Get Tax Credits for Helping Employees With Childcare

We recently recorded a conversation with Perquity to break down how employer-supported childcare tax credits work. We covered what changed, what qualifies, and where employers tend to get confused.

You can watch the full video here:

Most owners don’t think about childcare until it becomes a work problem. Then you see it. People running late, schedules getting rearranged, and employees stressed about how expensive daycare has gotten. For a lot of parents, childcare is one of their biggest monthly expenses.

Many families are paying $15,000+ per child every year. That financial pressure can show up at work. You might see it in decreased attendance and focus, plus retention might become harder.

With recent federal and New York changes, this credit is finally practical for everyday business owners, not just big corporations.

Why Employers Are Now Paying Attention

Employer-provided childcare tax credits have existed for years, but most businesses ignored them. The return was small, the cap was low, and the admin work was heavy.

Before 2026, the credit only covered 25% of costs, capped at $125,000, and required dealing with multiple childcare providers.

As of January 1, 2026

• The federal credit increased to 50%.
• Federal cap increased from $125,000 to $600,000
• New York offers a 50% state childcare tax credit
• Employers can use a service to manage all childcare payments

↪ And this is exactly what Perquity does. Instead of juggling contracts and payments with multiple daycare centers or schools, everything runs through one system. Employees enroll, choose their provider, and set their benefit amount.
↪Perquity verifies providers and sends payments directly. The activity is tracked for compliance, and the reporting lines up with payroll so tax treatment stays clean. The goal is to take the operational mess off your plate so you can offer the benefit without creating another process for your team to manage.
 

How Much Can You Recover?

When it’s structured correctly:

• New York State offers a 50% childcare tax credit, capped at $500,000
  
• The federal government offers a separate 50% childcare tax credit, capped at $600,000
  
• Many employers may recover most or all of qualifying childcare costs
  
• If federal limits apply, businesses may still recover a large portion through NY credits and federal deductions
  

This is why some employers now see childcare support as a retention strategy, not just a benefit expense.

New York Childcare Tax Credit Requirements

To qualify for the New York childcare tax credit:

• The employer must be subject to New York State taxes
  
• The childcare provider must be located in New York
  

Out-of-state providers may still qualify for the federal credit, but not the New York credit.

This Isn't All or Nothing

You don’t have to jump straight into covering full daycare costs for everyone on your team. Most businesses don’t. Some start by helping with part of the monthly cost. Others pilot this with a small group of employees before opening it up more broadly. A few cap the benefit so it’s predictable and doesn’t spiral into something hard to budget for.

You’ll want to set this up in a way that fits your business and doesn’t create chaos behind the scenes. Where people usually get into trouble is rolling something out quickly without thinking through how it will run through payroll and reporting.

We recommend keeping payroll and documentation clean right from the start. That’s what will help in the long run!

How Payroll Fits In

Employer-paid childcare is treated as a fringe benefit and is generally taxable income to employees.

As of this year, up to $7,500 per employee may be excluded from taxable income if eligibility requirements are met. Amounts above that must be reported as taxable wages and included in payroll taxes.

Employees must confirm that both spouses are working to qualify for the tax-free portion.

Action items for employers:

• Confirm your payroll system can track taxable vs non-taxable benefits
  
• Document employee eligibility
  
• Set expectations to avoid paycheck confusion

The Two Discrimination Rules

1. Employer-level rule
You can’t structure this benefit to favor owners or highly compensated employees. If you do, you risk losing the tax credit.

2. Employee-level rule
The $7,500 tax-free portion has its own fairness requirement. If the plan doesn’t meet it, owners and higher-paid employees may lose the tax-free treatment, even if others still qualify.

Action item: Make sure this benefit is not designed in a way that favors leadership.

Self-Employed and SMB Owners

Self-employed business owners may qualify for childcare tax credits when childcare is paid through the business. If you are the only person on payroll, discrimination rules generally are not an issue. You’re not favoring yourself over anyone else because there is no one else to favor.

Once you have employees, the rules change. You can’t set this up as an owner-only perk. The benefit has to be offered in a non-discriminatory way, even if not every employee chooses to use it.

How this gets reported depends on how your business is set up:

• S Corps and C Corps: Childcare benefits must be reported through payroll on a W-2
• Partnerships and sole proprietors: Benefits are often reported through a K-1, though some owners choose W-2 reporting for smoother payroll tracking during the year
  
  

So, What's Next?

Before offering employer-supported childcare:

• Talk with Megapay about setting up your payroll and getting started with Perquity
• Assign internal ownership of the process
• Does it make sense to start with a small pilot?
  

Helping with childcare can take a real weight off your team’s shoulders and that usually shows up in retention and morale. If reducing turnover is already on your radar, this fits right into that bigger picture. We’ve shared other ways on How to Reduce Employee Turnover here.

The tax credits make this more realistic for many businesses, but only if the benefit is set up cleanly and runs through payroll the right way.