Work just got more expensive for some employees, thanks to the Tax Cuts and Jobs Act passed in December of 2017. Under the previous law, employees could deduct job-related expenses that added up to more than 2% of their income as miscellaneous itemized deductions.
These expenses include any out-of-pocket expenses related to work that aren’t reimbursed by the employer. This includes uniforms, continuing education, professional licenses, research expenses, home office expenses and mileage. Sales professionals typically have substantial travel expenses, and may also spend a fair sum on meals and entertainment in pursuit of deals.
But under the new law, the deduction for miscellaneous itemized deductions goes away through 2025. This means nurses can’t deduct their scrubs, professors can’t deduct their research expenses, construction workers can’t deduct their tools and doctors can’t deduct their medical licenses. This was also the line for deducting investment expenses, tax preparation fees and union dues, so those deductions are gone too.
An alternative under the new law is for employers to establish accountable plans for their employees. Under an accountable plan, employees provide documentation of their expenses, and employers reimburse them for those expenses. Both sides win with an accountable plan: the employer gets the deduction for the reimbursed expenses, and the reimbursement to the employee isn’t included in their taxable income. Depending on the situation, an employee might come out ahead financially by agreeing to a lower salary in exchange for reimbursement under an accountable plan.
Another option, which carries some risk and which won’t be appropriate for most employees is to change status from employee to independent contractor. As an independent contractor, a worker can deduct all work-related expenses on Schedule C. However, independent contractors do not generally receive any benefits from their employer. The IRS and the Department of Labor may dispute this classification, which can result in penalties and additional taxes for the employer.
Are you an employer considering an accountable plan? Are you an employee with substantial work-related expenses? Call our office today and we’ll help you find the best way forward under the new law!
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