Can you deduct unreimbursed employee expenses?

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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.

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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.

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

Can a W-2 employee write off business expenses?

All W-2 employees could previously deduct unreimbursed employee expenses as miscellaneous itemized deductions on their tax returns. However, the Tax Cuts and Jobs Act (TCJA) of 2017 suspended many miscellaneous itemized deductions starting in 2018.

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That means most employees can no longer offset their taxable income with unreimbursed business expenses—at least until many provisions of the TCJA sunset at the end of 2025.

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But claiming those deductions wasn't really a great replacement for an expense reimbursement policy to begin with. Here’s why:

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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 exceptions: Who can deduct unreimbursed business expenses?

A handful of workers, including armed forces reservists, educators, and others, can still deduct unreimbursed employee expenses on their income tax returns. Here’s the full list of exceptions:

Armed forces reservists

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

Qualified performing artists

Actors, musicians, and other types of performing artists can deduct unreimbursed business expenses if they meet the following criteria:

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• Have at least two employers during the tax year
• Earn at least $200 from each employer
• Have $16,000 or less in adjusted gross income
• Qualified expenses related to the performing arts exceeded 10% of their gross income from the performing arts

Fee-basis public 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 hours during the school year can also deduct up to $300 in job-related expenses.

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

What unreimbursed employee business expenses are deductible?

Unreimbursed employee expenses must meet the same criteria as any deductible business expense. According to IRS rules, deductible expenses must be 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.

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Some common employee business expenses that meet the “ordinary and necessary” criteria include:

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• Business travel: Costs for transportation, lodging, and incidental expenses during business trips
• Tools and equipment: Tools, equipment, and other materials needed to perform your work
• Training and education: Fees for professional development courses, workshops, conferences, and certifications to maintain or improve skills related to your job
• Dues and fees: Union dues or other fees for professional organizations related to the job
• Car expenses: Driving a personal vehicle for business purposes, or paying transportation expenses like tolls and parking fees to meet with a client or attend a work-related event. Regular commuting costs aren’t a valid expense.
• Meal expenses: Business-related meals with clients, prospects, or co-workers, as well as meal costs incurred while traveling for business
• Work clothes: Uniforms or other clothing required for work that isn’t suitable for everyday wear
• Gifts: Gifts for clients and other business contacts valued up to $25 per person
• Home office expenses: Furnishings and equipment for a home office required for work

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Many companies give out company credit 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.

How to claim a deduction for unreimbursed employee expenses

Most employees who qualify for one of the above categories complete Form 2106, Employee Business Expenses, to calculate their deduction, and then report it on Form 1040.

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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 calculate your total unreimbursed business expenses.

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Reservists, fee-basis public officials, and qualifying performing artists can report their total amount of unreimbursed business expenses as an above-the-line deduction on Schedule 1 of Form 1040, which means they can claim either the standard deduction or itemized deductions.

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In contrast, qualified disabled workers report unreimbursed employee expenses on Schedule A of Form 1040, which means they must choose to claim itemized deductions.

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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.

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Educators don't have to file Form 2106 to claim the educator expense deduction. Instead, they report their deductions directly on Schedule 1 (Form 1040) 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 routinely have to make work-related purchases with their own money might feel undervalued or unsupported, leading to low employee engagement and, potentially, turnover.

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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 returns. 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 you paid for with your own funds.

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

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With Ramp, you don't have to worry about collecting expense reports and chasing down paper receipts. You can give employees corporate cards that automatically enforce your expense policies. When employees use their cards, Ramp prompts them to submit the receipt and matches it to the correct transaction.

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Our 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 ERP system to automatically code and categorize expenses. 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. Ramp’s expense management software can help you keep employees happy and productive without the hassle of paper expense reports.

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We even provide analytics to give you insight into your spending, helping you identify trends and find ways to optimize business expenses. Ramp’s cost-saving features and intelligent recommendations help customers save an average of 5% a year.

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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.