In 2018, the deduction for unreimbursed employee expenses was eliminated by The Tax Cuts and Jobs Act, which was passed by Congress. Before this law was passed, employees who incurred job-related expenses such as travel expenses were able to list them as itemized deductions on their federal tax return. But, unfortunately, the new tax laws ended these miscellaneous itemized deductions including unpaid wages for tax years 2018 to 2025.
Understanding Unreimbursed Expenses
These are expenses incurred by employees during the course of doing their job duties. Employers can reimburse employees when the expenses are incurred during the performance of their job duties and when employees are able to produce receipts for those job-related expenses.
During the course of their employment, it is fairly common for employees to use their own money or credit cards to cover work-related expenses such as travel, purchasing work-related supplies or tools, professional subscriptions, using their automobiles for work, etc. The employer may reimburse some of these expenses, but others may remain unpaid. In tax years before 2018, those unreimbursed employee expenses that exceeded 2% of the adjusted gross income could be claimed as a deduction.
What Counts as an Unreimbursed Expense?
These are the expenses for which the employer has not paid you back or for which the employer has not provided an allowance. The Internal Revenue Service (IRS) classifies employee expenses as "ordinary" and "necessary" expenses. Ordinary expenses are those that are common and accepted in your business or profession. On the other hand, necessary expenses are those that are appropriate and helpful for your work.
It is important to remember that an expense does not have be "required" in order to be considered necessary. Some common examples of unreimbursed expenses include job-related legal fees, brokerage fees, licensing fees, professional organization dues, home office expenses, employer-required medical exams, work clothes or uniforms, and work-related education and training.
What Should You Do About These Expenses?
Since you can no longer deduct these expenses on your tax returns, the best thing to do with expenses you incur while on the job is to not pay them yourself. Make sure your employer pays them. You may want to use a company credit card or have your employer billed directly for the expense. If you are in a position where you have to pay for something out of pocket, claim that expense right away. If your company requires you to do monthly expense reports, make sure you claim your expenses there. If these are work-related expenses and you have the documentation to show it, these reimbursed employee expenses are not taxable income. It should not be include in the W-2 form your employer files with the IRS showing your income for the year. However, your employer gets to deduct these expenses as business expenses.
It is also important that you know and understand your employer's reimbursement policy. If it is to reimburse the expense, make sure you claim it in a timely fashion. Under California Labor Code Section 2280, the employer is required to pay you back for work-related expenses. If they don't, they open themselves up to unpaid wage lawsuits.
Any reimbursement you get from your employer should be made under what is known as an "accountable plan," which is a set of procedures that makes sure that employees don't get reimbursed for personal expenses. So, employees must document their expenses. This could be done in the form of receipts. However, receipts may not be required for travel, meal and entertainment expenses below $75.
Employees have the duty to submit their expenses to employers in a timely manner. They are also required to return any payments that exceed the amount of what was actually spent for the job-related expenses. When an employee doesn't follow these rules, any reimbursements he or she receives must be treated as income, which then becomes subject to income tax. Then, the corporation will need to include them on your W-2 and you will have to deduct the expense on your personal tax return.
What if You Pay the Expenses?
Before the Tax Cuts and Jobs Act, employees were able to deduct unreimbursed job expenses as an itemized deduction on their tax returns. But, starting in 2018 through 2025, employees won't be able to claim this deduction. The new law eliminated all miscellaneous itemized deductions including the deduction of unreimbursed employee expenses. Therefore, those who spend money out of pocket for job-related training, travel or other expenses will not get a deduction. This deduction for unreimbursed employee expenses is set to make a comeback in 2026.
This is why is all the more important to seek and obtain reimbursement for such expenses from your employer. Employees can trade a salary reduction for such reimbursement. While the salary is fully taxable, the reimbursement is tax-free if made under an accountable plan.
COVID-19 and Unreimbursed Expenses
With the coronavirus pandemic, more and more Californians are working from home. Even those among us who did not previously work from home are now beginning to do so. While self-employed workers and independent contractors can still claim work-at-home expenses, full-time employees cannot because of the change in tax laws. But the fact remains that you have been forced to work from home because of the coronavirus and California unpaid wage laws requires employers to pay employees for job-related expenses. Therefore, you should claim coronavirus-related work-at-home expenses through your employer. In order to claim these expenses, it is important that you diligently track your expenses by saving all job-related receipts and using software to streamline your records.
Should I Contact an Unreimbursed Expenses Attorney?
Employers who fail to reimburse employees for expenses incurred on the job, in addition to being responsible for paying those out-of-pocket expenses, may also be required to pay other costs such as attorney's fees and interest from the date the employee incurred that the particular expense.
If you are an employee in California who has incurred job-related expenses, but have not been reimbursed by your employer, it is important that you contact an experienced unpaid wage reimbursement lawyer to discuss your claims. Call Kingsley & Kingsley at 888-500-8469 for a free, comprehensive and confidential consultation