Unreimbursed employee expenses refer to costs incurred by an individual for their job that are not repaid by their employer. Historically, these expenses could sometimes be claimed as a tax deduction on a taxpayer's federal income tax return. These fall under the broader financial category of personal finance, specifically related to income tax and deductible expenses.
What Is Unreimbursed employee expenses?
Unreimbursed employee expenses are costs that an individual pays out of pocket for work-related purposes and for which they do not receive reimbursement from their employer. Prior to changes in U.S. tax law, these expenses, ranging from job-related education and union dues to certain work-related travel, could be deducted by employees as itemized deductions on their federal income tax returns. Such deductions were typically categorized as miscellaneous deductions and subject to a 2% floor of the taxpayer's adjusted gross income (AGI). However, the tax landscape significantly shifted, impacting the deductibility of most unreimbursed employee expenses.
History and Origin
The concept of deducting business expenses from taxable income has long been a part of tax codes to account for the costs individuals incur to earn income. For many years in the United States, unreimbursed employee expenses were a permissible deduction for taxpayers who itemized. These deductions were typically reported on Form 2106, Employee Business Expenses.
A significant turning point for these deductions came with the passage of the Tax Cuts and Jobs Act (TCJA) of 2017. This comprehensive tax reform legislation, effective for tax years 2018 through 2025, suspended most miscellaneous itemized deductions that were subject to the 2% AGI limitation, including the majority of unreimbursed employee expenses. The change aimed to simplify the tax code and was accompanied by a significant increase in the standard deduction, which reduced the number of taxpayers who would benefit from itemizing. For instance, the number of taxpayers itemizing deductions fell from 31% in 2017 to just 9% in 2020.7 The Internal Revenue Service (IRS) outlines these changes in its publications, noting that miscellaneous deductions subject to the 2% AGI limit are no longer deductible for most individuals.6 This shift impacted a wide array of costs that employees previously bore and sought to deduct, fundamentally altering financial planning for some workers.5
Key Takeaways
- Unreimbursed employee expenses are costs paid by an employee for work that are not reimbursed by their employer.
- Prior to 2018, many of these expenses were deductible as miscellaneous itemized deductions, subject to a 2% AGI floor.
- The Tax Cuts and Jobs Act (TCJA) of 2017 suspended the deductibility of most unreimbursed employee expenses for tax years 2018 through 2025.
- Certain specific professions or circumstances may still allow for the deduction of some employee business expenses, but these are exceptions.
- The suspension of these deductions largely aligns with the TCJA's broader goal of simplifying the tax code for individuals by increasing the standard deduction.
Interpreting Unreimbursed employee expenses
In the current tax environment (2018-2025), interpreting unreimbursed employee expenses primarily involves understanding their general non-deductibility for most employees. For individuals, this means that costs like professional dues, home office expenses, job search expenses, and work uniforms (if suitable for everyday wear) that are not reimbursed by an employer cannot be used to reduce their taxable income. This shift puts a greater onus on employers to reimburse such costs or for employees to factor these expenses into their personal budgeting without the expectation of a tax benefit.
While the general rule is non-deductibility, it's important to note that some specialized categories of employment, such as qualified performing artists, fee-basis state or local government officials, and certain individuals with disabilities who incur impairment-related work expenses, may still be able to deduct specific employee business expenses. The Internal Revenue Service (IRS) provides detailed guidance for these specific circumstances in its official publications.
Hypothetical Example
Consider an employee, Sarah, who is a marketing professional. In 2017, before the TCJA came into effect, Sarah purchased $1,000 worth of specialized marketing software and paid $500 in professional development course fees, neither of which her employer reimbursed. Her adjusted gross income (AGI) for 2017 was $50,000.
Under the old rules, Sarah could include these as miscellaneous itemized deductions. The 2% AGI floor would be 2% of $50,000, which is $1,000.
Her total unreimbursed employee expenses were $1,000 (software) + $500 (courses) = $1,500.
The deductible amount would be $1,500 - $1,000 (2% AGI floor) = $500.
This $500 could then be added to her other itemized deductions, such as mortgage interest or state and local taxes, if the total exceeded her standard deduction for that year.
Now, consider the same scenario in 2025. Sarah incurs the same $1,500 in unreimbursed employee expenses. Due to the suspension of most miscellaneous itemized deductions under the Tax Cuts and Jobs Act, Sarah generally cannot deduct these expenses on her federal income tax return. Unless she falls into one of the very narrow exceptions (e.g., a qualified performing artist), these expenses provide no tax benefit, regardless of her AGI or whether her total itemized deductions exceed the standard deduction.
