One thing's for sure about The Tax Cuts and Jobs Act (tax reform): it has brought about a lot of changes. So many that for busy freelancers, it’s hard to keep up with all the nuances. That's especially true if you also maintain a 9-to-5 job.
That’s why the elimination of tax deductions for employee business expenses may catch you off guard when you file your taxes this year. Here is what you need to know:
Who is affected?
If you received a W-2 this tax year and you have unreimbursed business expenses related to your employment, then you should take note of the information below. And if you employ individuals and issue W-2s, you should pass this information along to them as well.
Essentially, employees can no longer reduce their taxable income by deducting common business expenses — at least until 2025, when this TCJA provision ends. Under the old tax rules, employees who itemized their deductions (as opposed to claiming the standard deduction) could claim business expenses if those expenses exceeded at least 2 percent of their adjusted gross income (AGI).
Prior to 2018, common eligible business expense deductions included:
Education expenses related to your work as an employee
Travel expenses related to your work as an employee
Passport fees for business trips
Professional society dues
Professional license fees
Subscriptions to professional journals and trade publications
A home office used regularly and exclusively in your work as an employee and for the convenience of your employer
Depreciation of a computer that your employer requires you to use
Tools and supplies used in your work as an employee
Union dues and expenses
Work clothes and uniforms required for your work (and not suitable for everyday use)
Legal fees and loan losses related to your work as an employee
Job search expenses to seek new employment in your current profession
Is reimbursement possible?
Yes, but likely not this tax season. You can ask your employer about setting up an accountable reimbursement plan — which allows you to be reimbursed for expenses as long as these three IRS-instituted rules are met:
The expenses must be related to your business purpose as an employee.
You must adequately account for the expenses to your employer for these expenses within a reasonable time — providing details such as the date, time, and place they were incurred, the amount you spent, and the business purpose of the expense.
You must return any excess reimbursements within a reasonable and specific period of time as determined by your employer.
If you have a significant amount of employment-related expenses and you do not already have such an arrangement in place, now would be the ideal time to talk to your employer about creating an accountable plan for the current tax year and beyond.
Does this change my freelance business deductions?
No. This change only applies to expenses related to W-2 employment situations. Non-wage earning self-employed individuals can deduct eligible business expenses related to their work on Schedule C or Schedule F of their tax returns.
If you have both a W-2 and freelance income, you can still claim the expenses related to your freelance business.
Know where you stand
Take time to learn the new tax rules before you file this tax season. For freelancers with W-2 income to claim and significant business-related expenses that they are hoping to deduct, the elimination of employee business expense deductions from the tax code is unfortunate.
However, it’s worth keeping in mind that the increased standard deduction (now at $12,000 for individual filers) may ease some of your tax pain. That being said, it is definitely worth talking to a professional to make sure you know exactly where your tax obligation stands in light of the new laws.
Jonathan Medows is a New York City based CPA who specializes in taxes and business issues for freelancers and self-employed individuals across the country. He offers a free consultation to members of Freelancer’s Union and a monthly email newsletter covering tax, accounting and business issues to freelancers on his website — which also features a blog, how-to articles, and a comprehensive freelance tax guide.
Jonathan is happy to provide an initial consultation to freelancers. To qualify for a free consultation you must be a member of the Freelancers Union and mention this article upon contacting him. Please note that this offer is not available Mar.1 through April 18 and covers a general conversation about tax responsibilities of a freelancer and potential deductions. These meetings do not include review of self-prepared documents, review of self-prepared tax returns, or the review of the work of other preparers. The free meeting does not include the preparation or review of quantitative calculations of any sort. He is happy to provide such services but would need to charge an hourly rate for his time.