The purpose of this study was to investigate the relationship between the childcare environment and physical activity and sedentary behavior of toddlers and preschoolers. A total of 68 toddlers (1.0–2.9 years) and 233 preschoolers (3.0–5.9 years) were recruited from 11 childcare services in 2013 within the Illawarra and Shoalhaven region of NSW, Australia. For this study analysis was conducted in 2016. The childcare environmentwas assessed using the Environment and Policy Assessment Observation (EPAO) instrument, and childcare services categorized as low, medium, or high based on their scores. Time spent in physical activity and sitting was assessed over one week using activPAL accelerometers. Relationship between EPAO and children's physical activity and sedentary behavior was assessed using multilevel mixed-effects linear regression. Toddlers who attended high EPAO services sat more (8.73 min [−10.26, 27.73]) and stood less (−13.64 min [−29.27, 2.00]) than those who attended low EPAO services. Preschoolers who attended high EPAO services sat less than those in low and medium services (mean [95%CI] = −7.81 min [−26.64, 11.02]). Sub-categories of the EPAO that were associated with less time sitting were: sedentary environments for toddlers and portable play equipment for preschoolers. This study extends previous research by identifying differences between toddlers and preschooler's physical activity and sedentary behaviors in relation to childcare environments. A greater understanding of how the childcare environment relates to sitting time for both toddlers and preschool aged children is needed.