Employee tax benefits 2026: What can my business offer?

Attracting and keeping good people is the problem on every small-business client’s whiteboard. In our Los Angeles practice, owners tell us the same thing month after month: the big employer down the street offers benefits they cannot match. The budget feels fixed, so the conversation stops there. It should not. The federal tax code offers a stack of employee tax benefits — credits that reimburse part of what the employer spends, and exclusions that let the employee receive more value than the dollar cost would suggest. The 2025 One Big Beautiful Bill Act (OBBBA) rewrote several of these benefits, made others permanent, and introduced a new one aimed squarely at families with young children. This guide walks through the eight benefits we discuss most often with employers, the Internal Revenue Code section behind each one, and the IRS form or FAQ you need to actually claim it.

Why do employee tax benefits matter in a tight labor market? 💼

Because they let a small employer compete for talent without matching a larger company’s cash budget. A $4,000 benefit funded with a $1,500 credit and a payroll-tax exclusion feels very different to both sides than a $4,000 raise.

Every one of the benefits in this guide has two moving parts. The employee receives something — paid leave, tuition, child care, a retirement match, an HSA contribution — that would otherwise come out of after-tax wages. The employer, meanwhile, often claims a credit against tax, deducts the cost as a business expense, or avoids payroll taxes on the amount. In our experience, owners stop at the sticker price of the benefit and never model the after-tax cost. The gap between those two numbers is where recruiting leverage comes from.

The second reason to re-examine these benefits in 2026 is legislative. OBBBA changed the math on paid leave, dependent care, child-care facilities, and student loan assistance, and it created a new vehicle — the Trump Account under Section 530A — that most clients have not yet heard about. Running last year’s benefits playbook misses real dollars.

What is the Section 45S paid family and medical leave credit? 🤱

Section 45S gives an employer a credit of 12.5% to 25% of the wages paid during a qualifying paid family or medical leave, provided the written policy pays at least 50% of normal wages. OBBBA made the credit permanent and extended it to premiums paid for paid-leave insurance.

An employer that offers at least two weeks of paid family and medical leave at 50% or more of normal wages, under a written policy covering all qualifying full-time employees, can claim the Section 45S credit on IRS Form 8994. The credit starts at 12.5% of the wages paid during the leave and rises on a sliding scale to a maximum of 25% when the policy pays 100% of wages. Family and Medical Leave Act coverage is not required to claim the credit, but the policy must track the FMLA categories — birth or adoption, care for a seriously ill family member, the employee’s own serious health condition, and the military-related categories.

Two OBBBA changes matter. The credit is no longer a temporary provision scheduled to lapse; it is a permanent part of the Code. And the credit now also attaches to premiums an employer pays for insurance that funds the paid leave, which opens the door for small employers who could not self-fund a two-week paid-leave benefit. The IRS Paid Family and Medical Leave Credit FAQ walks through the written-policy requirements, the two-week minimum, and the coordination with state paid-family-leave programs — a point that matters in California, New York, and the other states that run their own programs.

How much educational and student loan assistance is tax-free under Section 127? 🎓

Up to $5,250 per employee per year, under a written Section 127 educational assistance plan. The same cap can be used for qualified student loan principal and interest payments, which was first allowed by the CARES Act and extended through 2028 by later legislation.

Section 127 is one of the oldest employee tax benefits in the Code and still one of the most under-used. Under a written educational assistance plan that does not discriminate in favor of highly compensated employees, an employer can pay or reimburse up to $5,250 per employee per year, tax-free to the employee and deductible to the employer. The courses do not have to be job-related — a point owners find hard to believe, which is why we usually hand them the IRS FAQ on educational assistance programs to read for themselves.

Since 2020, the same $5,250 ceiling has also covered principal and interest payments on an employee’s qualified education loans. That extension, originally due to expire, has been pushed out through 2028 and the ceiling is now indexed. For employers with younger workers carrying student debt, a Section 127 plan that channels part of the $5,250 into monthly loan payments is one of the highest-impact benefits a dollar of payroll will buy. The payment is excluded from the employee’s wages for income tax and payroll tax, which means the employer also avoids its share of FICA on the reimbursed amount.

What credits exist for employer-provided child care? 👶

Section 125 cafeteria plans let employees pay for qualified dependent care with pre-tax dollars, up to a $7,500 limit raised by OBBBA. Section 45F provides a separate credit for employers that build, contract for, or sponsor child-care facilities, with the maximum credit for eligible small employers raised to $600,000 under OBBBA.

