Employment related expenses

What Are Employment Related Expenses?

Employment related expenses are costs incurred by an individual in the course of performing their job duties as an employee. These expenses are distinct from personal expenses and are directly attributable to the employee's role and responsibilities. While they fall under the broad financial category of taxation and personal finance, the ability to deduct employment related expenses from taxable income has changed significantly over time due to various tax reform efforts. Historically, such expenses could reduce an employee's tax liability, but current tax law imposes limitations on their deductibility for most W-2 employees.

History and Origin

The concept of deducting costs associated with earning income has long been a feature of tax systems. In the United States, before the Tax Cuts and Jobs Act (TCJA) of 2017, employees could generally deduct unreimbursed employment related expenses as miscellaneous itemized deductions on Schedule A of Form 1040. These deductions were subject to a 2% floor of the taxpayer's adjusted gross income (AGI), meaning only the amount exceeding 2% of AGI was deductible. The Internal Revenue Code (IRC) Section 162(a) outlined that "ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business" were deductible, with performing services as an employee constituting a trade or business¹⁴.

However, the TCJA, enacted in December 2017, suspended the deduction for unreimbursed employment related expenses for tax years 2018 through 2025. This change significantly altered how many employees manage and report these costs, effectively eliminating the federal income tax deduction for most individuals who are not self-employed¹², ¹³. While the deduction is set to be reinstated in 2026, the temporary suspension highlights the dynamic nature of tax policy concerning employment related expenses.

Key Takeaways

• Employment related expenses are costs an individual incurs to perform their job as an employee.
• Prior to 2018, unreimbursed employment related expenses were deductible as miscellaneous itemized deductions, subject to a 2% AGI floor.
• The Tax Cuts and Jobs Act (TCJA) of 2017 suspended the federal deduction for most unreimbursed employment related expenses for tax years 2018 through 2025.
• The suspension of the deduction primarily affects W-2 employees who are not reimbursed by their employers.
• If an employer reimburses an employee's business expenses under an "accountable plan," these reimbursements are generally not taxable to the employee.

Interpreting Employment Related Expenses

Understanding employment related expenses primarily involves determining their tax treatment. For most employees in the current tax environment (2018-2025), interpreting these expenses means recognizing that they are generally not deductible on their federal income tax return if unreimbursed. This contrasts sharply with prior law and with the treatment of business expenses for self-employed individuals, which remain largely deductible.

The key distinction for employees often lies in whether the employer has an "accountable plan" for expense reimbursement. Under an accountable plan, expenses must be business-related, substantiated by the employee, and any excess advances must be returned to the employer. If these conditions are met, the reimbursements are tax-free to the employee, and the expenses are not reported as taxable income or deducted by the employee¹⁰, ¹¹. If a reimbursement plan is non-accountable, reimbursements are typically included in the employee's gross income and are taxable.

Hypothetical Example

Consider Sarah, an employed marketing professional. In 2024, her employer requires her to attend a mandatory industry conference in another city. Sarah pays for her flight, hotel, and conference registration out of pocket, totaling $1,500. Her employer has an accountable plan in place and Sarah submits all her receipts and documentation correctly.

1. Expense Incurred: Sarah incurs $1,500 in employment related expenses.
2. Reimbursement Request: Sarah submits a detailed expense report to her employer, along with all receipts and proof of payment, as required by the company's accountable plan.
3. Employer Reimbursement: The employer reviews the expenses, verifies they are business-related and properly substantiated, and reimburses Sarah the full $1,500.
4. Tax Treatment: Because the reimbursement was made under an accountable plan, the $1,500 is not included in Sarah's gross income and is not taxable to her. She does not deduct these expenses on her individual income tax return, nor does she need to.

If, however, Sarah's employer did not have an accountable plan, or if Sarah failed to substantiate the expenses adequately, the $1,500 reimbursement might be treated as taxable wages. In that scenario, because of current tax law, Sarah would not be able to deduct the $1,500 from her income, leading to a higher taxable income and potentially a greater tax burden.

