If you work as an employee, you may have various job-related expenses you end up paying out of your own pocket, such as:
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.
Make sure you know what your employer’s reimbursement policy is. If the policy is to reimburse the expense, be sure to claim it. 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:
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.
Prior to the passage of the Tax Cuts and Jobs Act, employees were able to deduct unreimbursed job expenses as a personal itemized deduction. This wasn’t the most generous deduction in the world—such expenses were deductible only if, and to the extent, they exceeded 2% of an employee’s adjusted gross income. However, it was better than nothing. Unfortunately, starting in 2018 through 2025, employees now will be able to deduct nothing. The Tax Cuts and Jobs Act completely eliminated all miscellaneous itemized deductions subject to the 2% of AGI limit, including the deduction for unreimbursed employee expenses. Thus, employees who spend their own money for things like job related car expenses, travel, education, or tools get no deduction at all. The deduction for unreimbursed employee expenses is scheduled to return in 2026.
This makes it more important than ever to seek reimbursement for such expenses from the employer. As mentioned above, employees can come out ahead if they trade a salary reduction for such reimbursement—salary is fully taxable, but the reimbursement is tax-free if made under an accountable plan.