Childcare benefits can have a positive impact on recruitment, retention, and productivity—all key concerns for employers. According to a survey by Care.com, 56% of employers in 2024 are prioritizing child care benefits to recruit and train staff, which is 10% more than in 2023. Where do you stand? Can small businesses afford to help employees with childcare? Fortunately, there are some no-cost/low-cost ways as well as some tax solutions that can be used by small businesses to offer assistance to employees with their childcare costs.
Give PTO
There aren’t any federal rules requiring paid time off (PTO) that employers can use for childcare needs; there are some state laws on point. Whether or not required to offer any paid time off (PTO), it’s probably a good idea to have a PTO policy allowing employees to accrue pay for time they take off from work for their personal reasons. Creating a policy that enables employees to get paid if they need to stay home for a day or two with a sick child who has a stomach virus can go a long way in engendering company loyalty and increasing employee retention.
What about time off to see a child’s school play or ballgame? Some states have employee leave laws for unpaid leave—referred to as school activity leave. For example, California requires employers with 25 or more employees to give up to 40 hours annually for school activity leave. Helpside has a state-by-state guide on school activity leave laws. So, even if your state doesn’t require you to offer this unpaid time off, you might consider doing it anyway.
Provide dependent care assistance
Recognize the significant financial burden of childcare on employees with young children. According to the Department of Commerce, the average cost of child care for a child under age 13 takes up about 51% of what is paid for housing (e.g., $1,700 for housing and $867 for childcare). Employers can help with this financial burden by offering a dependent care assistance program. The program can be one funded by the company or paid by employees on a tax-advantaged basis. More specifically, employers can offer a dependent care flexible spending account (FSA), which allows employees to put some compensation into the FSA each year that’s exempt from income tax.
Here are some points to note:
- Whether the company or employee pays, the maximum annual amount is $5,000.
- If both spouses work for the same employer, each can fund their FSA with $5,000.
- Funds can be used for before- or after-school care programs, but not for education costs.
- Employees should be advised that if they receive benefits under an employer’s dependent care assistance program, it must be coordinated with the dependent care credit. Information provided to them in box 10 of Form W-2 covers the employer’s program. Depending on the amount and the number of dependents, it could mean no personal credit is allowed.
Take a family and medical leave credit
Instead of a deduction for paying employees if they take time off to care for a sick child, you may be able to claim a business tax credit—the family and medical leave credit. You must have a written policy that meets certain requirements, and you must offer at least 2 weeks of paid family and medical leave annually to employees. In the case of part-timers, the leave is prorated. The pay can’t be less than 50% of the annual wages normally paid to the employee. For credit purposes, the leave is triggered for the birth or adoption of a child and when the employee must care for a child with a serious health condition.
The credit is a percentage of the amount of wages paid to a qualifying employee while on family and medical leave for up to 12 weeks per taxable year. The minimum percentage is 12.5%. It’s increased by 0.25% for each percentage point by which the amount paid to a qualifying employee exceeds 50% of the employee’s wages, with a maximum of 25%. You reduce the deduction for wages or salaries by the amount of the credit.
Note: This credit is set to expire at the end of 2025 unless Congress extends it.
Wages that are taken into account for the credit are subject to payroll taxes. The IRS has Q&As on the credit. More details may be found in in instructions to Form 8994.
Take a childcare tax credit
One of the perks offered to employees by many large corporations, such as Intel, Merck, and Whirlpool, is on-site daycare. Do any small businesses provide on-site childcare facilities? Maybe you wouldn’t think so, but one source said many do. If you provide on-site childcare or offer certain childcare-related services, you may be eligible for a tax credit up to $150,000.
The credit applies to:
- Costs associated with acquiring, constructing, rehabilitating or expanding property used as the taxpayer’s qualified childcare facility.
- Operating expenses paid by the business, including amounts paid to support childcare workers through training, scholarship programs and providing increased compensation to employees with higher levels of childcare training.
- Qualified resource and referral costs which include amounts paid or incurred under a contract with a qualified childcare facility to provide childcare services to employees of the taxpayer.
Expenses up to 25% of childcare expenditures and 10% of childcare resource and referral expenditures can be taken into account in figuring the credit. More details can be found in the instructions to Form 8882.
Final thought
Even if employees work from home, they may need childcare in order to do their jobs effectively. Think about ways you can help make the responsibility of childcare less stressful and less costly for employees…the company will benefit.
Find more information concerning employee benefits here.
