This Barely Used Child Care Tax Break For Employers Just Got An Overhaul

Forbes

5 days ago

The Employer-Provided Childcare Tax Credit just got a revamp. Matt Roth for The Washington Post via Getty Images
Before CAKES body cofounder Taylor Capuano had her moment of fame on Shark Tank in 2023 for putting one of her retail company's nipple covers on judge Kevin O'Leary's head, she, like many working parents, had nearly reached a breaking point at her nine-to-five job.
Capuano and her husband had their first child during the Covid pandemic while she was working in marketing, and it was a financial struggle. After paying for basic monthly expenses–including a hefty child care bill and health insurance–there was barely anything left to save. Coupled with a boss who she says told her to start looking for another job when she needed additional daytime flexibility, Capuano knew the corporate world was failing parents like her. Like so many others, she turned to entrepreneurship and cofounded CAKES body with her sister, Casey Sarai in 2022. It's now a $92 million (2024 revenue) viral undergarments startup with 30 employees.
As the Trump Administration is floating ideas to boost the U.S. birth rate, including (as part of the just-passed tax and budget bill), putting $1,000 into a 'Trump Account' for babies born between 2025 and 2028, employers are increasingly stepping up to address one of the biggest challenges for working parents: the child care crisis.
Major companies, notably Chobani, UPS and Etsy, have unveiled new child care benefits for employees in recent years, from on-site facilities to stipends for backup care. And while such programs don't typically cover the full price of daycare, research shows they're making a difference and helping companies' bottom lines by reducing absences and turnover.
Still, few firms are taking advantage of one of the key incentives in the U.S. tax code to help cover some of the cost of providing such a program to their employees.
Bigger Tax Breaks On The Horizon
Until recently, the Employer-Provided Childcare Tax Credit allowed companies to offset 25% of the cost of building or operating a child care facility for employees, or contracting with a qualified provider, for up to a $150,000 tax break annually. But according to data Forbes obtained from the IRS, just 176 businesses operating as C corporations and pass-through corporations, including S corporations, claimed the tax credit in 2021, the most recent year the data was available. That's a minuscule fraction of the 6.7 million corporate income tax returns filed that year.
The expense of constructing a facility compared to how much a business can get from the credit is one of the reasons it is underutilized, says Aaron Merchen, executive director of policy and programs at the U.S. Chamber of Commerce Foundation. The maximum amount businesses could claim under the tax break had not been updated since its creation in 2001, until last week.
President Donald Trump's just-signed reconciliation package more than triples the amount that businesses can claim under the credit, while also allowing them to use a third-party to arrange child care for their employees. Companies will now be allowed to claim 40% of qualified child care expenditures up to $500,000, or 50% up to $600,000 in the case of small businesses.
Investing In Retention And Productivity
Since founding CAKES body three years ago, Capuano and Sarai are set on creating a supportive workplace culture for the parents on their staff, who they view as crucial to the firm's success. So they began looking into offering a subsidy for child care.
After researching whether they could take advantage of child care benefits tax credits, they hit a brick wall in 'about 20 minutes,' says Sarai. None of the existing programs would completely cover their subsidy budget, or make sense for a remote workforce. They wound up offering every full-time staff member a reimbursement of up to $3,000 per month toward nanny, daycare or babysitter costs, with a prorated program for part-time employees. The startup—which expects to clear $150 million in revenue this year—has budgeted up to $500,000 for the program in 2025, which they say translates to 100% employer-sponsored child care.
'It is not just a nice thing to do,' Sarai tells Forbes . 'This is part of our growth strategy and part of investing in the top talent that we have and maintaining them.'
In a 2024 study for Boston Consulting Group, Emily Kos, a managing director and partner, and her team examined five companies in a range of industries that offered childcare benefits such as reimbursements and on-site daycare: Etsy, Fast Retailing, Steamboat Ski Resort in Colorado, Synchrony, and UPS. Every single one saw a positive return on investment, which Kos says was calculated by looking at retention and productivity, ranging from 90% to 425%.
Before Covid-19 hit, financial services company Synchrony provided 10 days a year of backup child care as a benefit. Now, says Aaron Brown, senior vice president of Total Rewards, the company reimburses 60 days of backup care up to $100 per day, which can cover anything from summer camp to a babysitter.
'We're glad that people are using the benefit because it means that we're getting better business performance,' he says.
The company receives requests for around 4,000 days per year, which Forbes estimates would cost the company roughly $400,000. He says the cost is well worth it—the firm has had a 30% increase in applicants post-pandemic and low turnover.
'The care economy underpins the full economy,' says BCG's Kos. 'If parents can't go to work or if caregivers more broadly than just parents can't go to work, it's a significant portion of the workforce.'