Can I deduct business expenses if I am a W2 employee?

Technically, a W2 employee can deduct business expenses, but you have a couple of
hurdles to get over. You must:

  • Itemize (Schedule A), and
  • Have employee and other expenses that, combined, exceed 2% of your AGI.

For instance, if your AGI is $500k, you can deduct these expenses only after you are out of pocket more than $10k ($500k x .02).

Example: If your AGI is $500k and you drive 20,000 work-related miles in one year (commuting does not count) and the IRS allowable mileage rate is 54 cents, your deduction would be $800, as follows: [(20000 x .54) = $10,800 – $10,000] = $800. If you have other business expenses, they would be added, also.

Employee business expenses are reported on IRS Form 2106. You can also include expenses related to the “production of income” when calculating your 2% “haircut”. These include investment expenses, tax preparation costs, and certain legal costs. Of course, if you don’t have enough other expenses to itemize, you won’t get the deduction. A common example is taxpayers who live in a state with no income taxes and who have paid-off mortgages.

If your employer does not reimburse you for your business expenses, it’s possibly because she does not know about accountable plans. Why not ask?

What is an accountable plan?

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