If you’re like most business owners or entrepreneurs with children, you’ve probably wondered how they can help reduce your tax bill. (Let’s be honest — if you’re a parent, the thought’s likely crossed your mind!) The good news is that the Child Tax Credit is one of the most straightforward ways to accomplish exactly that, assuming you understand how it works and what’s required to qualify.
What you’ll learn
What you’ll learn
Key takeaways
- The Child Tax Credit is now permanent at $2,200 per qualifying child under age 17, with inflation indexing starting in 2026
- Up to $1,700 of the credit may be refundable, depending on earned income and eligibility
- Business income flows through to your personal return, meaning business decisions can affect Child Tax Credit eligibility and phaseouts
- The Child Tax Credit and the Child and Dependent Care Credit are separate benefits — and in many cases, you can claim both
The One Big Beautiful Bill Act (OBBBA), signed into law on July 4th 2025, made permanent changes to the Child Tax Credit that could affect your family’s tax liability this filing season — and beyond. Whether you run an S Corporation, are a member of a partnership, or operate as a sole proprietor, here’s what you need to know.
What is the Child Tax Credit?
The Child Tax Credit is exactly what it sounds like: a tax credit that reduces your tax liability for each qualifying child under age 17. For tax year 2025, the credit is worth up to $2,200 per child — an increase from the $2,000 amount that had been in place since the Tax Cuts and Jobs Act took effect in 2018.
What makes this credit especially valuable is that it’s a dollar-for-dollar reduction of tax owed. Unlike tax deductions, which only reduce taxable income, tax credits directly lower your tax bill.
For example, if you owe $5,000 in federal income tax and have one qualifying child, the Child Tax Credit can reduce your liability to $2,800.
And if the credit brings your tax bill down to zero before you use the full amount, you may still be able to receive part of the remaining credit as a refund. Up to $1,700 of the Child Tax Credit is refundable through the Additional Child Tax Credit, provided you meet certain eligibility requirements. Because those rules matter, it’s important to understand how the credit works before assuming you’ll receive the full benefit.
A quick (and important) distinction
Before moving on, it’s worth pausing to clarify a common point of confusion: the Child Tax Credit and the Child and Dependent Care Credit are not the same thing. Despite the similar names, they serve different purposes — and it’s easy to mix them up.
Here’s a quick way to see how the two credits compare.
| Good to know | Child Tax Credit | Child and Dependent Care Credit |
| Primary purpose | Offset the cost of raising children | Offset child or dependent care expenses |
| How it helps | Reduces tax owed dollar-for-dollar | Reduces tax owed based on eligible expenses |
| Refundable | Partially, depending on income | Generally nonrefundable |
| Common use case | Broad tax relief for families | Work-related care expenses |
Understanding which credit applies — and when — can help prevent missed opportunities at filing time.
What business owners should keep in mind
While the Child and Dependent Care Credit can still be valuable, it generally provides a smaller benefit than the Child Tax Credit. That’s because it’s calculated as a percentage of qualifying childcare expenses, ranging from 20% to 35% based on income.
The IRS also caps the expenses you can use: $3,000 for one child or $6,000 for two or more. In practice, that means a maximum credit of roughly $600 to $1,200 for many families. And unlike the Child Tax Credit, this credit is nonrefundable, so it can reduce your tax bill to zero — but won’t result in a refund. That said, you can claim both credits in the same year for the same child, as long as you meet the requirements for each.
Finally, here’s why the Child Tax Credit deserves special attention from business owners: you often have more control over income timing and structure than traditional wage earners. Decisions such as when to defer income or how much to contribute to retirement accounts can directly affect whether you qualify for the full credit or begin to phase out.
The takeaway
If you don’t take factors like this into account, you might unintentionally leave thousands of dollars on the table.
Now that we better understand the basics, let’s find out why the OBBBA’s provisions are getting the attention of employers.
What changed under the One Big Beautiful Bill Act?
The biggest change to the Child Tax Credit under the One Big Beautiful Bill Act (OBBBA) can be summed up in one word: permanence.
Before the OBBBA passed in July 2025, the expanded Child Tax Credit was set to expire, with the credit amount reverting to $1,000 per child at the end of 2025. Instead, the credit is now permanently set at $2,200 per qualifying child and will be indexed for inflation starting in 2026.
So why does permanence matter for small business owners? For the same reason we discussed earlier: planning certainty. When a credit is stable and predictable, you can more confidently plan income, deductions, and timing decisions around it — and use it to its full potential.
This wasn’t the only change introduced by the OBBBA. Beginning in 2025, both the child and at least one parent must have a valid Social Security number to claim the credit. Previously, only the child was required to have one.
Next, let’s zoom out and look at what these changes mean for small businesses — and the families who depend on them.
