A 15 per cent pay rise for centre-based and out-of-school care workers was due to expire in November after commencing in late 2024.
The $3.6 billion funding extension, which will let the pay rise live on for another two years, was not provided for in May's federal budget.
"We hadn't made that decision because we were still working through the details," Eduction Minister Jason Clare told ABC on Wednesday, saying it was something the government had to do.
"If we didn't do this, then the out-of-pocket costs for parents would increase by about 18 per cent."
The United Workers Union had planned a strike on July 15 if the payment wasn't extended.
"Early educators were willing to walk off the job to defend this pay rise, and they deserve credit for this win," union president Jo Schofield said.
The move bridges a gap left after the government announced wage increases for the childcare sector would not take full effect until June 2029.
On June 1, the Fair Work Commission ordered carers' pay be raised by between 14 and 27 per cent in a decision on underpayment in female-dominated industries.
But the commission meted the increases out gradually after finding most providers would not be able to absorb all that cost at once, which left workers facing a pay cliff when the government's subsidy ran out.
Operators who want the payment must not increase their fees beyond an agreed-upon yearly amount - currently 4.2 per cent - which will be updated by August.
Fees may rise further as centres juggle a minimum wage hike and the Fair Work Commission's ruling, which backdated pay increases to start in August 2025.
Childhood teachers will be $410 per week better off than they were before the scheme began, according to the government, with 20,000 workers having joined the sector since December 2024.
The five per cent of early learning centres which do not meet the national childcare safety standard will also lose the wage subsidy if they still fall short by July 2027, after a barrage of child-abuse cases sent lawmakers scrambling to tighten quality and safety standards.
"We're giving them a runway here," Mr Clare told reporters on Wednesday.
"You have 12 months. If you don't meet that standard by the first of July next year, then this funding gets cut off ... we're not mucking around."
"This funding is a genuine win," peak body The Parenthood's chief executive Georgie Dent told AAP.
