Factsheet: What we know about the federal employer-provided child care credit and how can it be better used by businesses

Overview

The employer-provided child care credit, also referred to as Section 45F in the Internal Revenue Code, provides a limited subsidy to businesses in the United States that provide child care to their employees. Employer-provided child care benefits can support businesses by attracting and retaining workers, especially when the U.S. labor market is strong and child care is scarce. Access to child care also can support a more reliable and productive workforce, which benefits businesses.

Roughly half of America’s children live in so-called child care deserts, areas with fewer available child care slots than children. And even when families are able to locate an available child care slot, the cost is often exorbitant, exceeding the cost of public in-state college tuition in some states. Indeed, survey data suggest that parents are spending an estimated 22 percent of their income on child care alone, with 33 percent of parents reporting they had to tap into their savings to cover the cost.

This has led some federal policymakers on both sides of the aisle to seek ways to address the nation’s child care shortage, but how to get these solutions across the finish line into law is elusive. The Trump administration and the Republican-controlled U.S. Congress are more focused on cutting federal support for child care to cover the cost of extending tax cuts for corporations and wealthy Americans, but therein lies one way to alleviate some of the strain in the child care market through the employer-provided tax credit.

At the end of 2025, many provisions passed under the 2017 Tax Cuts and Jobs Act will expire and provide policymakers with an opening to reform the tax code. Based on existing proposed legislation, it’s likely that the 119th Congress will pursue revisions to Section 45F to expand the subsidies available for businesses that offer employer-provided child care in an attempt to address some of the nation’s child care shortage.

To date, however, this tax credit has not been widely used, limiting its potential impact to provide families with young children the support they need. This factsheet summarizes what we know about employer-provided child care and some of the proposals to reform it.

The basics of Section 45F, the employer-provided child care tax credit

Firms can claim 25 percent of qualified child care expenses, plus 10 percent of qualified child care expenditures and referral service expenditures, up to $150,000 per year.
- Qualified child care expenses include the costs for “acquiring, constructing, rehabilitating, or expanding a child care facility; operating a qualified child care facility, including training and certain compensation increases for employees with advanced levels of child care training; and contracting with a qualified child care facility to provide child care.”
- Qualified child care resource and referral service expenditures include “expenses incurred to help employees find child care services.”

Few U.S. firms currently offer employer-provided child care and thus few workers have access to it

A 2022 U.S. Government Accountability Office report utilizing 2016 data estimated that only 169 to 278 corporate tax returns claimed the credit at an estimated cost of $15.7 million to $18.8 million in credits. In comparison, in 2016 between 70,001 and 70,808 corporate tax returns filed a General Business Credit form to claim multiple business credits on their taxes.
Partial data from 2018 analyzed by the Government Accountability Office suggested that U.S. firms reduced spending on child care facilities and resource expenses. The GAO report cites the complexity in administering child care and a general lack of awareness of the credit as key drives of the lower uptake.
In 2018, the Government Accountability Office also found that an estimated 16,846 to 21,378 individuals that own pass-through businesses claimed an estimated $6.4 million to $8 million in employer-provided child care tax credits. Compared to the estimated 633,000 and 695,000 individuals that filed tax returns for pass-through firms, few firms claim the credit. (Individual tax returns for pass-throughs do not amount to the total number of businesses since multiple individuals can be partners or shareholders in one business.)
Only 13 percent of civilian U.S. workers in 2024 had access to employer-provided child care benefits, according to 2024 estimate from the U.S. Bureau of Labor Statistics’ National Compensation Survey.
In 2020, nearly 30 percent of high-salaried, private-sector employees had access to employer-provided child care, compared to only 11 percent of overall U.S. workers at the time. Additionally, analysis of Bureau of Labor Statistics data suggests that workers in metropolitan areas and industries with more educated workers are more likely to utilize employer-provided child care benefits.

Could reforms to the employer-provided child care tax credit improve business uptake?

The small size of the employer-provided child care tax credit limits its utility, but increasing its utility may not be the most efficient allocation of scarce government dollars. Specifically:

The cost of constructing a child care center can range from $1 million to $3 million, compared to the maximum annual credit limit of $150,000. For large employers, the credit may not be enough to entice them to construct an employer-provided child care facility.
Economists have argued that the low uptake of the tax credit suggests that it may be an optimal candidate for reform as a vehicle to expand the provision of child care in U.S. workplaces since the credit could be reformed to better support the construction of new child care facilities and the creation of additional child care slots that parents desperately need. Importantly, reforming the credit would not be subsidizing existing centers because the historic low levels of businesses claiming the credit illustrate that new claims of the credit would likely result in the creation of new centers and increase the supply of available child care. If the credit already had high levels of businesses claiming it—and claiming it at its maximum value—then it would be a poor candidate for reform as it would suggest it was a behavior that businesses would otherwise pursue on their own.
Increasing the value of the employer-provided child care credit, however, is probably not the best way to improve child care availability. Increased funding could be better targeted to families that have a greater need for direct child care income support. The Joint Committee on Taxation estimated the Section 45F tax credit would cost $100 million over the 5-year period between fiscal year 2022 and 2026. That magnitude of increased spending on the employer-provided child care tax credit could be more efficiently allocated directly to help low- and middle-income working families access child care because white-collar, highly paid workers are already the most likely to have access to employer-provided child care or direct employer-provided child care benefits.