The simpler piece first. Under a Section 125 cafeteria plan with a dependent care flexible spending arrangement, employees can set aside up to $7,500 per year (married filing jointly) in pre-tax dollars to pay for qualified dependent care — day care, after-school care, or summer day camp for children under 13. OBBBA raised the dependent care FSA cap from the long-standing $5,000 level, the first meaningful increase since 1986. The dollars are exempt from federal income tax and payroll tax, which lowers the employer’s FICA liability as well. IRS Publication 15-B covers the discrimination testing and the imputed-income rules.

The second piece is the employer-provided child care credit under Section 45F, claimed on Form 8882. An employer that builds a qualified child care facility, contracts with a facility, or partners with a provider can claim a credit based on a percentage of qualified child care expenses plus a smaller percentage of qualified child care resource and referral expenses. OBBBA increased the maximum credit for eligible small employers to $600,000 and the general limit to $500,000, up from the previous $150,000. The current percentages and definitions are summarized on the IRS employer-provided child care credit page.

Which transportation, adoption, and health benefits qualify in 2026? 🚆

Section 132(f) qualified transportation fringes let employers reimburse up to $340 per month for transit and vanpooling, Section 23 covers adoption expenses up to $17,670 per child, and Section 223 health savings accounts have 2026 contribution limits of $4,400 self-only and $8,750 family.

Three employee tax benefits sit under one umbrella because the mechanics are similar — the employer deducts the cost, the employee excludes the amount from wages, and the IRS publishes the inflation-adjusted ceiling each year.

• Qualified transportation fringe (Section 132(f)). For 2026, the monthly exclusion is $340 for transit passes and vanpooling, and the same amount for qualified parking. Bicycle commuting reimbursements remain suspended through 2025 under current law. The current amount is in IRS Publication 15-B.
• Adoption credit (Section 23). For 2026, the credit covers up to $17,670 of qualified adoption expenses per child. OBBBA made $5,120 of the credit refundable for 2026, a meaningful change for families who previously could not use the credit against income tax. Employer-provided adoption benefits are also excluded from the employee’s income up to the same cap. See the IRS adoption credit page.
• Health savings accounts (Section 223). For 2026, IRS Revenue Procedure 2025-19 sets the HSA contribution limits at $4,400 for self-only coverage and $8,750 for family coverage, with a $1,000 catch-up for employees age 55 or older. The accompanying high-deductible health plan must have a minimum deductible of $1,700 self-only or $3,400 family, and the HDHP out-of-pocket maximum cannot exceed $8,500 self-only or $17,000 family.

What retirement credits can my small business claim? 💰

Section 45E, expanded by SECURE 2.0, provides a startup credit for new 401(k) and SEP/SIMPLE plans and an employer contribution credit for very small employers. Section 127 educational assistance can also be used to match student loan payments as if they were elective 401(k) deferrals.

Many of our clients still believe the retirement-plan startup credit maxes out at $500. SECURE 2.0 changed that in 2023, and the current rules are generous enough that the first three years of a new 401(k) can be largely paid for by the credit. The startup credit under Section 45E is up to 100% of qualifying startup costs for employers with 50 or fewer employees (and 50% for employers with 51 to 100 employees), capped at $5,000 per year for three years. A separate credit of up to $1,000 per employee is available for employer contributions, phased down over four years, for employers with up to 100 employees. The claim is made on IRS Form 8881.

SECURE 2.0 added one more lever that pairs well with the Section 127 benefit above. An employer that sponsors a 401(k), 403(b), 457(b), or SIMPLE IRA plan can treat an employee’s qualified student loan payments as elective deferrals for purposes of the employer match, so an employee who is paying down student debt instead of contributing to the plan can still receive the full employer match. For a workforce that skews younger, this feature often moves hires we would not otherwise land.

What are Trump Accounts and how do employer contributions work? 🏦

Trump Accounts are a new category of tax-favored account for children under 18, created by OBBBA under Section 530A. Employers can contribute up to $2,500 per child per year under a qualifying program, and that contribution is excluded from the parent-employee’s income.

Trump Accounts are the newest piece on this list and the one owners ask about most. The structure is modeled loosely on an IRA. Any individual can contribute up to $5,000 per year on behalf of a child under 18 who has a valid Social Security number. The money grows tax-deferred and is withdrawable under rules that broadly track traditional IRA treatment once the child reaches the eligible age. The federal government will make a one-time $1,000 deposit for each child born between January 1, 2026 and December 31, 2028, subject to citizenship, Social Security number, and other requirements set out on the IRS Trump Accounts page.

