doesn't help pay. So you, as an employer, you get 10% off that spend. So if you spend $50,000, you can get a $5,000. But the other one is the contribution to paying for care which, as Doug mentioned, 40 cents on the dollar or 50 cents on the dollar. Now we're going to go through some of the requirements, because the one big thing you need to know is that the funds cannot touch the employee, so they can't go into a dependent care flexible account. You can't do it as a reimbursement. You have to have a mechanism that goes from company directly to provider, and so that could be. You as the company can build a spreadsheet or build connections right, that's going to take a lot of admin time to manage a program like this. Or you can use a program platform similar to the one we work at, which is Upwards, which has already made that connection easy to make. The payments go from employer to provider, bypassing any touching of the employee's accounts, and so that, I think is the biggest hurdle there. So if you want to get 50 cents on the dollar, you're going to need a way to track that the dollars went directly to the provider. So some other things that qualify to get advantage of the 40 to 50 percent credit Facility expenditure so building, acquiring a child care center, operating expenses, employee training programs, child care worker compensation, enhancements. So keep in mind too, that this is annual. This is an annual credit and it's per EIN as well, so you can't have, you know, multiple EINs can't roll into one. It's got to be an individual, unique tax credit paying entity. Third-party contracts 40% to 50% so you could reserve slots at a licensed child care center. You could subsidize employees' child care costs. You can partner with child care networks. You can have agreements with multiple centers networks. You can have agreements with multiple centers. These are just other ways that you can take advantage of the 40 to 50% credit.

Speaker 2: 15:08

We mentioned resource and referral expenditures. We also call those like navigation programs. So those are contracts with child care placement services, platform subscriptions, like Upwards, professional referral services, individualized placement, counseling services. So really, navigation. The goal here is you're helping employees find care versus helping them pay for care. There are requirements when it comes to the facility. So it can't be friend, family, neighbor, it can't be nanny or babysitter. It has to be a licensed facility. That facility has to be licensed by the state. Active, must comply with state local laws. Um, the the dollars that you give to employees can't favor a highly compensated employee. So, um, janitor, ceo, all has the same access. Um, those are pretty much what qualifies for it. Doug, I'd love for you to maybe give some examples. This is where I think the people end up going. Holy cow Like this is real, real money.

Speaker 1: 16:23

Yeah, absolutely. Let's work through a couple different examples. Let's start with a small tech company that qualifies in the small business area. So their maximum credit is going to be $600,000. We're looking for about $1.2 million in qualified expenses. So if we assume around 350 employees would be eligible to take part, we're looking at about $3,400 a year. Count in again, small company not going to want to administer this program. So $10,190,000 on supporting employees with care, 10% on the $10,000 that is the resource and referral program is going to get you $596,000 back. That is only $1,700 net cost per employee annually for an incredibly significant benefit.

Speaker 2: 17:35

But let's step up now for a larger One thing I wanted to clarify in that one too. So the example that we put together was a tech company, 350 employees, and the assumption we made here was that each of those 350 employees would take advantage of the $3,400 stipend that we would suggest offering. But we know, doug, that not everybody has little kiddos. Not everybody, even if they have kiddos, join a program. So in our experience, if you were wanting to see 350 employees actually claim the full amount, you're really looking at having a population of like 2,800 employees, looking at having a population of like 2,800 employees. So for a population at 2,800 employees total population you would see roughly about 350 employees claim the full amount. If you were a company at 350 employees, you would expect, through our experience, to see about 50 employees of that 350 claim the full amount.

Speaker 1: 18:48

So in our example, in the example Doug just gave, like we assumed the company, everybody's going to use it, that's not the case, but at least you'll get a sense for the actual opt-in and what that means is the amount that you can contribute and take cost off of the employee is actually significantly more. When you have less people contributing, you can increase that amount. We've actually run programs that do kind of flex and scale basically have a budget that gets allocated based on the folks coming in there. So there's a lot of ways that you can design programs to maximize the impact of it to your employees but also the tax credit of it to your employees.

