Childcare as a Workforce Investment: Why This is a Tool Worth Using
The Indiana Employer Childcare Expenditure Tax Credit (IC 6-3.1-39.5) allows eligible Indiana employers to get 50% back of qualified childcare expenditures up to $100,000 per year directly against their state tax liability. This is a direct tax credit against the employer’s state income bill and not a tax deduction. Any one qualified employer can receive up to $100,000 per year meaning the maximum amount of qualified expenditure the employer can spend towards the credit is $200,000. If an employer earns more back in the credit than they owe in taxes for a specific year, then they can roll the leftover forward up to three years.
The tax credit was recently expanded by House Enrolled Act 1177 effective for tax year 2026 and beyond. The expansion is substantial as before the maximum number of employees a business could have was 100 and the expenditure that counted towards the credit was much stricter than it is now. After the expansion, businesses with up to 500 employees that have a state tax liability now qualifies.
Furthermore, prior to expansion, the only spending that counted was building and running a licensed childcare facility on-site. That was expanded significantly as now you can do that along with pre-paying for spots for employees’ children at a licensed Indiana provider, contract with a third-party childcare provider, cover operation costs or staff training at a childcare facility or pay for a childcare resource and referral service for employees’ children.
To qualify for the credit, however, any childcare provider receiving these expenditures must be licensed by the Indiana Division of Family Resources, and businesses already operating in the childcare industry are not eligible to claim the credit.
This tax credit is not only a way for employers to get money back in their pocket; it is a tool they can leverage for recruitment and retention of their employees. Childcare challenges are a common reason an employee will reduce their hours or leave a job altogether which creates expensive turnover and requires an employer to recruit, hire, and train a replacement. By helping employees access reliable childcare, a business can remove a significant barrier to staying employed while improving employee attendance, productivity, and overall stability of their workforce. An employee who has dependable childcare is more likely to arrive on time, remain focused throughout the day, and miss fewer days due to expected care disruptions.
An employer who provides childcare support also gets a competitive advantage in the labor market. For parents who are comparing job opportunities, access to childcare assistance can become a deciding factor when choosing an employer. By taking advantage of the credit, an employer can strengthen their employee retention, attract a wider pool of talent, and create a more reliable workforce.
The payback that comes with this tax credit is fleeting as returns are capped statewide at $2.5 million and awarded on a first-come, first-served basis as returns are filed meaning, the businesses that act fast are the ones that reap the benefits.
Employers claim the credit when they file their Indiana state tax return by reporting it on their Indiana Offset Credits Schedule using credit code 876. There is no application, no pre-approval process, and no agency to register with in advance. Employers simply need to maintain documentation of their qualifying childcare expenditures, confirm that the childcare provider is licensed, and claim the credit when filing their state tax return.
To see more information, download the tax credit info sheet here!