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Occasionally, your employees might dip into their own pockets to cover business-related expenses. They might pay for a meal with a client, book a hotel room for a business trip on their personal credit card, buy office supplies, or drive their own vehicle to a work conference.

If you have an expense reimbursement policy, employees simply submit expense reports to recoup those costs. But what happens to unreimbursed employee business expenses? This question is a common point of confusion for employees and employers alike.

This article explores unreimbursed business expenses, rules for deducting them, and tips for business owners and employees to streamline this aspect of business operations.

What are unreimbursed employee business expenses?

Unreimbursed employee business expenses are any out-of-pocket expenses employees incur while performing their job duties that their employer doesn't reimburse. They can include things like:

  • Costs for transportation, lodging, meals, and incidental expenses during business trips
  • Tools, equipment, and other materials needed for the job
  • Fees for professional development courses, workshops, conferences, and certifications to maintain or improve job skills
  • Dues for professional organizations related to the job
  • Driving their personal vehicle or paying transportation expenses or parking fees to meet with a client or attend a work-related event
  • Buying uniforms or other clothing required for work and not suitable for everyday wear
  • Gifts for clients and other business contacts valued up to $25 per person
  • Home office furnishings and equipment, if required for work

The expense also needs to be the kind of expense that would be deductible by the business under normal circumstances.

According to Internal Revenue Service (IRS) rules, deductible expenses are both ordinary and necessary. Ordinary expenses are common and accepted in the trade or industry. A necessary expense is helpful and appropriate for your trade or business.

Many companies give out company cards or have expense reimbursement policies in place to reimburse these expenses. If they don't, unreimbursed business expenses can put a financial strain on employees who have to bear these costs — especially for employees in roles that require frequent travel or continuous professional development — because they can't offset the cost with a tax deduction.

Can a W2 employee write off expenses?

Before 2018, workers could deduct unreimbursed employee business expenses as miscellaneous itemized deductions on their tax returns.

However, the Tax Cuts and Jobs Act (TCJA) of 2017 changed this when it eliminated many miscellaneous itemized deductions. That means employees can't deduct unreimbursed job expenses at all (at least until many provisions of the TCJA sunset at the end of 2025).

But claiming those deductions wasn't really a great replacement for an expense reimbursement policy for several reasons:

  1. Employees had to itemize deductions to benefit from the tax write-off.
  2. These miscellaneous itemized deductions were subject to a 2% floor, meaning employees could only deduct the amount exceeding 2% of their adjusted gross income (AGI).
  3. A tax deduction isn't a dollar-for-dollar reduction in the employee's tax bill. Instead, such expenses reduce their taxable income. So, for example, a $1,000 tax deduction would save an employee in the 25% tax bracket about $250 in taxes.

Special rules for certain types of employees

A handful of workers can still deduct unreimbursed employee expenses.

Armed forces reservists

Members of the U.S. Army, Navy, Air Force, Marine Corps, Coast Guard, National Guard, and Reserve Corps can deduct their unreimbursed travel expenses.

Qualified performing artists

A qualified performing artist:

  • Has at least two employers during the tax year
  • Earns at least $200 from each employer
  • Has $16,000 or less in adjusted gross income
  • Performing arts earnings make up less than 10% of their total taxable income (if they have other sources of income)

Fee-basis local government officials

Salaried government employees can't deduct unreimbursed employee expenses. State or local government workers who receive fee-based compensation can deduct unreimbursed employee expenses.

Disabled employees with impairment-related work expenses

Workers with physical or mental disabilities can deduct the cost of impairment-related work expenses that are necessary for them to be able to work.

Teachers

Teachers and other K-12 educators and administrators who are in school at least 900 during the school year can also deduct up to $300 in job-related expenses.

All taxpayers who claim unreimbursed employee expenses on their tax returns need to keep records like receipts, canceled checks, or credit card statements to prove they paid for the business expenses and weren't reimbursed for them.

What is Form 2106 for unreimbursed employee expenses?

Most employees who qualify for one of the above categories complete Form 2106, Employee Business Expenses, to calculate their deduction.

Form 2106 is pretty simple as far as tax forms go. In Part I of the form, you enter your expenses and any partial reimbursements received from your employer. Then, net the two figures to come up with your total unreimbursed business expenses.

It's a little more complicated if you drive your personal vehicle for work. In that case, you need to complete Part II of Form 2106 and provide the total miles you drove during the year and the miles you drove for business. Then, you calculate your deduction using the standard mileage rate or actual vehicle expenses.

Educators don't have to file Form 2106 to claim the educator expense deduction. Instead, they report their deductions directly on Schedule 1 as above-the-line deductions.

A better way to manage business expenses

Letting employees pay out-of-pocket for business expenses might seem like a cost-cutting move for business owners. But it's not really ideal.

Employees who continually have to pay work-related costs out of their own compensation might feel undervalued or unsupported, leading to low employee engagement and potential turnover.

It makes more sense to reimburse employees for any job-related expenses they incur because you can claim deductions for those expenses on your business tax return. This also gives you a more accurate view of your business operations and profitability because your financial statements reflect all your business expenses — not just the ones paid for via your own funds.

Of course, implementing and managing an expense reimbursement program can be complex. Fortunately, Ramp’s expense management software offers a comprehensive solution to streamline this process, benefiting both you and your employees.

With Ramp, you don't have to worry about collecting expense reports and chasing down paper receipts. You can give employees company cards with pre-set spending limits and policies. When employees use their cards, Ramp prompts them to submit the receipt and matches it to the correct transaction.

The software cuts down on reconciliations by automatically checking every transaction and flagging non-compliant expenses so you can focus on higher-level approvals. Ramp can also integrate seamlessly with your accounting software or enterprise risk management (ERP) system to automatically code and categorize expense transactions. This automation reduces your administrative burden and ensures you always have up-to-date, accurate records.

Capture every deductible business expense with Ramp

Reimbursing employee business expenses doesn't have to be stressful or time-consuming. Our expense management software can help you keep employees happy and productive without the hassle of paper expense reports.

We can even provide analytics to give you insight into your spending, allowing you to identify trends and find ways to optimize business expenses.

Interested in learning more about how Ramp can help you improve employee satisfaction and run your business better? Request a demo or try Ramp for free.

Try Ramp for free
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CPA, Accounting & Tax Content Writer
Janet Berry-Johnson, CPA, is a freelance writer with a background in accounting and income tax planning and preparation. She is passionate about making complicated accounting and income tax information accessible to readers. 
Ramp is dedicated to helping businesses of all sizes make informed decisions. We adhere to strict editorial guidelines to ensure that our content meets and maintains our high standards.

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