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 do that, once 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, so business decisions can affect Child Tax Credit eligibility and phaseouts.
- The Child and Dependent Care Credit is a separate benefit, and you may be able to claim both benefits in the same tax year.
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 in the years ahead. 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 reduces your tax liability for each qualifying child under age 17. Starting with tax year 2025, the credit is worth up to $2,200 per child, up from the $2,000 limit in place since the Tax Cuts and Jobs Act took effect in 2018. The credit limit is still $2,200 for the 2026 tax year, but it could rise in future years, since it’s indexed for inflation going forward.
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. Those eligibility rules, including income limits and Social Security number requirements, determine how much of the credit you receive.
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. They have similar names, so it’s easy to mix them up, but they serve different purposes.
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 | 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 usually offers a smaller benefit than the Child Tax Credit because it’s a percentage of qualifying childcare expenses, ranging from 20% to 50% based on income.
The IRS also caps the expenses you can use at $3,000 for one child or $6,000 for two or more children. In practice, that means a maximum credit of $600 to $3,000, depending on income and the number of qualifying children. 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.
The Child Tax Credit deserves special attention from business owners because 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 directly affect whether you qualify for the full credit or a reduced amount.
Dependent care FSA gets a boost, too
If your business offers employee benefits, starting January 1, 2026, the OBBBA raised the annual contribution limit for Dependent Care Flexible Spending Accounts (FSAs) from $5,000 to $7,500 ($3,750 if you’re married filing separately). It’s the first increase to this limit since 1986.
As a business owner, you can use an FSA to set aside pre-tax dollars for childcare, which lowers your taxable income. If you sponsor a Section 125 cafeteria plan for your employee, you can offer a higher limit, improving your benefits program with little additional administrative work.
Just keep in mind you can’t use the same expenses for the dependent care FSA and the Child and Dependent Care Credit. Work with a tax advisor to see which tax break makes the most sense based on your tax bracket and how much you spend on care.
The takeaway
If you don’t take factors like this into account, you might unintentionally leave thousands of dollars on the table.
Section 45F employer-provided child care credit
The Section 45F employer-provided child care credit differs from the tax breaks we’ve mentioned so far because it doesn’t apply to your own children. It applies when your business helps pay for childcare for your employees.
The OBBBA expanded this credit for amounts paid or incurred after December 31, 2025. Here’s what changed:
- The credit rate increased from 25% to 40% of qualified child care expenditures (or 50% for eligible small businesses)
- The maximum credit increased from $150,000 to $500,000 per year (or $600,000 for eligible small businesses)
For this credit, a small business has average annual gross receipts of $32 million or less over the preceding five years.
Qualified expenses include building, expanding, or operating a child care facility, contracting with a licensed childcare provider on your employees’ behalf, or paying for child care resource and referral services.
Now that we better understand the basics, let’s find out why the OBBBA’s provisions get attention from business owners.’
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) is it’s now permanent. Before the OBBBA passed in July 2025, dropping to $1,000 per child at the end of 2025. Instead, the credit is now permanently set at $2,200 per qualifying child and indexed for inflation after 2026.
Permanence matters for small business owners because it helps with tax planning. 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 the OBBBA introduced. Beginning in 2025, both the child and at least one parent must have a valid Social Security number to claim the credit. An Individual Taxpayer Identification Number (ITIN) isn’t enough. Previously, IRS rules only required the child to have an SSN.
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
Business owners with children should take a closer look at the Child Tax Credit because all business income, whether it’s K-1 income, W-2 wages from your own S Corporation, or self-employment earnings, flows through to Form 2441 on your personal tax return. That’s where you calculate the Child Tax Credit.
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.
How do you qualify for the Child Tax Credit?
Eligibility depends on meeting specific requirements for both you and your child. In a nutshell, here are the criteria you need to meet:
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 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 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 you’re completely ineligible once you exceed the income threshold
- The phaseout is gradual, not all-or-nothing. Your maximum credit drops by $50 for every $1,000 over the income limit until it fully phases out.
Confusing the Child Tax Credit with the Child and Dependent Care Credit
- These are two separate credits with different purposes and calculations. In many cases, you can claim both credits in the same year for the same child.
Looking at gross business income instead of household income
- IRS rules base eligibility on your household modified adjusted gross income, not your business’s gross receipts. Even if your business generates significant revenue, deductions and tax planning strategies 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.
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Planning considerations and next steps
Now that you know what to avoid and how 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. Divorce and custody arrangements also 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. Now that it’s permanent at $2,200 per child and indexed for inflation, it’s worth confirming you’re getting the full benefit. Review your situation annually, especially if your income or family circumstances change.
And if you’re not sure whether you qualify or how to optimize your tax planning around it, consult your accountant for further guidance. Understanding how this credit works means you won’t leave money on the table that is rightfully yours.
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.