Employee business expenses

Employee business expenses are a specific category within personal finance and tax deductions. They refer to costs incurred by an individual in the course of their employment that are not reimbursed by their employer. Historically, these expenses could often be deducted from an individual's taxable income, thereby reducing their overall tax liability. However, significant changes in tax law have altered their deductibility for most employees. These expenses must typically be considered "ordinary and necessary expenses" for the job.²⁶

What Is Employee Business Expenses?

Employee business expenses are costs that an individual pays or incurs as an employee for carrying on their trade or business of being an employee.²⁵ These expenses are a subset of broader [tax deductions] that can reduce a taxpayer's [taxable income]. For an expense to qualify, it must be both "ordinary" and "necessary." An ordinary expense is common and accepted in the taxpayer's industry or profession, while a necessary expense is helpful and appropriate for the business, though not necessarily indispensable.²⁴ Historically, such expenses included professional dues, unreimbursed travel costs, and certain work-related education.

History and Origin

The concept of deducting business expenses from income has evolved alongside the U.S. income tax system. The first federal income tax was introduced in 1861 to help finance the Civil War, though it was later repealed.²³ The modern federal income tax became a permanent fixture with the ratification of the 16th Amendment in 1913, which granted Congress the power to levy taxes on income.²² Over the decades, tax laws have been refined, defining what constitutes a deductible expense for both businesses and individuals. Prior to 2018, unreimbursed employee business expenses were generally deductible as [itemized deductions] on an individual's tax return, subject to a 2% floor of their [adjusted gross income] (AGI).²¹ This meant that only the amount exceeding 2% of the AGI could be deducted. However, the Tax Cuts and Jobs Act (TCJA) of 2017 significantly altered this landscape, suspending most miscellaneous itemized deductions, including unreimbursed employee business expenses, from 2018 through 2025.¹⁹, ²⁰

Key Takeaways

• Employee business expenses are costs incurred by an employee in their job that are not reimbursed by their employer.
• The Tax Cuts and Jobs Act (TCJA) of 2017 suspended the deduction for most unreimbursed employee business expenses for tax years 2018 through 2025.¹⁸
• Certain categories of employees, such as qualified performing artists or fee-basis state/local government officials, may still be able to deduct these expenses.¹⁷
• For expenses to be deductible when permitted, they must be "ordinary and necessary" for the performance of the job.¹⁶
• Proper [record-keeping] is crucial for substantiating any business expense claims.¹⁵

Interpreting the Employee Business Expenses

For most W-2 employees, the ability to deduct unreimbursed employee business expenses has been suspended by the TCJA until 2026. This means that, for the time being, these expenses do not directly impact the [tax liability] of typical employees unless they fall into specific, limited categories.¹⁴

However, the concept remains highly relevant for [self-employed] individuals, who continue to deduct ordinary and necessary business expenses on [Schedule C] of their tax return. For these individuals, understanding what qualifies as a legitimate business expense is critical for accurately reporting [gross income] and reducing their overall tax burden.

Hypothetical Example

Prior to 2018, consider an employee, Sarah, who had an adjusted gross income (AGI) of $50,000. She incurred $2,500 in unreimbursed professional development courses directly related to her job. Under the old rules, she could only deduct the amount exceeding 2% of her AGI.

Calculation:

• 2% of AGI = 0.02 * $50,000 = $1,000
• Deductible amount = $2,500 (total expenses) - $1,000 (2% AGI floor) = $1,500

Sarah would have been able to deduct $1,500 from her [taxable income].

Under current law (2018-2025), if Sarah is a regular W-2 employee, she would generally not be able to deduct these $2,500 in unreimbursed employee business expenses, regardless of her AGI. This highlights a significant shift in [financial planning] for many employees who previously relied on these deductions.

Practical Applications

While broadly suspended for W-2 employees, the principles of employee business expenses still have practical applications in specific scenarios:

• Self-Employed Individuals: Entrepreneurs and independent contractors are still able to deduct ordinary and necessary business expenses from their income. This includes home office expenses, business travel, supplies, and professional fees.
• Certain Professions: As noted, specific groups like qualified performing artists, fee-basis state or local government officials, and employees with impairment-related work expenses may still deduct unreimbursed employee business expenses.¹³ These individuals would typically use [IRS Form 2106] to calculate and report their expenses.
• Employer [Reimbursement] Policies: The changes in tax law encourage employers to review and implement robust [reimbursement] policies for legitimate business expenses. When an employer reimburses an employee for substantiated business expenses under an "accountable plan," these reimbursements are generally not included in the employee's [gross income] and are deductible for the employer.¹² This creates a win-win situation where employees are not out-of-pocket and employers can still deduct the costs. For guidance on distinguishing taxable from nontaxable benefits, employers often refer to IRS Publication 15-B.¹¹

Limitations and Criticisms

The primary limitation of employee business expenses, particularly since the TCJA, is their general non-deductibility for the vast majority of W-2 employees. This legislative change eliminated a common [deduction] that many individuals used to reduce their [taxable income]. Critics argue that this places a greater financial burden on employees who must incur job-related costs without employer [reimbursement].

Another limitation, even when deductions were more widely available, was the stringent [record-keeping] requirement. Taxpayers needed to maintain detailed logs, receipts, and other documentation to substantiate their expenses in case of an IRS audit. Failure to adequately prove an expense could lead to its disallowance. Furthermore, for those who could previously deduct these expenses, they were often subject to the 2% of AGI floor, meaning a significant portion of the expenses might not have been deductible anyway.¹⁰ The suspension of these deductions is currently scheduled to last until the end of 2025.⁹

Employee Business Expenses vs. Employer-Provided Benefits

Employee business expenses are distinct from [employer-provided benefits]. The key difference lies in who primarily incurs and benefits from the cost, and how it is treated for tax purposes.

While employee business expenses are costs the employee pays out of pocket for work-related activities, [employer-provided benefits] are forms of non-wage compensation offered by the employer, such as health insurance, retirement contributions, or tuition assistance.⁶ These benefits are typically detailed in IRS Publication 15-B, which clarifies their taxability for employees.⁵

FAQs

Can I still deduct employee business expenses on my tax return?

For most W-2 employees, the deduction for unreimbursed employee business expenses has been suspended by the Tax Cuts and Jobs Act (TCJA) from 2018 through 2025.³, ⁴ However, certain categories of employees, like qualified performing artists or self-employed individuals, may still be eligible to deduct these costs.²

What kinds of expenses were previously deductible?

Historically, common deductible employee business expenses included unreimbursed travel costs, professional dues, work-related education, union dues, job search expenses, and certain work-related tools and supplies. These had to be [ordinary and necessary expenses] for the job.

What should I do if my employer doesn't reimburse my business expenses?

If your employer does not [reimbursement] your business expenses and you are a W-2 employee, you generally cannot deduct these expenses on your federal tax return during the 2018-2025 period. It is advisable to discuss [reimbursement] policies with your employer.

Do self-employed individuals deduct business expenses?

Yes, [self-employed] individuals continue to deduct ordinary and necessary business expenses directly related to their trade or business. These expenses are typically reported on [Schedule C] (Profit or Loss from Business) of their tax return, reducing their [taxable income].

What is "ordinary and necessary" in the context of business expenses?

An expense is "ordinary" if it is common and accepted in your trade or business. It is "necessary" if it is helpful and appropriate for your business. It doesn't have to be indispensable to be considered necessary.¹