The One Big Beautiful Bill Act (OBBB) permanently enhanced employer credits for paid family and medical leave and employer-provided childcare. Tax professionals suggest employers begin reviewing their benefit policies now to ensure they can take full advantage of the more valuable credits.
Paid Family and Medical Leave Credit
The enhancements to the employer paid family medical leave credit under IRC § 45S apply to tax years starting after December 31, 2025, meaning “right now is an excellent time for employers to review their leave policies,” said EY’s Beth Cobb during the firm’s January 28 webinar. She explained that credit, which was enacted in 2017, had been temporarily extended prior to the OBBB. Now an enhanced version is permanent.
Under § 45S, employers who offer paid family and medical leave to qualifying employees can claim a general business credit of between 12.5% and 25% of wages paid for up to 12 weeks of leave. The applicable percentage is based on the percentage of normal wages replaced for employees during leave.
A key OBBB change gives employers the option to calculate the credit based on either wages paid to employees on leave or on premiums paid for a qualifying insurance policy. Cobb said the change could be helpful to “employers who are not self-insuring” or “who have fewer employees taking such a leave per year.” She noted that the IRS has not yet issued guidance on “parameters” it will apply to the “premiums-paid approach.”
In addition, pre-OBBB, the leave benefit had to be offered to all qualifying employees – now it must be offered to all employees who customarily work more than 20 hours per week. This change is expected to drive increased participation, said Cobb. The prior requirement “was one of the primary points that kept many employers from participating in the credit.”
Importantly, the OBBB also clarified the treatment of state- or local government-mandated benefits for purposes of the credit. These mandated benefits “are taken into account when determining the amount of paid leave provided by the employer, but that they are not taken into account when calculating the credit,” said Cobb. She suspects that with the OBBB clearing up ambiguities, “more employers may opt to participate.”
Other OBBB changes include an option for employers to reduce the employee tenure requirement from one year to six months and new aggregation rules that treat all entities in a controlled group as a single employer.
Childcare Credit
The OBBB also boosted the employer-provided childcare credit under IRC § 45F. For tax years after 2025, the credit rate increases from 25% to 40% of qualified expenditures, and the annual cap jumps from $150,000 to $500,000 per employer. “While many employers were not that interested in trying to figure out what they could do for $150,000 a year, we’re seeing a lot more interest now that the cap has been increased to $500,000,” said EY’s Matt Kelley.
A more generous credit is available to small businesses with average annual gross receipts of no more than $25 million. These employers can claim a credit for up to 50% of qualified childcare expenses, subject to a $600,000 annual cap.
Kelley added that “traditionally” the credit was aimed at “owning, operating, constructing a childcare facility, whether onsite or offsite.” But with the OBBB modifications, he said “it’s much clearer that you can claim this credit on childcare services provided to employees, even through a third party.” Employer-subsidized costs of third-party childcare go towards the calculation of the maximum $500,000 tax credit, Kelley explained.
What Employers Should Do Now
Panelists stressed that because the changes are complex and take effect in 2026, the time for employers to act is now. “Time is of the essence,” said Cobb. “Working to ensure that all the statutory requirements are met in advance is important,” she added, so employers “don’t miss out on 2026 credits.”
Cobb recommends tax departments collaborate with their HR and benefits counterparts to understand how to respond to the credit changes. Tax departments should obtain copies of applicable leave policies to determine whether they are “already aligned” with the new OBBB provisions or if modifications are needed. In addition, Cobb suggests employers assess their payroll or leave management system to be sure it distinguishes between leave that qualifies for the § 45S credit and other types of leave.
And Kelley said he’s having conversations now with employers who are interested not only in aligning childcare benefits with the OBBB enhanced credit under § 45F but also claiming the less generous credit for prior years. Despite the pre-2026 $150,000 cap, Kelley recounted employers saying, “Well, while we’re doing it, if we offer this benefit, let’s go ahead and pick up a three-year look back. Let’s get that $450,000.”
In addition, Kelley said expanding benefits is becoming a “strategic conversation” after the OBBB enhancements. Employers are looking at how more generous benefits could increase talent acquisition and retention, with the costs offset by the OBBB enhancements. In the paid leave context, that might mean expanding leave to all employees who work 20 hours or more per week to “pick up a seven-figure tax credit,” said Kelley.
Finally, panelists recommended employers look for comparable state-level credits. Several states offer childcare credits that complement the IRC § 45F credit, said Kelley. He highlighted New York, which offers a refundable credit that incorporates the federal rules.
However, Kelley noted there has been less state-level activity on paid leave credits. States typically take the “stick” rather than “carrot” approach toward leave, opting for mandates instead of tax credits, he explained.
For more on the credit for employer-paid family and medical leave, see Checkpoint’s Federal Tax Coordinator 2d ¶ L-17880. For more on the employer-provided childcare credit, see Federal Tax Coordinator 2d ¶ L-17870.
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