Employee Business Expenses
If you are an employee, your income from your job is reported to you on a W-2 form, and the expectation is that your employer is providing you with the location, materials, tools and equipment, and other things you need to do your work. However, it's not always the case that employers pay for all of an employee's business expenses.
The IRS does give employees the opportunity to claim some tax deductions if you spend money on your job (such as on business meals and entertainment, local transportation, gifts, travel, education, supplies, tools, uniforms and other customary business expenses), so long as the expenses are considered reasonable and meet certain requirements and are not reimbursed by your employer.
The way in which your business expenses are written off for tax purposes depends on whether your employer reimburses you for your expenses and, if so, what type of reimbursement plan the employer uses.
Reimbursed expenses under accountable plans. Generally speaking, you'll get the full benefit of all your allowable deductions if they are reimbursed by your employer under what is known as an "accountable plan." This is a plan under which you have to report and document your expenses for your employer, and you have to return any expense allowance amounts over and above the expenses you have proven. Your employer then subtracts the reimbursements from your taxable income when filling out your annual W-2 form, so you pay no tax on the amount of the reimbursements.
Unreimbursed expenses. If you have expenses that are not reimbursed by your employer, or if your employer does not use an accountable plan, you'll generally have to claim the nonreimbursed expenses on Form 2106, Employee Business Expenses. In some cases, you may be able to use Form 2106-EZ, Unreimbursed Employee Business Expenses. Then the total amount of your expenses from either of these forms is transferred to Line 21 of Form 1040 Schedule A, Itemized Deductions.
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Warning
Schedule A requires that your employee business expenses be classified as "miscellaneous deductions" that must be reduced by 2 percent of your adjusted gross income (AGI) before they can be deducted. In other words, you'll automatically lose the benefit of some of your expenses, up to the amount of 2 percent of AGI.
And, if you can't itemize your deductions because all of your deductible expenses don't add up to more than the standard deduction for your filing status, you will lose the tax benefits of your employee business expenses entirely.
Therefore, it becomes very important to keep track of your expenses so that your allowable deductions will be as large as possible. Sometimes a few extra dollars of expenses will make the difference when you're deciding whether it's worthwhile to itemize in a particular year.
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This is the basic story, but as you might guess, there are a few wrinkles to be aware of. In the next few sections, we'll go over:
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