Child care is a critical component in alleviating the worker shortage crisis. Below are four things employers can do now to help their employees access childcare. The following sections provide more detailed information on relevant tax credits and benefit options.
Four things employers can do to help their employees with childcare
1. Research existing childcare options in the community and provide a childcare guide for employees.
Many states have existing child care networks or associations for the education of young children. Contact the organizations that specialize in child care in your state to help identify different types of quality care in your community. Be sure to include traditional child care centers and child care homes, nonprofit and faith-based providers, and Head Start and Early Head Start programs for eligible families.
2. Contract with a third-party company to help employees connect with childcare providers.
A third-party company can facilitate a variety of services that will enhance benefits packages and provide substantive assistance to employees in addressing dependent care needs.
A third party company may:
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Provide direct guidance and service to employees to help them find the type of childcare that meets their needs.
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Facilitate a “back care” program where a business establishes a relationship with a specific provider who will be able to provide care if a working parent’s usual childcare arrangement is disrupted.
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Set up and run an employer subsidy program where employers help cover the cost of care for employees by providing vouchers.
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Manage partnerships with childcare providers. For example, arranging access to a certain number of places reserved at a childcare provider specifically for that employer, often at negotiated special rates.
Examples of third party intermediaries include KinderCare, Care.com, TOOTRiS and WeeCare.
Did you know? Employers can recover some of the costs of third-party intermediaries through a tax credit. Learn more about the Employee-Provided Child Care Tax Credit below.
3. Offer a Dependent Care Flexible Spending Account (DCFSA).
Employers can offer a Dependent Care Flexible Spending Account (DCFSA)—a pre-tax benefit account used to pay for eligible dependent care services. More on this in the section below.
4. Educate employees about their tax options.
Do your employees know that parents can reduce their tax burden by claiming childcare expenses? One example – the Child and Dependent Tax Credit (CDCTC) – is highlighted in a section below.
Employer Guide to the Employer Provided Child Care Credit
The Employer-Provided Child Care Credit can save employers with qualifying expenses more in taxes than using a deduction alone, and employees can exclude some child care benefits from their taxable wages. For employers, the credit can offset actual federal income tax liability.
What are the parameters?
Any size employer or type of company can claim this credit. The Employer Provided Child Care Tax Credit allows employers to claim 25% of eligible expenses, including:
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When a business builds or acquires and then operates an in-house childcare centre
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Amounts paid to contract with a licensed child care program (including home-based providers)
Employers can also claim a 10% credit for costs associated with contracting with a third-party referral service.
The credit is limited to $150,000.
How do I claim this credit?
To receive the tax credit, employers must fill out a short, half-page form (Form 8882). The credit is part of the general business credit and an employer can claim the credit at any time within three years from the due date of your return on either an original or amended return.
Example
Learn more and see examples of how the tax credit works here.
In addition, state tax credits for employer-provided child care are available in 18 states. Find out more here.
Employer’s Guide to Dependent Care Flexible Spending Accounts
A Dependent Care Flexible Spending Account (DCFSA) is a pre-tax benefit account used to pay for an employee’s eligible dependent care services.
A full list of eligible expenses can be viewed here.
How does it work?
Like a health care flexible spending account, with a DCFSA, funds are withdrawn from an employee’s paycheck before taxes are deducted, reducing an employee’s overall tax burden. At the end of the year, employees who contributed to a DCFSA can submit receipts and be reimbursed for those eligible expenses. Employees can contribute up to $5,000 per year filing as individuals or filing jointly, or $2,500 for married couples filing separately.
Only certain expenses can be reimbursed, and they must be directly related to professional care services that allow an employee to work, look for work, or attend school full-time. Employees pay out-of-pocket for care expenses and are reimbursed through the DCFSA plan. DCFSA funds are use-it-or-lose-it, meaning that funds not spent at the end of the year do not roll over to use the following year.
Some plans allow for some unused funds to roll over at the end of the year. Employers can choose one of two ways for account holders to roll over unused funds:
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Account holders can carry over up to $550 from one plan year to the next.
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The grace period option, which allows unlimited funds to be carried over to be spent in the first two and a half months of the next plan year. At the end of that period, all unspent transferred funds are forfeited.
Please note: If an employer intends to claim the childcare tax credit, they must deduct any expenses paid by an FSA. If an employer provides money to pay child care expenses, or if money is withheld from an employee’s paycheck on a pre-tax basis, those dollars received must be deducted from allowable expenses when applying for the CDCTC.
Employee Guide to Child and Dependent Care Tax Credit
The Child and Dependent Care Credit (CDCTC) is a tax credit that helps parents and families pay for the care of their children and other dependents while they work, look for work or go to school.
If you qualify for the Child and Dependent Care Tax Credit, the credit will lower the amount of federal income tax you have to pay.
Who is eligible?
Families can claim a childcare tax deduction as long as they meet the following requirements:
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The care must be for a child under the age of 13.
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The family must need childcare because both carers are working, looking for work or are full-time students.
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The family must have qualifying child or dependent care related expenses.
What are the parameters?
For 2022, the maximum amount of care expenses that can be claimed is $3,000 if there is one eligible person, and $6,000 if there are two or more eligible people. For taxpayers with adjusted gross income (AGI) above $43,000, the maximum credit is $600 (for one child and expenses of at least $3,000) and $1,200 (for two or more children and expenses of at least $6,000). For those earning less than $43,000, the credit can be larger, but not more than $1,050 for one child and $2,100 for more than one child.
Please note: As a result of legislation enacted during the pandemic, the amount of the child and dependent care tax credit was significantly greater for expenses in calendar year 2021. The increased credit expired on December 31, 2021 and was not renewed by Congress.
How do I claim this credit?
To claim the credit, you will need to complete Form 2441(note that this form may change for tax year 2022), and include the form when filing your federal income tax return. You must identify all persons or organizations who provide care for your child or dependent.
In addition, state dependent care tax credits are available in 25 states. Find out more here.
About the authors
Jenna Shrove
Senior Director of Strategic Advocacy and Advisor to the Chief Policy Officer
Jenna Shrove is a senior director of strategic advocacy and advisor to the chief policy officer at the US Chamber of Commerce.
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