Employee Business Tax Deduction versus Self-Employed Expenses
When we say an employee business tax deduction we mean it to refer to an employee business expense, such as necessary expenses. We will point out the difference between how to treat an employee tax expense versus a 1099 contractor expense. For starters, one major difference between being an employee and being self-employed is how you deduct the expenses you incur related to your work. A self-employed individual is able to deduct expenses on his or her business schedule. However, an employee is generally limited to deducting them as itemized deductions.
Itemized Deduction
That means self-employed individuals benefit by deducting their expenses directly on their business schedule. This can then result in a reportable business loss when the expenses exceed their business income.
On the other hand, an employee can only deduct employee business expenses on an IRS Form 2106. Therefore, the total from the Form 2106 is deducted as a miscellaneous itemized deduction. Thus, in order to claim employee business expenses, the employee must itemize their deductions and cannot utilize the standard deduction.
Two Percent of AGI Limitation
In addition, the employee’s business expenses fall into a category that is reduced by 2% of the employee’s adjusted gross income (AGI). This means that if the employee’s AGI for the year is $100,000, for example, only expenses that relate to the job, in combination with other miscellaneous expenses in that category, in excess of $2,000 (2% of $100,000) are deductible.
Alternative Minimum Tax Limitation
On top of that, miscellaneous itemized deductions are not deductible at all under the alternative minimum tax (AMT). Thus, if an individual is subject to the AMT, he or she may gain little or no tax benefit from employee business expenses.
AMT Basics
AMT taxes specific types of income. Under the regular tax system they would be tax-free and not allow for some of the typical tax breaks. Basically, the entire amount you calculate under the IRS AMT rules is your AMT liability. However, for more detail, keep reading below.
In the past the AMT rate 39.6% maximum rate, now it is 28%. However, the regular tax maximum rate is 37%, and is applicable for 2018-2025 under tax reform.
We know that in 2018 the rules change and now the 28% AMT rate goes into affect when income goes above $191,500 for married joint-filing couples and $95,750 for individuals and other tax classes.
Tax reform greatly raises the exemption amounts for 2018-2025. Therefore, the IRS permits an AMT exemption. This exemption is now a deduction when calculating AMT income. Of course, this exemption phases out when your AMT income surpasses the relevant limits. However, tax reform does increase those thresholds for 2018-2025 significantly.
So when your AMT bill goes over and above your regular liability, be aware that you will owe the great AMT amount. Note that the taxpayers responsibility for AMT is the variance between the calculation of tax under the the IRS rules for AMT and the lower standard tax amount.
Ordinary and Necessary Requirement
What’s the difference between ordinary and necessary expenses, you ask yourself? An ordinary expense is common and acceptable according to the industry, trade or business you are in. Whereas a necessary expense is appropriate, helpful, for your business. Ordinary and necessary expenses never include personal expenses. Although not all-inclusive, examples of permissible expenses include the costs of tools, education that relates to your job, job-seeking expenses, business travel away from home, and business use of a car and home. Also, never include expenses that calculate the cost of goods sold or capital expenses.
Do you have questions about an employee business tax deduction?
If you have questions related to employee business tax deduction, expenses and strategies to deduct them, such as bunching deductions, taking advantage of fast write-off provisions of the tax law, or working out a tax-favored reimbursement plan with your employer, please give this office a call at 781-849-7200 or email us at contactus@worthtax.com and ask for me, Alex Franch, BS EA. With tax season quickly approaching in a little over a month, we encourage you to be proactive and set up your appointment today! We are also offering a variety of client discounts to save you money.
Alex Franch, BS EA
Alex is a Tax Specialist and Partner at Joseph Cahill & Associates / WorthTax. He has a diverse background including a Bachelor of Science from Boston College in Mathematics and extensive military service. Alex is an Enrolled Agent and has a decade of tax preparation experience. He is passionate about serving businesses with tax and financial planning.
Sources and Resources
- Form 1099 Miscellaneous Filing Deadline
- IRS Tax Guidance: S Corporation Stockholder, Reasonable Compensation
- 12 Common Tax Problems to Avoid
- Tax Reform is Confusing Part 2
- Tax Reform is Confusing! Here is a Side by Side Comparison Part 1
- Learn About This Year-End Tax Strategy
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- 529 Plan: Higher Education, Learning the Hard Way
- Minimizing Tax on Social Security Benefits
- Employee Business Expenses: Tax Reform Suspends Tax Deduction
- Preparing Taxes for 2018 and Beyond
