Small Business

Unreimbursed Employee Expenses: What are they?

Sep 6, 2022 3 min
What are Unreimbursed Employee Expenses

Unreimbursed Employee Expenses: What are they?

Reading Time: 3 minutes

To understand unreimbursed employee expenses, let’s look at a situation you’ve possibly been in when dealing with friends. 

So, your friend asked that you help purchase an item for them from the grocery store. 

They decide not to refund the money spent.

You can refer to the money spent as an unreimbursed expense.

What are unreimbursed employee expenses?

When your employee incurs business expenses that directly or indirectly benefit the company’s productivity but isn’t repaid, such expenditures are classified as unreimbursed employee expenses.

Business expenses could be traveling costs, professional subscriptions, purchase of work-related tools and supplies, etc.

Before 2018, employees who incurred work-related expenses could deduct them from their federal tax returns. In 2018, The Tax Cuts and Jobs Act (TCJA) eliminated the deduction for unreimbursed employee expenses for the tax years 2018 to 2025.

This means that any employee business expenses the employer doesn’t repay can no longer be deducted from their federal tax returns.

Unreimbursed employee expenses 101: Before 2018, unreimbursed expenses exceeding 2 percent of the adjusted gross income were claimed as a deduction.

What are the qualifications?

Unreimbursed employee expenses are job expenses that an employer doesn’t repay. 

The Internal Revenue Service (IRS)has an extensive list of work expenses that are not subject to reduction.

  • Educator expenses
  • Business travel
  • Daily commuting costs 
  • Tools and supplies used at work
  • Professional organization dues
  • Laboratory breakage fees
  • Licenses and regulatory fees
  • Professional society dues
  • Home offices used by employers
  • Passport fees for business trips, 
  • Medical examinations required by employers
  • Work clothes and uniforms

Who can claim a deduction?

Although the Tax Cuts and Jobs Act has discontinued deductions for tax years 2018-2025, there

are some exceptions. 

unreimbursed employee expenses - expense management software

You may still be able to deduct certain unreimbursed expenses if you fall into one of the categories below or have certain qualified educator expenses.

  • Armed Forces reservists.
  • Qualified performing artists.
  • Fee-basis state or local government officials.
  • Employees with impairment-related work expenses.
  • Eligible educator: This is a kindergarten to grade 12 teacher or aide in school for at least 900 hours during a school year.

How to claim unreimbursed employee expenses

If you fall under the qualified category of those eligible for unreimbursed business expenses reduction, you should file Form 2106 with your tax returns. 

Employee business expense form 2106
Photo Credit: IRS

The form requires that employees enter the total business expenses paid out of pocket, including any portion the employer reimbursed. 

Final thoughts – What should you do?

As a result of discontinued deductions by the TCJA on unreimbursed expenses, your employees may hesitate to spend out-of-pocket for business-related activities. 

This could lead to poor customer service delivery, business goodwill, and profitability loss.

To avoid a negative impact on your business, it is essential that you set up a clear reimbursement policy for expenses made by employees.

Unreimbursed Employee Expenses FAQs 

  • What are employee expenses?

These are expenses an employee incurs while performing their duties for a company. 

  • Are unreimbursed employee expenses deductible?

No, they are not. However, there are exceptions made by the IRS.