Beginning this year, the One Big Beautiful Bill Act (OBBBA) increases the employer childcare credit for small businesses to 50 percent of qualified childcare expenses, up to $600,000 per year.1
But many small business owners are confused about how this works when the employer and the employee are one and the same or are married.
The savings here are real, so let’s walk through the benefits step by step with real numbers.
Can a Sole Proprietor Benefit?
A sole proprietor cannot claim the credit for their own childcare because they are not an employee. But they can benefit if they hire a legitimate W-2 employee—say, their spouse.
Example 1: Sole Proprietor Hires Spouse
Assume:
- Childcare expense: $20,000
- Credit rate: 50 percent
- Owner’s combined federal and self-employment tax rate: 36 percent
- Spouse’s combined federal and payroll tax rate: 30 percent
Step 1. The Credit
$20,000 × 50 percent = $10,000 credit
This reduces the owner’s tax dollar-for-dollar by $10,000.
Step 2. The Deduction
The remaining $10,000 (the half not used for the credit) is deductible.
$10,000 × 36 percent = $3,600 additional tax savings
Total tax benefit for the sole proprietor business owner:
- $10,000 credit
- $3,600 deduction benefit
- The result: $13,600 total tax savings (cash)
Step 3. Tax Cost to the Employee-Spouse
Because the arrangement likely fails Dependent Care Assistance Program (DCAP) non-discrimination rules,2 the entire $20,000 must be included in the spouse’s W-2 wages.
$20,000 × 30 percent = $6,000 tax cost
Net Household Benefit
- Owner pockets $13,600
- Spouse pays $6,000
- Net household savings: $7,600 ($13,600 - $6,000)
In this example, the family saves 38 percent on its childcare ($7,600 ÷ $20,000. And this is the cash savings after self-employment, payroll taxes, and federal income taxes, as applicable, on both spouses.
Want more savings? Add a Section 105-HRA to make the family medical expenses tax-deductible.
What about a Solo S or C Corporation Owner?
An S or C corporation owner is a W-2 employee of the corporation. So the corporation can pay childcare expenses for the shareholder-employee.
But if the shareholder owns more than 5 percent, the benefit cannot be tax-free under DCAP rules. It’s easy to think this impediment kills the deal. Not so.
Sure, you have to include the $20,000 in wages. Let’s run the numbers.
Example 2: Solo S Corporation
Assume:
- $20,000 childcare expense
- 50 percent credit
- Owner’s combined income plus payroll tax rate: 36 percent
Step 1. The Credit
$20,000 × 50 percent = $10,000 credit
Step 2. The Deduction
The corporation deducts the remaining $10,000.
$10,000 × 36 percent = $3,600 tax savings Total tax savings for the S corporation owner:
- $10,000 credit
- $3,600 deduction benefit
- The result: $13,600 tax savings (cash)
Step 3. Tax Cost of Wage Inclusion
$20,000 × 36 percent = $7,200 additional tax
Net Benefit
- $13,600 tax savings
- $7,200 tax cost
- $6,400 net tax savings
Even though the entire $20,000 is taxed as wages, the credit and the deduction still produce a meaningful benefit. In this case, it’s equal to 32 percent of the $20,000 spent ($6,400 ÷ $20,000. This is the cash savings, after payroll and federal income taxes.
This explains how the solo S corporation owner “wins” despite failing the DCAP non-discrimination rules and having the benefit taxed.
Added benefit. The $20,000 of childcare included in the S corporation owner’s income counts as W-2 income for reasonable compensation purposes.
Takeaways
The 50 percent credit is the driver. Beginning in 2026, OBBBA allows small businesses to claim a credit equal to 50 percent of qualified childcare expenses. That dollar-for-dollar tax reduction is what makes the strategy powerful.
Taxable wages do not kill the benefit. If the childcare benefit must be included in wages because the business fails the DCAP non-discrimination rules (as is common with sole proprietors and solo S and C corporations), the numbers can still work strongly in your favor. The credit plus the deduction often exceeds the tax cost of including the benefit in income.
Sole proprietors and solo S or C corporations can both win:
- In the sole proprietor example, the household nets $7,600 after accounting for the spouse’s added tax.
- In the solo S corporation example, the owner still pockets $6,400 after paying tax on the wage inclusion.
The math matters. When you combine (1) a 50 percent credit and (2) a deduction for the remaining expense, you are usually well ahead of the salary inclusion tax cost.
- IRC Section 45F.
- IRC Section 129.