As soon as next year, Pennsylvania companies offering child care benefits to their employees can benefit from a newly-enacted employer child care contribution tax credit. Starting in 2025, employers in the state will be eligible to claim a 30 percent tax credit for contributions they make to employees’ child care costs. Here’s a look at how employers can take advantage of this new modification of the PA tax code.
What the PA Child Tax Credit entails:
- Beginning with the 2025 tax year, employers may claim a child care tax credit for contributions made during the year toward employees’ eligible child care costs. Companies may apply the tax credit against their state tax liability.
- The amount of tax credit is based on the aggregate contribution an employer makes to all employees during the tax year. However, the state law limits the amount of the employer’s contribution to the first $500 made per employee.
- The law stipulates guidelines for providing opportunities for all employees to receive child care benefits equally in order for the employer to be eligible to receive tax credits.
Worth noting:
The law doesn’t restrict the mode of delivering child care benefits; care can be center-based, back-up care, in-home care, etc. However, it does not provide tax credits for services beyond child care coverage (e.g., elder care).
The law is silent on whether employer contributions through a Section 129 dependent care flexible spending account (FSA) count. Section 129 of the Internal Revenue Code allows employers to offer dependent care FSAs to employees on a tax-free basis. FSAs allow employees to set aside pre-tax money to pay for dependent care expenses.
While there are state and federal tax credits designed to help primarily lower-income families offset dependent care expenses, in 2024 only 17 states offered tax credits to employers who provided child care benefits to their workers, according to the National Conference of State Legislatures. We can now add Pennsylvania to that list.
In addition, the Internal Revenue Service offers companies an employer-provided child care credit of up to $150,000 per year to offset 25 percent of qualified child care facility expenditures and 10 percent of qualified child care resource and referral expenditures. The credit is an incentive for companies to provide child care services to their employees.
By allowing businesses to claim expenses related to child care operations, they gain tax credits that reduce their corporate income tax liability. Such tax credits can help offset the cost of creating employer-operated child care facilities or contracting with service providers who deliver child care to employees.
How Bright Horizons Can Help
Offering employer-provided child care tax credits is a step in the right direction in helping to expand child care access and equity for Pennsylvania workers. Recent estimates show that gaps in the child care sector cost Pennsylvania’s economy $6.65 billion annually in lost wages, productivity, and tax receipts. Increasing the pool of workers may require employers to initiate or expand their own child care benefits for employees.
At Bright Horizons, we understand the challenges and opportunities that come with providing child care benefits. With more than 35 years of experience, we partner with businesses to deliver top-tier child care solutions that meet the needs of your workforce. Whether you’re looking to start a new program or enhance an existing one, our team is here to help you every step of the way.
