Get Employee Business Expenses

Eligible W-2 employees need to itemize to deduct work expenses. If you are an eligible W-2 employee, you can only deduct work expenses on your taxes if you decide to itemize your deductions.

All of your employees' wages are also considered fully deductible, including any bonuses and commissions, as long as the payments are deemed ordinary, reasonable, and for services rendered. This deduction can also apply to independent contractors; however, they must be classified correctly to avoid penalties.

Business Start-up Costs As a new business, you can generally deduct up to $5,000* of start-up expenses (e.g., salaries, marketing, market analysis, etc.) and $5,000* of organizational costs (e.g., legal services, fees paid to the state to incorporate).

You can fully deduct small tools with a useful life of less than one year. Deduct them the year you buy them. However, if the tools have a useful life of more than one year, you must depreciate them.

Employee business expenses can be deducted as an adjustment to income only for specific employment categories and eligible educators. Taxpayers can no longer claim unreimbursed employee expenses as miscellaneous itemized deductions, unless they are a qualified employee or an eligible educator.

What is Substantiation? IRS Publication 15, (Circular E), Employer's Tax Guide, states that the employee must substantiate their business expenses by providing the employer with evidence of the amount, time, place, and business purpose of the expense within a reasonable period of time after they are paid or incurred.

However, seven states took a different tack, ing to Nathan Rigney, lead tax research analyst at H&R Block. Alabama, Arkansas, California, Hawaii, Minnesota, New York and Pennsylvania all provide a deduction for unreimbursed employee business expenses on their respective state income tax returns, he said.

Business expenses are deductions from taxable income. The total of business expenses is subtracted from revenue to arrive at the business' total amount of taxable income. The IRS defines allowable business deductions as costs that are "ordinary and necessary" for the industry in which the business operates.