I am a commissioned employee who provides all my own supplies & tools. Can I write-off these business expenses?

The Effect Of The New Tax Law On Employee Expenses

The passing of the new tax law in December 2017 had a significant effect on people who do not get reimbursed for the items they purchase for work. Prior to the new law, employees were able to deduct, as miscellaneous expenses subject to the 2% adjusted gross income floor, unreimbursed expenses they incurred for work if they itemized their deductions on their personal tax return. Unfortunately, this is no longer the case. 

This means that as a commission employee, you can no longer deduct expenses for the tools and products you purchase to do your job. If you are one of the people affected by not being able to deduct expenses you incur as an employee, you may want to have a conversation with your employer about maybe reimbursing you a portion of what you spend. 

Self-employed or small business owners are still able to deduct those costs as business expenses. That includes booth renters, salon suite owners, independent mobile stylists, and traditional salon owners. The new law only eliminated the deduction for work-related expenses for traditional employees.

The Changes To The Employee Expense Deduction Law May Not Be A Bad Thing If Your Expenses Were Not Substantial?

Although the elimination of miscellaneous deductions, which includes employee expenses, is unfortunate for some people, it’s not all bad if you consider that the standard deduction for 2018 and beyond nearly doubled for all of us. 

Most of us will find that itemizing our deductions is no longer beneficial because of the larger standard deductions. For 2020, the standard deduction is $12,200 compared to $6,350 in 2017. Therefore, your unreimbursed expenses and other itemized deductions would have to exceed the standard deduction amount of $12,200 to make itemizing your deductions beneficial. 

Most people will find it’s not beneficial to itemize their deductions because the new, larger standard deduction provides more benefit. If you’re not itemizing deductions, it no longer matters whether you can deduct unreimbursed job expenses as miscellaneous itemized deductions.

What You Should do if Your unreimbursed job expenses are substantial?

If you have a lot of unreimbursed job expenses, the first thing you may want to do is see if your employer will cover the cost. This option may not be feasible because most salon owners are themselves trying to make ends meet. That said, some of my salon owner clients cover all of or part of the cost of their employees’ expenses. This by no means is the norm, so please don’t look down on your employer if they do not reimburse a portion of your expenses.

Years ago, I worked at a salon where I was able to purchase tools from a salon approved vendor at no upfront cost. My employer deducted a small amount from my paycheck until the entire amount was paid off. 

How Your Employer Should Handle Reimbursements To Avoid The Employee From Paying Tax on Reimbursed Amounts

For employers that decide to reimburse their employee’s expenses, it’s important that they make sure they use an “accountable plan” that meets all IRS requirements. Using an accountable plan allows the employer to deduct reimbursed expenses as an expense to them, while not including the reimbursed amount as part of the employee’s gross wages on their W-2. If an accountable plan is not used, all reimbursements must be included in the employee’s paycheck as part of gross income.

Another option is to see if you qualify to work as an independent contractor. If you have a large number of unreimbursed job expenses, and you meet other independent contractor guidelines set by the IRS, it might be more beneficial to become a booth renter and be classified as an independent contractor. Just be sure you understand the requirements and the tax and accounting implications of becoming a business owner. Speak with a CPA if you are thinking about moving from employee to independent contractor status. 

Feel free to reach out to me if you have any questions or if you need tax or accounting help.  

By Desarie Anderson, CPA to the Hair Industry.

desarie@andersonaccounting3.com

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