IRA Financial’s Adam Bergman Esq. explains why most employee expenses are not tax deductible and how self-employed individuals can receive federal tax deductions.
With so many people out of work and thousands of businesses closing their doors, life is very different this year. COVID-19 has changed the way we live, eat and work. Millions of people are now working from home, which comes with new challenges for many businesses. Unfortunately, employee expenses are not tax deductible for most people. However, there are steps you can take to recoup those expenses. Further, Mr. Bergman describes what self-employed individuals can do about their business expenses.
In general, if you are not self-employed or serve as an independent contractor, the IRS won’t let you write off those home-office expenses on your 2020 taxes. For tax years prior to 2018, the unreimbursed employee expenses that exceeded two percent of your adjusted gross income could be claimed as a deduction. However, thanks to the Tax Cuts and Jobs Act, those deductions were eliminated.
Before 2018, employees who incurred job-related expenses, such as travel expenses and job-specific expenses, were able to deduct itemized deductions on their federal tax returns. Unfortunately, the new tax reforms sounded a death knell for miscellaneous itemized deductions, including unreimbursed employee expenses for the tax years 2018 to 2025.
It’s not uncommon now for employers to reimburse employee expenses that are incurred wholly, exclusively and necessarily in the performance of their duties. It is common for employees to use their own money to cover work-related expenses such as traveling costs, professional subscriptions, home computer and internet service, buying work-related tools and supplies, etc.
The IRS classifies employee expenses as ordinary and necessary expenses. Ordinary expenses are those that are common and accepted in your trade, business, or profession while necessary expenses are appropriate and helpful to your business. An expense doesn’t have to be required to be considered necessary.
Some examples of these expenses are: educator expenses, job-related legal fees, laboratory breakage fees, licenses and regulatory fees, professional society dues, home office used by employers, passport fees for business trips, medical examinations required by employers, tools and supplies used at work, work clothes and uniforms, work-related education, etc.
Depending in what state you live, you may get a tax break. Alabama, Arkansas, California, Hawaii, Minnesota, New York and Pennsylvania all provide a deduction for unreimbursed employee business expenses on their respective state income tax returns.
What About the Self-Employed?
If you are self-employed or work as an independent contractor, you can receive a federal tax deduction on the expenses incurred by the business. Of course, there are certain restrictions, but here is a good list of expenses you be able to deduct:
- Office supplies
- Continuing Education
- Phone and Internet
- Business Travel and Meals
- Home Office
Generally, you can deduct 50% of the cost of a meal if the meal was business-related, was not “lavish or extravagant,” you or your employee were at the meal, one of your business contacts got the meal, and the cost of the meal didn’t include a charge for entertainment.
If you use a car for your job, you can deduct a little over $1 for every two miles you put on your car for business purposes.
How it works: At the end of the year, tally the number of miles you drove in the car for business, multiply that by the IRS’ standard mileage rate — 57.5 cents per mile in 2020 — and deduct the total. Be sure to keep a mileage log; you’ll need it if you’re audited.
What else you can do: Deduct your “actual car expenses” instead. These include depreciation, licenses, gas, oil, tolls, parking fees, garage rent, insurance, lease payments, registration fees, repairs and tires. You may have to do this anyway if you’re using five or more cars in your business. If you’re leasing your car, check out IRS Publication 463 for rules about the amount of lease payments you can deduct.
No matter your expense, it adds up and you are entitled to the biggest deduction you can claim! So be sure to keep accurate records of your employee expenses.
Another Way to Receive a Tax Deduction
The most common way that anyone can get a tax deduction is not employee expenses, but retirement saving. If your employer offers a 401(k) plan, contributions can be made pretax. Any funds put into the plan this way are not taxable. Therefore, if you earn $50,000 and put $8,000 in a pretax 401(k), you are only taxed on $42,000 for the year.
Of course, if you are self-employed, it’s up to you to open a plan for yourself. If you own a business with full-time employees, you can look at a traditional 401(k) or Safe Harbor 401(k) plan. If you want to make things a little simpler and cost-effective, the SIMPLE and SEP IRA are also options for you.
If you work for yourself or have a business with no employees (other than a spouse or business partner) you can open a Solo 401(k). There is no doubt that this is the best plan for the self-employed.
There are ways to save on taxes during these difficult times, especially if you are now self-employed. However, most normal employee expenses are not tax deductible. You should speak with your employer before the end of the year to see what you may be reimbursed for. You could receive some money back!
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