Unreimbursed Employee Business Expenses

You Can Deduct Some Expenses Related to Your Job

Business woman reading the financial section of a newspaper. Seattle skyline in the background.
Business expenses, such as subscriptions to professional magazines and newspapers, can be tax write offs. © Tetra Images - Take A Pix Media / Getty Images

It may seem unfair that you have to spend money to make money, particularly when you're not self-employed. The Internal Revenue Service agrees with you, at least to an extent. Employees who incur job-related expenses can potentially deduct those costs on their federal tax returns. Except, of course, it's never that easy. 

Job-related expenses are miscellaneous deductions. That means you have to itemize to claim them instead of claiming the standard deduction for your filing status.

If the total of all your itemized deductions doesn't exceed the standard deduction you're entitled to, it's usually not in your best interest to itemize — it will end up costing you tax dollars. You might want to seek reimbursement from your employer instead. 

That said, here's what you need to know and how to go about it if you decide that you do want to claim those expenses on your tax return. 

Eligibility for the Employee Business Expense Deduction

Make sure you haven't been reimbursed for what you spent, or that your employer did not give you an advance toward these costs or an allowance to pay for them. If the things you spent money on where ordinary and necessary business expenses for your employer, if you had to give an accounting to your employer explaining exactly what the money was spent on, and if you had to return any money that was leftover, it was mostly likely an advance or allowance.

Not only are these expenses not deductible, but the money given to you might appear in box 12 of your W-2 as income on which you must pay taxes. All three of these criteria must be met, however, before the money is charged to you as income. 

If your employer later reimbursed you for what you spent, such as if you provided a receipt and he paid you back, this isn't income but it doesn't qualify as an employee business expense, either.

 

Types of Employee Business Expenses That Can Be Deducted

Employees can incur a wide variety of expenses related to their jobs, so it's impossible to list all of them here. But five broad categories of tax-deductible job expenses are often claimed. 

  • Vehicle expenses: These include costs associated with using your personal vehicle for work-related reasons. You can either deduct a portion of your driving expenses based on your work-related mileage, or you can use the standard mileage rate set by the IRS each year. The rate is 53.5 cents per mile driven for work as of 2017. If you want to deduct your actual expenses, you can calculate your deduction based on the miles you drove by completing page 2 of IRS Form 2106, which you'll have to submit with your tax return. Allowable miles are limited to getting from one workplace to another, visiting clients or customers, going to a business meeting away from your regular workplace, or getting from your home to a temporary workplace when you have one or more regular places of work. Commuting is not included. IRS Publication 463, chapter 4 gives a detailed explanation of these rules. 
  • Parking, tolls and local transportation expenses: These are separate from actual vehicle expenses like fuel, oil, insurance and maintenance. They include the other costs of travel like parking, tolls, bus fare or train fare. And again, certain expenses are disallowed. If you have to pay to park your vehicle at your workplace, this isn't deductible. As long as you're driving for business purposes and not for commuting, however, these costs can be deducted.
  • Travel expenses: These include the cost of hotels, airfare, car rental and similar expenses if you must travel away from your home at least overnight. 
  • Meals and entertainment expenses: If you're having a meal with or entertaining clients, customers, business associates or employees, these costs are deductible if they are directly related to and associated with conducting business. "Directly related" means that the purpose of the gathering was to conduct business, that you did indeed engage in business, and that you — or, more precisely, your employer — had every reason to believe that the event would result in income. Typically, only half the cost of meals and entertainment are tax deductible, but there are some exceptions to this rule. You can find them in chapter 2 of Publication 463.
  • Other business expenses: These include any expenses that aren't included in the above categories such as the cost of business cards, subscriptions to trade and business publications, home office expenses, business gifts and work-related education.

    How to Deduct Employee Business Expenses

    Claiming employee business expenses begins with completing Form 2106, Employee Business Expenses to figure out the total amount of the deduction you're entitled to. You can then enter the figure on line 21 of Schedule A, the form you'd use to itemize deductions rather than take the standard deduction. The shorter Form 2106-EZ can be used if you want to claim the standard mileage rate instead of actual vehicle expenses. You'd then enter the total of all your itemized deductions — determined after you've completed Schedule A — on line 40 of Form 1040 in place of the standard deduction you'd otherwise be entitled to. 

    The AGI Limitation

    The IRS categorizes employee business expenses as miscellaneous deductions, along with things like tax preparation fees and safe deposit box fees. Miscellaneous deductions are reduced by 2 percent of your adjusted gross income or AGI. What's left over is the amount you can claim as a deduction. For example, if your AGI is $80,000, you can only claim a deduction for the amount of your miscellaneous expenses that exceed $1,600, or 2 percent of $80,000. If you have $1,800 in expenses, you'll get a $200 deduction. If your miscellaneous expenses don't add up to 2 percent of your AGI, they don't qualify for a deduction at all. 

    Recordkeeping

    Assuming you meet all these rules and you want to deduct your work-related expenses, the IRS may expect you to be able to substantiate them. You'll need proof for each expense you claim showing the description of what you spent money on, the amount, the business purpose and relationship, and the date and place where the expense was incurred. You might want to keep a running file throughout the year to hold all your receipts, or make it a point to scan them into your smartphone or laptop on a regular basis. Not only will this make calculations easier at tax time, but you'll have the proof at your fingertips if the IRS ever asks you to produce it.