Big Changes Ahead for Employer Child Care Tax Credits

Child care is no longer just a family issue. It is a workforce issue. Across the political spectrum, there is growing recognition that the lack of affordable, reliable care is holding back both parents and employers. 

In the U.S. mixed-delivery child care system, businesses play a vital role by helping close gaps in availability and affordability through direct investment, partnerships, or workplace-based services. One of the main tools to encourage that investment is the Employer-provided child care credit (IRC §45F), a federal incentive designed to reward employers who support their employees’ needs.

Understanding how this credit works, and how recent federal changes will make it more generous, is key to seeing its potential for businesses in Kansas and Missouri.

What is the employer-provided child care credit?

Originally enacted by Congress in 2001, the Employer-provided child care credit (IRC §45F) is a federal program designed to encourage businesses to invest in child care for their employees. Employers could be eligible for a nonrefundable tax credit equal to a maximum of 25% of child care expenses made on behalf of their employees. 

The existing credit was capped at $150,000 per employer, which meant that employers had to spend at least $600,000 on employee child care expenses to receive the full credit.

Qualified expenses included the following:

• Constructing, purchasing, or retrofitting an on-site child care facility.
• Operating costs of an on-site child care facility.
• Contracting costs with a third-party child care provider.
• Child care referral and resource service costs. 

In 2022, the U.S. Government and Accountability Office (GAO) published an important report analyzing the credit, specifically looking why so few businesses claimed it. The GAO found a variety of reasons why employers did not use the credit:

• The credit is too small to incentivize the provision or contracting of child care services.
• Child care is not accessible or too expensive for employees.
• Many businesses are unaware of the tax credit.

Overall, a very small number of business provide child care services to their employees: only 11% of all workers have access to employer-provided child care, according to a 2021 Bureau of Labor Statistics analysis. 

How did the OBBBA change the employer-provided child care tax credit? 

Starting in 2026, the employer-provided child care tax credit will change substantially. In particular, the credit will become more generous to employers and provide more flexibility, especially for small businesses. 

Under the One Big Beautiful Bill Act (OBBBA), a higher percentage of expenses will now be covered by the tax credit. Instead of 25% of child care expenses made on behalf of employees, businesses may receive up to 40% or 50% for eligible small businesses. * For most businesses, the cap on the credit amount will also increase from $150,000 to $500,000 (indexed for inflation); the amount for small business will rise to $600,000 (also indexed). 

What’s more, small businesses may pool resources to provide child care and use third-party intermediaries to facilitate child care services for employees. This alone allows employers to use innovative options like those offered by oneCOMMUNITY, a child care nonprofit based in Wichita, KS we highlighted in our July 2025 newsletter. 

State policy to support employer-provided child care

States often enact their own tax credits that mirror or supplement federal credits to make them more generous to businesses and provide state tax relief. Although Kansas has an existing credit that works alongside the federal credit, Missouri does not currently have one on the books. 

Kansas

The Kansas Child Day Care Assistance Tax Credit (K.S.A. 79-32,190) is a refundable state credit for employers (and other taxpayers) who help employees access licensed child care. Employers can claim the following amounts:

• 30% (max $30,000/yr) for amounts paid to purchase or help locate care.
• 50% (max $45,000) in the establishment year of an employer or multi-employer facility and 30% (max $30,000/yr) for ongoing operations.
• 50% (max $45,000/yr) for payments to an organization that provides access to child care. 

The program has a statewide $3M annual cap (first-come). It aligns with federal IRC §45F by incentivizing facilities and referral supports and by allowing multi-employer/intermediary approaches. It differs in that Kansas’ caps are much lower and that Kansas’ credit is refundable while the federal credit is nonrefundable. 

Like the federal credit, the Kansas credit is not widely used by businesses currently. To better support employer-based child care options, Kansas policymakers may consider the following to increase utilization:

• Raise annual caps and expense percentages to reflect current construction and contracting costs, encouraging larger-scale facilities and stronger ongoing support.
• Index caps and percentages to inflation so the credit retains its value over time.
• Increase the statewide cap to prevent eligible employers from being turned away and to maximize the federal credit’s impact.

Missouri

Missouri currently has no state-level employer child care tax credit, although policymakers have come close to creating one this past legislative session. HB 269 would have offered a 30% credit for employer-provided child care expenses (capped at $200,000 per employer) alongside new credits for child care contributions and provider investments. While the bill had bipartisan support, it was blocked late in the session. 

Aligned’s Take: Affordable child care is critical to a strong workforce. Kansas’ refundable credit is a good start but needs higher caps, extended credit rates, and inflation indexing to match upcoming federal improvements. Missouri should enact a similar credit to give employers a state-level incentive to expand child care options.

* Small businesses are defined as those with average annual gross receipts under the amount set by IRC § 448(c) in the previous five years.