Early this morning, the House of Representatives passed a reconciliation bill that would enact significant tax provisions and spending cuts. The House Bill (H.R. 1) now heads to the Senate, where changes are likely before passage. This article is one of a series of articles discussing various proposals in the legislation that touch on tax withholding, reporting, and fringe benefits.
The House Bill expands two credits designed to help employers cover the cost of employer-provided child care and paid family and medical leave.
Employer-Provided Child Care Credit
The House Bill would permanently increase the credit for employer-provided child-care under section 45F. Under current law, section 45F provides businesses a nonrefundable tax credit of up to $150,000 per year on up to 25 percent of qualified child care expenditures and 10 percent of qualified child care resources and referral expenditures. The House Bill would increase the maximum credit from $150,000 to $500,000, which would be indexed for inflation, and the percentage of qualified child care expenses covered from 25 to 40 percent.
This provision also creates a higher limit for qualified small businesses. A “qualified small business” is one that meets the gross receipts test under section 448(c) for a five-year period (an inflation-adjusted $31 million for 2025). For those businesses, the bill would increase the maximum section 45F credit to $600,000 and the percent of qualified child care expenses covered to 50 percent. The provision also allows small businesses to pool their resources to provide child care to their employees and for businesses to use a third-party intermediary to facilitate child care services on the business’s behalf.
The House Bill also expands the definition of qualified child care expenditures to include amounts paid or incurred under a contract with a third-party that contracts with one or more qualified child care facilities to provide child care services. In addition, the definition of qualified child care facilities is expanded to allow for qualified child care facilities that are jointly owned or operated by the taxpayer and other entities or persons.
Paid Family and Medical Leave Credit
The House Bill would also make permanent the paid family and medical leave (PFML) tax credit under section 45S, originally created as part of the Tax Cuts and Jobs Act (TCJA). Under current law, businesses may claim a nonrefundable tax credit ranging from 12.5 percent to 25 percent of the wages paid to eligible employees while on family or medical leave. In general, leave paid by a state or local government agency or required by a state or local law are not taken into account for purposes of the credit. An eligible employee must be a full- or part-time employee that has worked for the employer for at least one year and earns no more than 60 percent of the “highly compensated employee” limit. For 2025, that eligibility cap is $96,000.
Currently, to qualify for the credit, an employer must provide at least two weeks of PFML to all full-time eligible employees (and a pro rata amount to part-time employees) on an annual basis, have a written policy on PFML in effect, and pay at least 50 percent of normal wages to employees during their leave. Employers may claim a credit for up to 12 weeks of paid leave benefits. Employers also must generally comply with non-interference, non-retaliation, and non-discrimination provisions under the Family and Medical Leave Act to be eligible for the credit, even if they are not subject to that law.
The House Bill would make the PFML credit, which was set to expire December 31, 2025, permanent and makes other changes to the existing design of the credit. First, the House Bill expands the credit to allow employers to claim the credit for a portion of paid family and medical leave insurance premiums (without regard to whether any employees take leave during the year). The credit is equal to 12.5% of premiums in the case of an insurance policy if the rate of payment under the policy is 50 percent of wages normally paid to an employee and is increased by 0.25 percentage points (but not above 25 percent) for each percentage point by which the rate of payment exceeds 50 percent of wages normally paid. An employer may elect to claim the credit either with respect to wages paid to individuals on family and medical leave or with respect to insurance premiums. However, the employer cannot claim the credit with respect to premiums paid on a policy and wages paid under the policy.
The House Bill also includes a new aggregation rule that treats all employers in a controlled group under section 414(b) and (c) as a single employer for purposes of the credit. As a result, each member of the controlled group generally must satisfy the requirements for credit. However, an exception exists if a “substantial and legitimate business reason” exists for failing to provide a written policy for providing family and medical leave. Under the proposal, the operation of a separate line of business, the rate of wages or categories of jobs, or the application of State or local laws regarding paid leave do not qualify for the exception. However, an employer that provides state- or local-mandated paid family and medical leave, would not cause other employers within its controlled group to fail to be eligible for the credit even though it is ineligible for the credit.
Finally, employers are permitted under the proposal to treat employees who have been employed for at least six months as qualifying employees (assuming the employee otherwise meets the definition of a qualifying employee), compared to one year under existing law. For purposes of the compensation limit that applies to qualifying employees, the proposal provides that compensation is determined on an annualized basis, except that it is determined pro rata for part-time employees. An employee must be customarily employed for at least 20 hours per week to be considered qualifying.