Deductions and Reimbursement of Job Expenses
Many people who work as employees rather than running their own business pay expenses related to their work. These may include meals, travel, job training, insurance premiums, research costs, subscriptions, costs of tools and supplies, and uniform costs in occupations that involve wearing a uniform, among many other examples. In general, employees should refrain from paying their own job-related expenses. They should arrange to have their employer pay them instead, or otherwise they can seek reimbursement from the employer.
Any job-related expenses should not be counted as taxable income for the employee. The employer should not include them in the W-2 form as part of the pay that the employee receives. Since job-related expenses are deductible as business expenses for the employer, this is not an unreasonable burden for the employer to shoulder.
Reimbursement Policies and Accountable Plans
Some states require employers to reimburse employees for any costs that they incur that are related to their job. In other states that do not require employer reimbursement, an employee may need to agree to a reduced salary in exchange for reimbursement. The employer will need to set up an accountable plan to monitor reimbursements so that it does not inadvertently reimburse an employee for expenses unrelated to their job.
Under an accountable plan, an employee will need to follow certain record-keeping rules to document their job-related expenses. They usually will need to keep receipts of these expenses except for certain costs related to meals and travel. They also must return payments from the employer if they exceed the appropriate reimbursement amount. Employees must promptly follow up with the employer after they incur a job-related expense, providing a report and documentation of the expense.
Reimbursements received outside the rules of the accountable plan will be classified as taxable income and reported on the W-2. This means that the employee would deduct them on their personal tax return.
Paying Your Own Job Expenses
Under the Tax Cuts and Jobs Act, which went into effect in 2018, the deduction for unreimbursed employee expenses was eliminated. Formerly, this deduction allowed employees to deduct these expenses if they exceeded 2 percent of their adjusted gross income. All deductions based on the 2 percent threshold have been removed through 2025. They may return in 2026 unless federal tax laws change again.
The loss of this deduction means that employees should make sure to get reimbursed for these expenses, even if it involves accepting a reduction in their salary. This will result in a net tax benefit, since reimbursement is tax-free, while their salary is taxable income.
