There are two tax credits available to working parents to help offset child care expenses. One tax credit is the well-known Child and Dependent Care Tax Credit, which provides a credit of 20 to 35 percent of the amount paid for child care expenses. The child care expenses are limited to $3,000 for one qualifying child and a maximum of $6,000 for two or more qualifying children. The other tax credit is the lesser known Employer-provided Child Care Tax Credit.
The Employer-provided Child Care Tax Credit is available to employers who pay a child care facility to provide child care services to their employees. Employers must make payments directly to a child care facility pursuant to an arrangement or contract between the employer and the child care facility. Payments made to employees as a reimbursement for child care expenses cannot be included in the credit. Amounts taken as a credit cannot also be deducted as an expense.
The federal tax credit is equal to 25 percent of the child care expenditures made by the employer. The credit is limited to $150,000. The Georgia tax credit is equal to 75 percent of the child care expenditures made by the employer. The credit is limited to 50 percent of the employer’s income tax liability for the taxable year, but any credit not used in a tax year can be carried forward for five years. Under the right circumstances a company can use 100 percent of the child care costs it incurs on behalf of its employees to reduce its tax liability.
Employees can actually realize a greater benefit from the Employer-provided Child Care Tax Credit than they would from the Child and Dependent Care Tax Credit they could claim on their own return. For example, if an employee pays $3,000 for child care, the maximum credit they can take on their return is $1,050 ($3,000 x 35%). The employee effectively paid $1,950 for child care services ($3,000 - $1,050 = $1,950). If the employer pays $3,000 to a child care facility for an employee’s child, the employee saves the $1,950. It is important to note that the employer is not subject to the $3,000 limitation per child when calculating the credit. According to the National Association for Child Care Research and Referral Agencies, average annual fees paid for full-time care for a 4-year-old in Georgia during 2009 was $5,973. Thus, savings for most employees would be substantial, although child care payments made in excess of $5,000 are added to the employee’s gross wages.
The Employer-provided Child Care Tax Credit essentially creates a dual benefit. The employee benefits by saving money on child care while the employer benefits by applying the tax credit for the child care expenses against its tax liability. The employer may realize additional, less apparent benefits such as the ability to attract quality employees at lower salaries, an increase in productivity by providing quality child care to employees, and a decrease in turnover for employees who may not be able to pay for child care out of pocket.
Please consult with your tax advisor or contact me if you would like help in determining if it would be beneficial to you to provide child care for your employees.
Brian Prevatt is in the tax department at Hancock Askew & Co.
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