What Job Expenses Are Deductible for W2 Income?
Deducting work expenses as a W-2 employee is no longer a given. Understand the current tax landscape and the specific circumstances that still allow a deduction.
As a W-2 employee, you may pay for work-related costs, such as uniforms, tools, or travel, that are not paid back by your employer. These are known as unreimbursed employee expenses. Many employees wonder if they can receive a tax benefit for these costs, and understanding the rules is an important part of managing your tax situation.
The General Rule for W-2 Employee Expenses
For most W-2 employees, the ability to deduct unreimbursed job expenses on a federal tax return is suspended. This change was implemented by the Tax Cuts and Jobs Act of 2017 (TCJA) and is in effect for tax years 2018 through 2025. This suspension means common costs like a home office, tools, supplies, and unreimbursed travel are not deductible on your federal return.
Before the TCJA, employees could deduct these expenses as a miscellaneous itemized deduction. However, the deduction was limited to the amount that exceeded 2% of their Adjusted Gross Income (AGI).
The TCJA eliminated this category of miscellaneous itemized deductions. This change, combined with a higher standard deduction, means fewer taxpayers itemize deductions. The suspension of the employee expense deduction is scheduled to expire after 2025, at which point the previous rules may be reinstated unless Congress acts to change the law.
Federal Exceptions for Deducting Job Expenses
While the general rule suspended the deduction for most employees, four specific categories of workers can still claim unreimbursed job expenses on their federal tax return:
- Armed Forces reservists who travel more than 100 miles from home for their service. The deduction is for unreimbursed travel expenses and is limited to federal per diem and standard mileage rates.
- Qualified performing artists who meet several criteria. These include working for at least two employers, having arts-related business expenses over 10% of their arts income, and having an adjusted gross income of $16,000 or less before the deduction.
- Fee-basis state or local government officials who are compensated partly or entirely on a fee basis. They can deduct expenses incurred while performing their duties.
- Employees with impairment-related work expenses. These are costs for attendant care or other services at the workplace that are necessary for the employee to be able to work.
State-Level Deductions for Employee Expenses
The TCJA’s changes affected federal taxes, but the impact on state taxes varies. Not all states conform to the federal tax code, meaning some did not adopt the federal elimination of the unreimbursed employee expense deduction.
Several states, including California, New York, Pennsylvania, Alabama, Arkansas, Hawaii, and Minnesota, continue to allow W-2 employees to deduct these job costs on their state income tax returns. This means an expense may be deductible on your state return even if it is not on your federal return.
The rules and limitations for this deduction differ by state. Some states may follow the old federal rule with a 2% of AGI floor, while others have different calculations. Employees should consult the guidance and tax forms from their state’s department of revenue.
Employer Reimbursement Plans
Since the federal deduction is unavailable for most employees, the main way to handle job-related expenses is through an employer reimbursement plan. These plans fall into two categories, accountable and non-accountable, with different tax consequences for the employee. An accountable plan offers the most tax-favorable outcome.
For a plan to be considered “accountable” by the IRS, it must meet three requirements. The expenses must have a business connection, the employee must account for them to the employer with documentation like receipts, and the employee must return any excess reimbursement.
When all these conditions are met, the reimbursements are not considered taxable income. They are also not included in the employee’s wages on their Form W-2.
If a plan fails to meet one or more of these requirements, such as providing a flat allowance with no documentation, it is a non-accountable plan. Under these plans, all reimbursements are treated as taxable wages. This means the amounts are added to the employee’s income on their W-2 and are subject to income, Social Security, and Medicare taxes.
How to Claim the Deduction If You Qualify
If you qualify to deduct unreimbursed job expenses, you must use Form 2106, Employee Business Expenses. This form is used to calculate the total amount of your deductible expenses.
On Form 2106, you will detail costs like vehicle expenses, travel, and other job-related purchases. You will enter your total expenses and subtract any non-taxable reimbursements received from your employer. The result from Form 2106 is your total deductible employee business expense.
This final figure is transferred to Schedule 1 of Form 1040 as an adjustment to income. This is an “above-the-line” deduction, meaning you do not need to itemize to claim it. An exception exists for employees with impairment-related work expenses, which are taken as an itemized deduction on Schedule A after being calculated on Form 2106.