Practical Applications
The changes concerning unreimbursed employee expenses have significant practical applications for both employees and employers. For employees, it underscores the importance of seeking reimbursement for job-related costs whenever possible. If reimbursement is not an option, these expenses now effectively reduce an individual's net income without offering a corresponding tax break, impacting their overall take-home pay or personal cash flow. This shift has prompted many individuals to re-evaluate their employment terms, particularly regarding fringe benefits and expense policies.
From an employer's perspective, the non-deductibility for employees means that employers might face increased pressure to provide allowances or reimbursements for work-related expenses. Businesses that value employee retention and satisfaction may adapt their policies to cover costs that employees previously absorbed. This can affect a company's budgeting and compensation strategies. The general landscape of personal taxation and how it affects individuals' financial decisions has evolved significantly due to these changes.4 This legislative alteration highlights the dynamic nature of tax codes and their direct impact on individual taxable income and spending power.
Limitations and Criticisms
The primary limitation of discussing unreimbursed employee expenses since 2018 is their general non-deductibility for most taxpayers, a direct consequence of the Tax Cuts and Jobs Act (TCJA). This change has drawn criticism for several reasons. For one, it places a greater financial burden on employees who must incur necessary job-related costs without the ability to offset them against their income for tax purposes. Prior to the TCJA, these expenses, along with other miscellaneous deductions, could be used to reduce one's taxable income if they exceeded a certain threshold, providing some relief to workers.3
Critics argue that eliminating these deductions disproportionately affects individuals in certain professions that naturally incur significant out-of-pocket costs, such as educators who buy their own supplies, or salespersons with extensive travel. While the TCJA increased the standard deduction to simplify filing for many, it simultaneously removed a avenue for individuals with legitimate, substantial work-related expenses to reduce their tax liability, unless those expenses are reimbursed by the employer. The Tax Policy Center noted that the TCJA eliminated or restricted many itemized deductions, including those for unreimbursed employee expenses, for 2018 through 2025.2 This legislative shift highlights a broader policy debate about fairness in the tax system and who bears the cost of earning income.1
Unreimbursed employee expenses vs. Business expenses
The distinction between unreimbursed employee expenses and business expenses lies primarily in the tax treatment and the entity incurring the cost. Both categories involve costs necessary for generating income, but their deductibility and application differ significantly.
Unreimbursed Employee Expenses: These are costs an individual employee incurs in the course of performing their job duties that are not reimbursed by their employer. Examples typically include professional development, union dues, job search expenses, and certain work-related travel or uniform costs. As discussed, for most employees, these expenses are generally no longer deductible on federal income tax returns for tax years 2018 through 2025 due to the Tax Cuts and Jobs Act.
Business Expenses: These are costs incurred by a self-employed individual (a sole proprietor, partner in a partnership, or an independent contractor) or a business entity in the course of operating their trade or business. These expenses are generally fully deductible against the business's gross income to arrive at its net taxable income. Examples include office rent, advertising costs, supplies, and business-related travel. For self-employed individuals, these are typically reported on Schedule C (Form 1040), Profit or Loss from Business, and reduce their taxable income without being subject to the limitations that formerly applied to unreimbursed employee expenses. The key difference is that business expenses are incurred by the business entity itself, whereas unreimbursed employee expenses are incurred by an individual acting as an employee.
FAQs
Q: Are unreimbursed employee expenses still deductible on federal taxes?
A: Generally, no. For tax years 2018 through 2025, the Tax Cuts and Jobs Act suspended the deductibility of most unreimbursed employee expenses for federal income tax purposes.
Q: What types of expenses were considered unreimbursed employee expenses?
A: Historically, these included job education expenses, union dues, professional society dues, job search expenses, work uniforms not suitable for everyday wear, and certain tools and supplies. Prior to 2018, they were part of miscellaneous deductions subject to a 2% adjusted gross income (AGI) floor.
Q: Are there any exceptions for deducting unreimbursed employee expenses?
A: Yes, some limited exceptions exist for specific professions, such as qualified performing artists, fee-basis state or local government officials, and individuals with disabilities who incur impairment-related work expenses. These specific cases are outlined by the IRS.
Q: What should I do if my employer doesn't reimburse my work expenses?
A: Since these expenses are generally no longer deductible for federal tax purposes, it's advisable to seek reimbursement from your employer whenever possible. If reimbursement is not an option, you will bear the full cost of the expense without a corresponding federal tax benefit.
Q: Does this change affect self-employed individuals?
A: No, this change primarily affects employees who receive a W-2. Self-employed individuals and independent contractors can still deduct ordinary and necessary business expenses on their Schedule C (Form 1040) to calculate their net profit.