OBBB Strategy: How to Pay Your Spouse and Get a Tax Credit for Your Own Child Care

A smart new way to cycle family dollars through your business — legally and lucratively.

What Changed:

The Employer-Provided Child Care Credit under IRC §45F just got supercharged by the One Big Beautiful Bill (OBBB):

  • Credit increased to 40% of qualified child care expenses

  • Even better: Small businesses with <$25M in gross receipts get a 50% credit

  • Annual credit limit increased to $600,000 (indexed starting 2027)

  • You can now qualify even if you contract with a third-party child care provider

Also enhanced:
The Dependent Care Assistance Program (DCAP) limit under IRC §129 rises from $5,000 → $7,500 per employee (starting in 2026) — tax-free to the employee and deductible to the business.

The Strategy: Turn Your Family Into a Tax-Advantaged Payroll Loop

If you're an S-Corp owner and your spouse legitimately works in the business (admin, payroll, ops, etc.), here’s a powerful new stack:

Step 1: Put your spouse on payroll — legally and reasonably

  • W-2 income for real services

  • Eligible for benefits like DCAP

  • Business deducts wages + benefits

Step 2: Set up a Section 129 Dependent Care Assistance Plan

  • Offer a $7,500 tax-free benefit for dependent care

  • Funds must go to qualified child care expenses

  • Your spouse receives the benefit tax-free

  • Your business deducts it fully

Step 3: Capture the IRC §45F employer child care credit

  • Get 40–50% of your DCAP costs back as a tax credit

  • Yes — even if the benefit goes to your employee-spouse

  • Stack this with the deduction for maximum advantage

What Makes This Legal?

The OBBB made two critical updates:

  • Third-party contract eligibility: You no longer need to own the child care center — you can use outside providers.

  • Employee family members are allowed: There's no rule disqualifying benefits for spouses who are real employees.

Just be sure the role, wages, and benefits are substantive and documented.

Compliance Checklist:

  • Is your spouse doing real work?

  • Is compensation “reasonable” under IRS standards?

  • Are Section 129 plan docs in place?

  • Is the child care provider licensed and on record?

  • Are you filing Form 5500 if required for your plan?

  • Are you reporting the §45F credit on your return?

Why It Matters for SMBs

This isn’t just tax gymnastics — it’s a cash flow boost for working families, and a way for small businesses to keep more dollars in-house.

Pair this with other family payroll plays (like employing a child under §3121(b)(3)(A)), and the savings multiply.

Want Help Setting This Up?

We help small business owners structure payroll, benefit plans, and credit capture strategies that are fully IRS-compliant and optimized for the new law.

This is one of the best hidden wins of the OBBB — don’t miss it.