Practical Applications

The most significant practical application of understanding employment related expenses is in individual tax planning and employer reimbursement policies. For employees, the suspension of federal deductibility means that seeking reimbursement from an employer under an accountable plan is now the primary method of avoiding the financial burden of these costs. Employees should familiarize themselves with their company's expense policy and ensure proper substantiation of expenses to maximize tax-free reimbursements⁹.

From an employer's perspective, maintaining a robust and compliant accountable plan is crucial. This allows employers to reimburse legitimate business expenses without creating additional taxable income for their employees, thereby reducing the administrative burden and potential tax complications for both parties. The Internal Revenue Service (IRS) provides detailed guidance in publications like IRS Publication 17, which outlines general rules for federal income tax returns and covers various deductions and credits relevant to individuals⁸.

Limitations and Criticisms

The primary limitation of current tax law regarding employment related expenses is the suspension of their deductibility for most employees. Critics argue that this change places a greater financial burden on individuals who incur significant job-related costs that are not reimbursed by their employers. This can disproportionately affect certain professions, such as teachers, long-haul truckers, or professionals with substantial continuing education requirements, who may historically have relied on these deductions to offset their income⁷.

Furthermore, the shift places more onus on employers to implement and manage accountable reimbursement plans effectively. While the intent of the TCJA was to simplify the tax code and encourage employers to cover business costs directly, it has eliminated a previous avenue for employees to reduce their taxable income for out-of-pocket work-related expenditures. The Tax Adviser, a publication of the AICPA, notes that even though the deduction is suspended, the principles of what constitutes an "ordinary and necessary" business expense and the need for proper substantiation remain important, as these deductions are set to return in 2026⁶.

Employment Related Expenses vs. Business Expenses

While often confused, employment related expenses and business expenses differ primarily in the taxpayer's status and, consequently, their tax treatment under current U.S. federal tax law.

The crucial distinction is that self-employed individuals continue to deduct their ordinary and necessary business expenses directly from their business income, reducing their overall taxable income. Employees, however, have lost this direct federal deduction for out-of-pocket costs unless their employer provides tax-free reimbursement through an accountable plan⁵.

FAQs

Q: Are all employment related expenses non-deductible for employees?

A: For federal income tax purposes, most unreimbursed employment related expenses are not deductible for W-2 employees from 2018 through 2025 due to the Tax Cuts and Jobs Act (TCJA). However, if your employer reimburses you under an "accountable plan," these reimbursements are generally not considered taxable income to you. Some states may still allow deductions for these expenses⁴.

Q: What is an "accountable plan"?

A: An accountable plan is an employer's expense reimbursement arrangement that meets specific IRS rules. To be considered accountable, the expenses must have a business connection, you must substantiate the expenses (e.g., with receipts), and you must return any excess advance payments to your employer. When these conditions are met, reimbursements are typically tax-free to the employee³.

Q: What types of costs were previously considered deductible employment related expenses?

A: Before 2018, common deductible employment related expenses included work-related travel expenses, professional dues, subscriptions to industry publications, job search expenses, and certain work-related education costs. These were generally deductible as miscellaneous itemized deductions subject to a 2% AGI floor².

Q: Will the deduction for employment related expenses return in the future?

A: Yes, the suspension of the deduction for unreimbursed employment related expenses under the Tax Cuts and Jobs Act is temporary and is scheduled to expire after the 2025 tax year. Barring further legislative changes, these deductions are expected to be reinstated starting in 2026, reverting to rules similar to those prior to the TCJA¹.

Q: How do employment related expenses affect my overall financial planning?

A: Given the current non-deductibility for federal taxes, employees should prioritize seeking reimbursement from their employers for legitimate job-related costs. If reimbursement is not possible, factor these out-of-pocket expenses into your personal budget and financial planning, as they will directly reduce your discretionary income rather than your tax deductions.