The employer piece is where this becomes a benefit decision. Under a qualifying employer-sponsored program, an employer can contribute up to $2,500 per year per employee’s child, and that contribution is excluded from the employee’s gross income (it still counts against the overall $5,000 annual contribution limit). For a company with young parents on the payroll, a Section 530A benefit sits beside the dependent care FSA, the paid family leave policy, and the student-loan match as a package aimed specifically at life-stage retention.

Which employee tax benefits should an owner prioritize first? 🧭

Start with the Section 125 cafeteria plan — it is the plumbing that routes HSA, dependent care FSA, and health premiums through pre-tax dollars. Layer paid family leave under Section 45S if the workforce includes parents and caregivers, then add Section 127 and the SECURE 2.0 retirement credit.

In our practice, the sequence that produces the best after-tax outcome for an owner with 10 to 100 employees is:

1. Adopt or refresh the Section 125 cafeteria plan so health premiums, HSA contributions, and dependent care FSA elections run pre-tax. This is the single biggest payroll-tax lever most clients still miss.
2. Add a written Section 45S paid family and medical leave policy of at least two weeks at 50% or more of normal wages, and claim the credit on Form 8994.
3. Adopt a written Section 127 educational assistance plan, and decide up front whether the $5,250 can be used for qualified student loan payments. For a younger workforce, point most of it at loans.
4. If you do not yet sponsor a retirement plan, model the Section 45E startup credit for a new 401(k). For many clients with fewer than 50 employees, the first three years are a near-wash after the credit.
5. Only after the plumbing is in place, consider the larger decisions — a child-care facility under Section 45F, an employer Trump Account program under Section 530A, or an adoption benefit under Section 23. These are big commitments but they stand on top of the four above, not instead of them.

A benefit nobody uses helps nobody. Each layer in this sequence is paired with employee education, open enrollment materials, and a one-page explainer that tells each employee what they can get and how to elect. That communication is the second half of the work and the half owners most often skip.

Frequently asked questions about employee tax benefits ❓

Q. Which employee tax benefits were changed by the One Big Beautiful Bill Act?

The 2025 One Big Beautiful Bill Act made the Section 45S paid family and medical leave credit permanent and extended it to premiums paid for paid-leave insurance. It also raised the dependent care FSA limit under Section 125 to $7,500, expanded the Section 45F employer-provided child care credit for small employers, and created Section 530A Trump Accounts, which allow a $2,500 excluded employer contribution per child. See the IRS Paid Family and Medical Leave Credit FAQ and the IRS employer-provided child care credit page.

Q. How much educational assistance can I give an employee tax-free in 2026?

Up to $5,250 per employee per year under a written Section 127 plan. The assistance can cover tuition, fees, books, equipment, and, through 2025 under the CARES Act expansion and continuing under the extension through 2028 included in later legislation, qualified student loan payments. The IRS FAQ on educational assistance programs explains the plan requirements and the record keeping employers need.

Q. What is the 2026 HSA contribution limit for employees?

For calendar year 2026, the self-only HSA contribution limit is $4,400, the family limit is $8,750, and the catch-up for individuals age 55 and older is $1,000. These limits were set by IRS Revenue Procedure 2025-19 and apply to employees covered by a high-deductible health plan that meets the Section 223 definition.

Q. Can my small business claim a credit for starting a 401(k) plan?

Yes. Section 45E, as expanded by SECURE 2.0, lets eligible small employers claim a credit for a portion of plan startup costs for the first three years and, for very small employers, an additional credit for employer contributions. The credit is claimed on Form 8881 and is coordinated with the auto-enrollment credit for new plans.

Q. Who qualifies for a Trump Account and how does the employer piece work?

A Trump Account under new Section 530A is a tax-favored account for a child under age 18 who has a valid Social Security number. An employer can contribute up to $2,500 per child per year under a qualifying program, and that contribution is excluded from the employee’s income. Children born between January 1, 2026 and December 31, 2028 who meet the citizenship and SSN requirements also receive a one-time $1,000 government deposit. The IRS Trump Accounts page is the primary reference.

Q. Which commuter, adoption, and family benefits still qualify in 2026?

For 2026, employers can reimburse up to $340 per month for qualified transit passes and vanpooling under Section 132(f), and the Section 23 adoption credit covers up to $17,670 of qualified adoption expenses per child, with $5,120 of that credit refundable for 2026 under the One Big Beautiful Bill Act change. IRS Publication 15-B and the IRS adoption credit page carry the current amounts.

This article is general information, not tax or legal advice for your situation. Credit amounts and contribution limits are indexed and change each year. Before you adopt or amend a benefit plan, contact SW Accounting & Consulting Corp so the plan documents, the payroll setup, and the year-end credit forms are coordinated.