If you work as an employee, you may have various job-related expenses you end up paying out of your own pocket, such as:
- work-related travel, transportation, meal, and entertainment expenses
- business liability insurance premiums
- depreciation on a computer or cellular telephone your employer requires you to use in your work
- dues to a chamber of commerce if membership helps you do your job
- dues to professional societies
- education that is work related
- home office expenses for part of your home used regularly and exclusively in your work
- expenses of looking for a new job in your present occupation
- legal fees related to your job
- malpractice insurance premiums
- a passport for a business trip
- research expenses of a college professor
- subscriptions to professional journals and trade magazines related to your work
- tools and supplies used in your work
- union dues and expenses, and
- work clothes and uniforms (if required and not suitable for everyday use).
What to Do About Job Expenses?
Don’t pay them! The best thing to do with expenses you incur while on the job is not to pay them yourself. Have your employer pay them. Use a company credit card or have your employer billed directly for the expense. If you must pay for something out of your own pocket, have your employer reimburse you. Provided they are for work-related expenses and are properly documented, these reimbursements are not taxable income to you and should not be included in the W-2 form your employer files with the IRS showing how much you were paid for the year. Your employer meanwhile gets to deduct these expenses as a business expense.
You’re much better off being reimbursed than paying for something yourself and deducting it because (1) your deduction for job expenses is limited, and (2) any deduction you get will only recoup part of the expense. For example, if you spend $1,000 for a business trip and deduct it as an unreimbursed job expense, you’ll get at most a $1,000 deduction. If you’re in the 28% tax bracket, you’ll save $280 on your taxes. Thus, your trip ends up costing you $720. If, on the other hand, your employer reimburses you for the $1,000, the trip will cost you nothing because the $1,000 is not taxable income.
Make sure you know what your employer’s reimbursement policy is. If the policy is to reimburse the expense, be sure to claim it. If an employee has a right to reimbursement, but fails to claim it, a personal deduction for the employee's expenses is not allowed because the employee's expenditures are not "necessary.”
It may be worth your while to take a salary reduction in order to get your employer to reimburse you for some expenses. Note, however, that your employer may be required by law to reimburse you for work-related expenses. For example, this is required in California (see Cal. Labor Code Sec. 2280).
Any reimbursement you receive from your employer should be made under an “accountable plan.” An accountable plan is a set of procedures that ensures that employees don’t get reimbursed for personal expenses. In brief, you must:
- make an “adequate accounting” of the expense—that is, follow all the applicable recordkeeping and other substantiation rules for the expense; for example, you must keep receipts (except for travel, meal, and entertainment expenses below $75; or travel and meal expenses paid on a per diem basis)
- timely submit your expense report and receipts to employer, and
- timely return any payments that exceed what you actually spent for job expenses.
If you fail to follow the rules, any reimbursements you receive must be treated as employee income subject to tax. Thus, the corporation must include them on your W-2. You’ll then have to deduct the expense on your personal tax return as described below.
If You Have to Pay Job Expenses Yourself
If your employer does not reimburse you for your out-of-pocket work-related expenses, you can deduct them as a personal itemized deduction. Unreimbursed employee expenses are deductible to the extent they would be deductible by a self-employed person. They are subject to the same rules and limitations as business expenses (with a few variations). Thus, they are deductible only if they are ordinary, necessary, and reasonable in amount. Special rules also apply to many deductions—for example, education expenses may only be deducted to maintain or improve skills required in your current job, or to maintain your professional or work status.
However, an employee’s deduction for unreimbursed job expenses is subject to an important limitation inapplicable to regular business expenses: Employee expenses fall under the category of miscellaneous itemized deductions, and as such are deductible only if, and to the extent that, they (along with your other miscellaneous deductions) exceed 2% of your adjusted gross income.
Example: Carolyn, an employee salesperson, spends $1,500 for a sales trip that her company does not reimburse her for. She has no other miscellaneous itemized deductions and her AGI is $50,000. She may deduct the expense only to the extent it exceeds 2% of her AGI. Since 2% of $50,000 is $1,000, she may only deduct $500 of her $1,500 travel expense.
Because of this limitation, the higher your AGI, the fewer expenses you’ll be able to deduct. It doesn’t seem fair, does it?