Unreimbursed Employee Expenses: Out-of-Pocket Expenses Employees Incur

August 31, 2024 3 min read Accounting Finance Taxes Unreimbursed Expenses Employee Costs Tax Deductions Out-of-Pocket Expenses Employer Reimbursements

An in-depth explanation of what unreimbursed employee expenses are, their implications, examples, and their treatment in tax calculations.

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Unreimbursed Employee Expenses refer to expenses that employees pay out-of-pocket while performing work-related duties, which are not reimbursed by their employer. These types of expenses can range from travel and meals to job-specific tools and uniforms.

Tax Implications

For tax purposes, unreimbursed employee expenses were traditionally deductible under certain circumstances. Prior to the Tax Cuts and Jobs Act (TCJA) of 2017, employees could deduct these expenses as miscellaneous itemized deductions if they exceeded 2% of their adjusted gross income (AGI). However, TCJA suspended this deduction for tax years 2018 through 2025.

Common Examples

Travel Expenses: Costs incurred for traveling for work, such as airfare, hotel accommodations, car rentals, and fuel.
Meals and Entertainment: Expenses for meals and entertainment related to business activities, albeit with certain restrictions.
Tools and Equipment: Purchases of tools or equipment necessary for performing job duties, such as a carpenter buying specialized tools.
Uniforms: Costs for work-specific clothing or uniforms that are not suitable for everyday wear.

Historical Context

Historically, the ability to deduct unreimbursed employee expenses allowed employees, particularly those who incurred substantial out-of-pocket costs, to lower their taxable income. This was especially relevant for job roles that required significant self-funded expenditures, such as salespeople and contractors.

Special Considerations

Employer Reimbursement Programs

Many companies offer reimbursement programs to cover job-related expenses. Employees should be aware of such programs and should utilize them to mitigate out-of-pocket costs.

Record Keeping

Employees should maintain detailed records of their unreimbursed expenses. Receipts, invoices, and logs are essential for tax filing and potential future reinstatements of deduction policies.

Comparison with Reimbursed Expenses

Feature	Unreimbursed Expenses	Reimbursed Expenses
Tax Deductibility	Not deductible under TCJA (2018-2025)	Not deductible, as the reimbursement is not included in taxable income
Financial Burden	Borne by the employee	Borne by the employer
Record-Keeping Requirements	Essential for potential future deductions or employer reimbursement claims	Required for reimbursement processing, but less critical for personal tax purposes

Miscellaneous Itemized Deductions: A category of tax deductions that includes unreimbursed employee expenses.
Adjusted Gross Income (AGI): A measure of income calculated from your gross income and used to determine how much of your income is taxable.

FAQs

Can I still deduct unreimbursed employee expenses?

Currently, under the TCJA, these deductions are suspended for tax years 2018 through 2025.

What should I do if my employer does not reimburse my expenses?

Consider discussing reimbursement policies with your employer and inquire about potential programs or allowances.

What types of expenses are commonly reimbursed by employers?

Travel, meals, lodging, tools, equipment, and uniforms are commonly reimbursed expenses.

References

IRS Publication 529, Miscellaneous Deductions.
Tax Cuts and Jobs Act of 2017.

Summary

Unreimbursed Employee Expenses are costs incurred by employees that are not covered by their employer. While historically deductible under specific regulations, recent tax reforms have suspended this benefit, making record-keeping and employer reimbursement programs more critical for affected employees. Understanding these expenses can help employees make informed financial decisions and potentially leverage employer reimbursement options.