Speaker 2: 19:28

But also the tax credit. Let me run a quick example here, like you just mentioned. So if you're in a company that has 350 employees, you're going to see if you offer any dollar amount to childcare, you're going to see about 50 people opt in and that is with like the best marketing, the best employee awareness. There's just stuff that we've uncovered over the years where even and I'm sure all benefit leaders like even if it's free money, there's still people that just don't take advantage of it. Time, like there's a lot of different reasons. So at a company of 350 employees, if you were already willing to spend 1.19 million for 50 people, you could actually give each employee 23 800 for that same price. So you could. That's 23 000 you would give and then you would get 11 900 back, like back, Like that is just like the scale of it.

Speaker 1: 20:30

I think we're going to need to do a follow-up episode where we map out some of these different program designs and potential costs associated with it and really like talk through, because there's so many ways to layer it and we're not going to have time to get through all of it today 100% yeah.

Speaker 1: 20:45

I think that's a key thing. It's also part of the workshop we're doing tomorrow. We can follow up on the back end of that and really, because I think there's two things here right there's the program design and then how it layers in to this and really I think, how it can solve problems for different size organizations and different geographies, different wage levels, and I think that'd be something that could be really helpful for folks and trying to translate this within their organizations.

Speaker 2: 21:12

Yeah, give us another example.

Speaker 1: 21:16

Well, let's go into maybe a larger employer and think about, let's say you know, a large employer could be anything manufacturing financial services, let's say 5,000 employees. But let's take a more mixed approach in how we're putting this program together. So we're reserving slots at centers and maybe some hard-to-service areas so that we know employees can have part-time, full-time care. Or we're leveraging those seats for backup care seats for backup care. We also have a backup care program that is going to pay out to the providers to support families when they have emergency child care needs, and we're also going to run direct subsidies for up to 500 employees, or around 500 employees. All together. Between these things we're going to spend about a million dollars, you know, around $400,000 to reserve the seats and make sure those are always available, make sure the centers are like at the level that we want in those areas $100,000 for backup care, $500,000 for direct subsidies.

Speaker 1: 22:24

Now all of these are qualified child care expenditures and I think that's like the piece that really kind of changed here and is really drilled down. Is these all count in the same way and so at that million dollars you're going to get that 40 percent back on the dollar, so four hundred thousand dollars back as a tax credit on that, effectively reducing the spend by two-fifths, and so that is massive. Think of the breadth of that program and how you can administer it. You still have some wiggle room in that because you're not at that $1.2 million. So this is where, again, that may sound like a burden to run, but you can still get 10% back on contracting with a third party Again one we've worked with and worked for to administer that program and make sure that it's successful and take ownership of it.

Speaker 2: 23:29

And so, again, massive opportunity to put some really awesome stuff in place. And this is not even including and I think we're going to wrap it up here and leave a little bit of a teaser for a couple episodes that our next episode is scheduled for six months from now.

Speaker 1: 23:41

I think we may have to accelerate it with this.

Speaker 2: 23:47

I think so. Yes, it's been a, it's been a, it's been a journey. Doug and I, we try to do the best that we can, but we're at episode 14, but I wanted to leave with uh, things can stack. So the 45 F is for the employer. As many know, we've talked about programs like New York, georgia. They offer state credits as well, so you can stack those together. And then, even further, the employee.

Speaker 2: 24:15

There was an increase in the DCFSA from 5,000 to 7,500, right, which is going to return tax credits back to them on their spend. And then there's also the CDCTC, which is the child care. I'm not even going to try to pronounce it, but there's a tax credit on your tax. So as you start looking at layering these and I think we'll put a spreadsheet together I'll do something. But this is where we showed the example that if an employee is spending 15,000, the employee gives them 3000, which is1,500 after a 50% credit. Take out the DCFSA, take out some credits on their tax return, the final cost can come down to $5,900, all by the employer offering a $3,000 stipend again, which is only $1,500 in costs. We got some spreadsheets. That sounds complicated.

Speaker 1: 25:15

It is, and it shouldn't be, but this is where we are and that's why we're here to break it down and make sure that that it is usable. So till the follow-ups, Till the follow-ups.

Speaker 2: 25:27

Tell the follow-ups Cue the music Bye.