This paper explores whether value-added tax (VAT) rate reduction can affect the employment size of firms. Specifically, based on the data of Shanghai-Shenzhen A-share listed companies from 2013 to 2023, this paper tests the effects of China’s VAT rate reduction on the employment size of firms by using a quasi-natural experiment design and the time-varying DID approach. The results show that the VAT rate reduction significantly promotes employment absorption by firms. The further study shows that the VAT rate reduction significantly increases the employment of workers with postgraduate degrees and workers in management and R&D positions. The mechanism analysis shows that the VAT rate reduction expands the employment of firms by increasing firm’s operating cash flows and bank loans. The heterogeneity study shows that the positive relationship between the VAT rate reduction and corporate employment is concentrated in digital firms and firms facing greater difficulties in transferring tax burden and acquiring bank loans. This paper contributes to the extant research on the effects of VAT reform and the growing literature on the determinants of corporate employment.