What is the Employer-Provided Child Care Credit (45F)
Workers need child care. Without it, employees with young children may reduce their hours and productivity or leave the workforce altogether. More than half (57%) of parents said child care responsibilities impacted their ability to work over the last month. Businesses have a vested interest in ensuring their staff can access and afford child care: when companies offer child care benefits, they see increased employee retention and loyalty, improved productivity, and a better workplace environment. Despite the clear advantages, 2020 data from the Bureau of Labor Statistics indicates just 11% of all workers have access to employer-provided child care, and those with lower incomes were less likely to receive a benefit.
To encourage businesses to provide child care to their employees, the federal government offers companies a tax credit to help cover some of the associated costs.1 The Employer-Provided Child Care Credit, under the Internal Revenue Code Section 45F, offers employers a tax credit of up to 25% of qualified child care expenditures and 10% of qualified child care resource and referral expenditures, both detailed below. The credit is capped at $150,000, meaning employers would have to spend around $430,000 to receive the full credit, and any further spending exceeding that amount would not be reimbursed.2
Qualified child care expenditures include costs associated with acquiring, constructing, rehabilitating, or expanding property to be used as part of a child care facility, and for the operating costs of such a facility, including supporting child care workers through training, scholarships, and wages. Though it is often called the “Child Care Facilities Credit,” employers may also contract with licensed child care programs, including home-based providers, in addition to operating on-site child care facilities, to offer child care services to their employees. Businesses often partner with child care companies such as the Learning Care Group, Bright Horizons, and KinderCare to offer this benefit.
Additionally, any amount paid under a contract to help employees find child care is considered a qualified resource and referral expenditure. These services must be accessible to all employees and cannot favor those who make higher wages or by ranking within the company.
Not much recent information is available about the employers or employees who benefit from this credit. In 2013, the most recent year for which data are available for the take-up of the credit, employers claimed $16.7 million in associated child care costs, representing just around 0.02% of all general business tax credits claimed for the year. The companies who used the credit the most were in the fields of finance, information, and manufacturing. This low take-up rate helps reflect the limited child care assistance provided by employers in general.
Given how little recent data is available, Congress requested in July 2020 that the GAO to evaluate the Employer-Provided Child Care Credit and submit a report including characteristics of employers and employees receiving the credit, challenges employers cited for not using the credit, how employees benefit when their employers use the credit, and recommendations. The Committee gave the GAO a one-year deadline. The report should offer both policymakers and companies a roadmap for how to better utilize the credit.
Recent proposals from the Biden Administration and Republicans on the Ways and Means Committee would both modernize and expand the Employer-Provided Child Care Credit. BPC has held roundtables with small business owners who described the challenges they have accessing a credit of this type and offering child care benefits more generally.
We found that larger companies are more likely to have the resources and capacity: For example Patagonia has offered on-site child care to employees with children ages two-months to nine years since 1983. The program costs approximately $1 million annually, and Patagonia uses the Employer Child Care Credit to the fullest extent, receiving a tax credit of $150,000.
The company has documented a variety of benefits for both the business and their employees. In the last five years, Patagonia has seen 100% of mothers return to work after having a child, compared to the national average of 80% of mothers who return to work within one year (though a lower percentage return to their previous job). Other reported benefits include more women in managerial positions, greater employee loyalty, and a stronger workplace culture built around trust and community. Overall, when considering savings in terms of employee retention and engagement, the company estimates they recoup 91% of costs and that the inclusion of intangible benefits would raise their return on investment to 115-125%.
If more employers were to follow Patagonia’s example and take advantage of the employer child care credit, they could not only see a return on investment, but also a higher employee retention rate and improved work culture.
Child care and the workforce are two issues that are inextricably linked; we cannot start to think about economic recovery without first addressing the lack of, and high cost of, child care. This credit allows employers to support safe, functional, and high-quality child-care options for their employees, but it is not being utilized enough. While some companies can demonstrate its effectiveness, there is not enough information about the shortfalls—or overarching benefits—to make informed decisions about how to best update the credit so it works better for more businesses and employees around the country.
We look forward to reading the upcoming GAO report and hope it helps policymakers and businesses understand how to improve the credit and make it more accessible for employers. This information, along with the proposals introduced by President Biden and the Republican Ways and Means Committee, are a start to providing greater incentives and expanding the credit to meet the needs of businesses and employees. These changes will hopefully encourage more businesses to use the employer child care credit, further supporting working families and helping to get people back to work.
1 It is important to note that federal law also allows employers to offer Dependent Care Assistance Plans, including flexible spending accounts (FSAs), where employees can set aside a portion of their pre-tax salary for expenses including child care, preschool, summer camp, and before or after school programs. A DCAP could also include direct payments by an employer to a child care provider, on-site care offered by an employer, or direct reimbursement of an employee’s costs for child care. For more information on DCAP plans, read our short explainer.
2 his page should be used informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Individuals interested in pursuing this credit should consult their own tax, legal, and/or accounting advisors and consult the IRS website for more information. For more information on what counts towards the credit, read Form 8882 from the IRS website.
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