Other child care policy considerations

Surveys suggest that parents support employer-provided child care as it is a prerequisite for many parents to find employment and remain productive at work if they have young children.
Employer-provided benefits in general can create additional friction, factors that reduce workers’ abilities to move more efficiently between jobs in the labor market, which can create a less dynamic economy resulting in lowered productivity in the labor market. In an economy with an undersupply of child care, access to an employer-provided child care slot might keep workers in a job they might otherwise leave out of fear of losing the provided benefit. This is often referred to as “job lock” and is heavily associated with employer-provided health care benefits.
Incentivizing investment in child care through the tax code will not address a pervasive issue in child care that contributes to its lack of supply: the low wages paid to child care workers, despite the high prices parents pay. Low pay in the sector—roughly $14.60 an hour, or $30,370 annually, in 2023—contributes to high levels of turnover in the profession and increased levels of stress for those who remain.
There is some evidence that employer-provided child care may result in greater gender discrimination on top of the existing workplace discrimination and gender wage gaps. In Chile, researchers found that the implementation of a requirement for employers to provide child care resulted in a wage penalty on female workers.
It is possible to encourage and support businesses and communities to provide child care outside of the tax code, where greater guardrails and flexibility can be implemented. For example:
- In 2022, President Joe Biden signed the CHIPS and Science Act into law. The law supported the U.S. domestic semiconductor manufacturing sector through increased federal investment and included provisions requiring companies that applied for more than $150 million in grants to provide affordable, accessible, and high-quality child care for workers. There are concerns that the second Trump administration will try to eliminate the congressionally created program.
- In 2023, Indiana announced a $25 million Employer-Sponsored Child Care Fund to provide up to $750,000 in grants to Indiana-based employers with 20 or more employees, or a community nonprofit applying on behalf of a group of local employers. The program provided considerable flexibility, allowing employers to utilize the funds to provide on-site or near-site care, child care tuition benefits, or support dependent care assistance plans, an employee benefit plan that reimburses up to $5,000 annually to employees that pay for dependent care. The state utilized some of the state’s remaining federal relief funds from the COVID-19 pandemic and required that applicants implement the program within a year and match only 10 percent of the grant amount.

Bipartisan legislation in the 119th Congress to adjust the employer-provided child care tax credit

U.S. Sens. Katie Britt (R-AL) and Tim Kaine (D-VA) proposed the Child Care Availability & Affordability Act (S.847) alongside U.S. Reps. Salud Carbajal (D-CA), Michael Lawler (R-NY), Sharice Davids (D-KS), and Juan Ciscomani (R-AZ) (H.R. 1827). The proposed legislation would increase the maximum credit up to $500,000 and allow percentage of expenses covered up to 50 percent. It also would allow small businesses a maximum credit up to $600,000 and allow them to file a joint application. The Child Care & Affordability Act also would make changes to the Child and Dependent Care Tax Credit and Dependent Care Assistance Program.
U.S. Reps. Sharice Davids (D-KS), Brian Fitzpatrick (R-PA), Suzanne Bonamici (D-OR), and Ryan Mackenzie (R-PA) introduced the Affordable Child Care Act (H.R. 1408) to expand the maximum 45F credit to $300,000.

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Conclusion

The U.S. child care market desperately needs reform. Yet under the new Trump administration and Republican-controlled 119th Congress, it’s unlikely the pressure on parents in need of affordable child care is going to be alleviated. Indeed, recent deep cuts to the U.S. Department of Health and Human Services’ Administration for Children and Families—which supports child care, early childhood development, Head Start programs, and other crucial programs—the pain may only get more acute for parents struggling to afford the crushing cost of child care in the United States.

The impending expiration of the 2017 Tax Cuts and Jobs Act suggest that if anything gets done by Congress in 2025, it is going to be tax reform. Revision of the Section 45F employer-provided child care tax credit will likely be included based on existing policymakers interest, yet revisions to the tax code alone will not be enough to support the growing needs of U.S. families.

Interested in learning more about the critical role of the child care market in the U.S. economy and its relationship with broad-based economic growth? Take a look at the following pieces by Equitable Growth: