Tax Issues For Employees        

In reviewing our newsletter articles over the past year or so, we realized that the vast majority of them are focused on business owners and the self-employed.  


However, we also have quite a few clients who earn most of their income as employees and this article is geared toward assisting you in understanding and taking advantage of the tax saving opportunities available to you.  

...commuting expenses are not deductible


Auto Expenses

Most of our clients probably know by now that commuting expenses are not deductible (other than commuting to a temporary job location), but if you are required to do any other type of business-related auto travel, your travel most definitely is subject to a deduction to the extent that it is not reimbursed by your employer.  The most popular method of deducting auto travel is by simply multiplying your total job-related miles by the standard IRS mileage rate (54 cents per mile in 2016). 

Unreimbursed auto expenses are deducted on Schedule A of your 1040 as miscellaneous itemized deductions but only to the extent that they exceed 2% of your adjusted gross income.  Since you are subject to this limitation, it can be advantageous to work out a deal with your employer if you have significant job-related expenses whereby your salary is reduced by the amount of expenses each month.

For example, lets assume your employer requires you to drive on average 300 miles per month.  That would work out to a deduction of $162.00 per month (in 2016) or an annual deduction on your tax return of $1944.  However, if you have an adjusted gross income of $100,000, you would not be able to deduct any auto expenses (assuming you have no other unreimbursed business costs) because they would not exceed 2% of your AGI ($100,000 x 2% = $2000). 

However, using the same scenario, you could ask your employer to simply reduce your salary by $160 per month and reimburse your mileage up to the same amount each month.  The end result is that your employer is still giving you the same amount of money to perform your duties, but your annual salary would be $1920 lower which would save you $538 if you're in the 28% tax bracket.

If you own or lease a very expensive vehicle, it may be in your best interest to forego the mileage allowance and use your actual expenses for depreciation, gasoline, lease payments, repairs, etc.  You will probably want to consult with our office before taking this option however since depreciation is typically limited for luxury autos.  Please call us for more details.

Meals and Entertainment

Like the mileage deduction and all other unreimbursed business expenses, your deduction for business meals and entertainment is subject to the 2% of AGI limitation.  You are also only entitled to deduct 50% of business related meals.  Excessive T&E expenses can be a red flag on your tax return for an audit, so we always advise our clients to document carefully on the restaurant receipt what the business meeting was about and who was in attendance.


All unreimbursed "overnight" travel costs (hotels, meals, laundry, airfare, auto rental, etc) are deductible on Schedule A.  Meals, of course are deductible only at 50% as discussed above, but when traveling overnight, you may also ignore your actual "incidental" expenses (meals, laundry, tips, etc) and deduct the IRS's allowed per diem rate.  

The standard per diem rate is currently $57, but can go higher for high cost cities.  If you are a budget conscious traveler (and you likely are if you are paying for it out of your own pocket), the per diem rate may actually be a much better option for maximizing your deduction.

Home Office

Quite frankly, most employees are not going to qualify for a home office deduction simply because they already have a desk at their employer's office.  However, for those employees who are required to conduct administrative functions at home, you can qualify for the home office deduction if you meet the following conditions:

1)  you exclusively and regularly use the home office to conduct administrative or management activities

2)  you have no other location available to conduct those activities, and

3)  the home office is for the employer's convenience.

If you are an employee who performs most of your job duties outside of your home, but are required to perform administrative functions at home, you may want to consider taking a home office deduction.  The deduction is generally figured on a percentage basis.  For example, if your home office is 300 square feet and your home is 1800 square feet, you could take 16.7% (300/1800) of your home expenses (utilities, rent, etc) as a home office deduction.  

One caveat, however is that if you take a home office deduction on part of your personal residence, you may lose a portion of your gain exclusion when you sell your residence.  Please consult with our office if you are considering taking this deduction.

Other Business Expenses

Many other business expenses are deductible on Schedule A of your annual tax return.  A few of them are outlined below to assist you in remembering the various expenses when tax time arrives:

Office supplies
Safety equipment
Protective clothing
Trade publications
Office decoration
Union and professional dues
Computer equipment
Business cards
Malpractice insurance
Continuing education
Job search

Company Sponsored Benefit Plans

We generally advise our clients to take advantage of any employer-sponsored plan they are offered since most will save the employee taxes.  For example, 401(k) contributions will lower your taxable income and all earnings from your plan are tax-deferred until retirement.  

You can generally contribute much more through a company-sponsored 401(k) plan than you could with an IRA and if the company matches your contribution, the effective return you will receive by contributing will likely never be matched by an IRA contribution.

Another popular benefit plan for employees is a company cafeteria plan which allows you to set aside money during the year to pay for dependent care expenses and out-of-pocket medical and dental costs.  

The deduction (or credit in the case of dependent care expenses) you receive on your tax return is very limited for these types of expenses and a company-sponsored cafeteria plan will allow you to fully deduct all dependent care and medical costs.  However, you must be careful and not over-estimate your costs at the beginning of the plan year since any funds you set aside and don't use are forfeited.

The above text contains a few suggestions you may want to discuss with your employer.  Many of the tax-saving strategies we discussed (cafeteria plan, salary-reduction/auto expense reimbursement, etc) might cost your employer very little yet save you a substantial amount of money.  If you or your employer would like to discuss these items in more detail, we would be more than happy to assist you!



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