The new tax law quietly supercharged child care benefits for employers — and there’s real strategy here if you run a small business or family-owned company.
Two key provisions now offer serious tax savings for supporting working parents (including yourself, if structured correctly):
Enhanced Employer-Provided Child Care Credit
Now worth 40% of qualified child care expenses
(up from 25%)50% credit for small businesses
if your average gross receipts are under $25 millionUp to $600,000/year in eligible expenses can qualify
(for small businesses — $500K cap for larger ones)Applies even if you partner with a third-party child care provider
(e.g., via a shared care facility or voucher system)
Strategic Use Case:
You may be able to structure payments to cover child care for employees — or even yourself or your spouse — and recoup 50% of those costs via a tax credit.
Caution: The IRS still requires that the benefit be broadly available and not just for owner-employees. But a properly designed dependent care assistance program (DCAP) + written child care policy could pass muster.
Dependent Care Accounts (DCAPs) – Bigger Tax-Free Limits
Old limit: $5,000 per year
New limit (starting in 2026): $7,500 per year
Tax-free to employees, deductible for the business
Strategy Tip:
If you employ your spouse, or even yourself in a C-Corp structure, you can run the increased DCAP through payroll and reduce both income tax and payroll tax liability.
So… Can You Pay Your Spouse (or Yourself) for This?
Technically yes — but structure matters:
In an S-Corp, you'll need to treat your spouse as a bona fide employee, with actual work duties and compensation — then offer DCAP or reimbursements as part of a broad-based benefit plan.
In a C-Corp, it’s more flexible: even owner-employees can receive these benefits, including employer-paid child care and dependent care assistance.
Bonus Tip: If your spouse already helps with the business (e.g., admin, marketing, bookkeeping), now is the time to formalize that role. Paying them through payroll opens the door to dependent care benefits and other tax-favored fringe perks.
You pay your wife $40,000 in W-2 wages as a legitimate employee. She has $7,500 in eligible child care costs in 2026. You:
Reimburse her $7,500 through DCAP (runs through payroll, Box 10 of W-2)
That $7,500 is deductible to the S corp
She pays no federal income tax or payroll tax on it
You do not pay employer payroll taxes on that amount either
If you also pay $5,000 to a third-party center directly, and don’t reimburse her through DCAP for that, you could potentially claim a 50% tax credit on the $5,000 — saving $2,500 in federal tax.
Final Thought
Child care is expensive. The new law gives you a way to turn those costs into credits and deductions — and with smart planning, you can stack the employer credit + DCAP exclusion + fringe benefit structuring for maximum savings.
If you're a family-run business or a small shop with working parents, this could be one of the most overlooked wins in the new bill.
Want help designing a compliant plan that works for your business and family? Let’s talk.