How does the Child Tax Credit affect business owners and their families
Here’s why business owners with children will want to take a closer look. All business income — whether it’s K-1 income, W-2 wages from your own S Corporation, or self-employment earnings — flows through to your personal tax return. That’s where the Child Tax Credit is calculated.
If you’re near the phaseout thresholds ($200,000 for single filers or $400,000 for married filing jointly), decisions you make inside your business can directly affect whether you receive the full credit.
“While it’s important for business owners to understand how the Child Tax Credit works, discussing it directly with employees is usually best avoided. Because the credit is a personal tax benefit claimed on an individual return — and separate from payroll — employees are better served discussing it with their own tax advisors, unless you offer a formal financial wellness program.”
— Marit Burmood, CPA, EA, small business coach
Now that we understand why business owners should pay attention, let’s look at the eligibility criteria that comes into play.
How do you qualify for the Child Tax Credit?
Eligibility comes down to meeting specific requirements for both you and your child. In a nutshell, here’s the criteria that needs to be met:
One important update to note: to claim the credit, you (or your spouse if filing jointly) and your child must have valid Social Security numbers issued before the tax return due date.
| Requirement | What to know |
| Child’s age | Must be under 17 at the end of the tax year |
| Relationship | Child, stepchild, sibling, or qualifying descendant |
| Residency | Must live with you more than half the year |
| Support | Child cannot provide more than half of their own support |
| Dependent status | Must be claimed as your dependent |
| Citizenship | U.S. citizen, national, or resident alien |
| Social Security numbers | Child and at least one parent must have a valid SSN |
| Income thresholds | Full credit up to $200k (single) / $400k (MFJ), then phases out |
| Refundable portion | Requires at least $2,500 in earned income |
Income limits and phaseouts
On the income side, you qualify for the full $2,200 credit per child if your modified adjusted gross income is $200,000 or less (single filers) or $400,000 or less (married filing jointly). Once you exceed those thresholds, the credit phases out by $50 for every $1,000 over the limit until it’s fully eliminated.
To qualify for the refundable portion of the credit — up to $1,700 — you’ll also need at least $2,500 in earned income.
Paperwork point
You claim the Child Tax Credit when you file your tax return using Schedule 8812. To support your claim, it’s a good idea to keep documentation such as:
- School records
- Medical records
- Childcare enrollment records and applicable Social Security documents
You don’t need to attach these to your return — just keep them on hand in case the IRS ever asks for verification.
What do business owners tend to get wrong about the Child Tax Credit?
Here are a few misconceptions that come up most often:
Assuming they’re completely ineligible once they exceed the income threshold
- The phaseout is gradual, not all-or-nothing. The credit is reduced by $50 for every $1,000 over the income limit until it’s fully phased out.
Confusing the Child Tax Credit with the Child and Dependent Care Credit
- These are two separate credits with different purposes and calculations — and in many cases, you can claim both in the same year for the same child.
Looking at gross business income instead of household income
- Eligibility is based on your household modified adjusted gross income, not your business’s gross receipts. Even if your business generates significant revenue, deductions and planning may keep you within the phaseout range.
Forgetting about the age cutoff
- If your child turns 17 at any point during the tax year, they are no longer eligible for the Child Tax Credit. This often surprises taxpayers when their tax liability jumps from one year to the next.
Simple and streamlined
“OnPay offers easy setup, and the dashboard is great for keeping track of payroll expenses. Filing payroll taxes has been a breeze. Having all the forms in easy reach for loan applications, lines of credit, and workman’s comp keeps things running smoothly.”
— Dr. Katie Bendis, Bloomingdale Chiropractor
Planning considerations and next steps
So now that you know what to avoid, and what is required to qualify for the credit, let’s talk about some final planning considerations and next steps. To keep it simple:
- A new baby during the year could mean an additional $2,200 credit
- A child turning 17 during the year means losing the credit entirely
As we discussed, income swings can push you in or out of the phaseout range, plus divorce and custody arrangements will most certainly affect who gets to claim the credit and when.
Take a closer look at the Child Tax Credit
While the Child Tax Credit isn’t overly complex, a little planning goes a long way. And now that it’s permanent at $2,200 per child and indexed for inflation, it’s worth making sure you are maximizing it. Make sure to review your situation annually — especially if your income or family circumstances change.
And if you are not sure whether you qualify or how to optimize your tax planning around it, consult your accountant for further guidance. My hope is that you understand how important this credit is, so that you don’t leave money on the table that is rightfully yours. Here’s to parenthood and as many tax breaks as possible!
Take a tour to see how easy payroll can be.
Marit Burmood is a tax advisor, small business coach, and financial educator dedicated to helping entrepreneurs achieve financial success. She holds a Master’s Degree in Taxation and is a CPA and EA with over a decade of experience guiding small business owners and tax professionals through the complex landscape of entrepreneurship.