Unreimbursed employee expenses: 2025 guide (what's deductible + how to comply)

Unreimbursed employee expenses have become increasingly complex since the Tax Cuts and Jobs Act changed federal rules. The 2025 legislative updates permanently altered how finance leaders approach corporate expense policies. This guide explains current regulations and provides strategies for managing workplace expenses while minimizing organizational risk.

Are unreimbursed employee expenses deductible?

No. Unreimbursed employee expenses are not tax-deductible for most W-2 employees following permanent changes enacted in 2025.

For most W-2 employees, unreimbursed work expenses are no longer deductible on federal tax returns. The Tax Cuts and Jobs Act suspended these deductions from 2018 through 2025. Recent legislation made this suspension permanent for most workers.

This regulatory change fundamentally altered the economics of employee-borne work expenses and has significant implications for finance teams designing compensation and reimbursement policies.

How did federal tax treatment change in 2025?

Before 2018, employees could claim unreimbursed expenses as itemized deductions on Schedule A, subject to a 2% threshold of their adjusted gross income.

This 2% AGI floor created a significant barrier. For example, an employee earning $50,000 could only deduct expenses exceeding $1,000. Additionally, employees had to itemize their deductions rather than taking the standard deduction. This made claiming these deductions burdensome for many workers.

This tax treatment provided some offset for employees who incurred work-related costs. However, the 2% threshold and itemization requirement meant many employees received little to no actual tax benefit from their unreimbursed work expenses.

Critical impacts of the 2025 changes

Current federal tax law eliminates this relief for the vast majority of employees, creating several critical impacts:

• Workers now absorb the full after-tax cost of any unreimbursed business expenses
• Millions of American workers are affected by this change
• Organizations face new competitive implications in talent markets
• Finance teams must navigate these tax law changes while ensuring proper compliance
• Employee satisfaction becomes directly tied to reimbursement policy decisions

The permanent nature of these changes means finance teams should design reimbursement policies based on organizational strategy, employee retention, legal compliance, and competitive positioning rather than tax considerations.

Which states still allow deductions for unreimbursed employee expenses?

Several states have not conformed to federal tax reform and continue to allow itemized deductions for unreimbursed employee expenses. Finance teams must understand these jurisdictional differences when designing policies and supporting employees in different locations.

Strategic implications for multi-state operations

This eight-state divergence creates significant complexity in compliance. Organizations must either:

1. Maintain different expense policies by state (creates administrative burden and potential fairness concerns)
2. Implement comprehensive reimbursement policies (eliminates the need for state-by-state differentiation)

Most finance leaders find that comprehensive reimbursement policies powered by automated expense management provide better employee experience and simpler administration.

What are unreimbursed employee expenses?

Unreimbursed employee expenses are work-related costs that employees pay from their own pockets without receiving reimbursement from their employers. These out-of-pocket expenses create significant implications for both employee satisfaction and organizational financial management.

Finance leaders must understand these expenses for designing effective reimbursement policies that balance cost control, employee retention, legal compliance, and accurate financial reporting.

Hidden risks when employees absorb work costs

When employees absorb work-related costs without reimbursement, organizations face hidden risks:

• Decreased employee morale: Workers bearing costs subsidize business operations with after-tax income
• Potential legal liability: States with mandatory reimbursement laws create compliance exposure
• Inaccurate expense reporting: Untracked costs distort actual project expenses and budgets
• Competitive disadvantage: Talent acquisition suffers against companies with better reimbursement policies

Finance teams must recognize that unreimbursed expenses represent a transfer of business costs to employees.

What types of unreimbursed employee expenses exist?

Common categories of unreimbursed employee expenses that finance teams encounter:

These expense categories represent significant areas where finance teams can improve policy coverage to enhance employee satisfaction and gain more accurate visibility into actual organizational spending patterns.

Work-from-home expenses: What qualifies?

The shift to remote work during and after the COVID-19 pandemic created significant confusion about which home office expenses qualify for reimbursement or deduction. Finance teams should provide clear guidance to employees on these common scenarios.

Home office equipment and furniture

Qualifies:

• Desks, ergonomic chairs, monitors, keyboards, and other equipment purchased specifically for a dedicated home office space

May qualify with documentation:

• Standing desks, lighting fixtures, filing cabinets if exclusively for business use

Does not qualify:

• Furniture suitable for general household use
• Decorative items
• Equipment that serves dual personal/business purposes

Technology and connectivity

Qualifies:

• Business-specific software subscriptions
• Upgraded internet service required for work (incremental cost above personal use)
• Dedicated business phone lines

Partial qualification:

• Internet service where the employee can document the business-use percentage

Does not qualify:

• Personal streaming services
• General household WiFi with no documented business allocation
• Personal device upgrades

COVID-19-specific considerations

Qualifies:

• Personal protective equipment (PPE) required by the employer
• COVID-19 testing required for business travel or on-site work
• Sanitation supplies for a dedicated home office

Does not qualify:

• General household sanitizers
• Masks for personal use
• Home air purifiers
• Medical expenses

Utilities and home maintenance

Partial qualification possible:

• Electric, heating, and cooling costs allocated to a dedicated home office space (must meet IRS simplified or regular method requirements)

Does not qualify:

• General home maintenance
• Landscaping
• Homeowner's insurance
• Rent/mortgage payments (even for remote workers)

Critical restriction for W-2 employees

While these categories represent common work-from-home expenses, most W-2 employees cannot deduct unreimbursed home office expenses under current federal law. The home office deduction suspension that began in 2018 remains in effect. Only self-employed individuals and specific eligible worker categories can claim these deductions.

Finance team action items

1. Develop clear WFH reimbursement policies that specify which expenses the organization will cover
2. Communicate that employees should not expect tax deductions for unreimbursed home office costs
3. Consider offering stipends or direct reimbursement for essential WFH equipment to support remote workers
4. Document business-purpose requirements for any WFH reimbursements to maintain accountable plan status
5. Regularly review and update policies as remote work arrangements evolve post-pandemic

Organizations that reimburse WFH expenses through accountable plans provide tax-advantaged benefits to employees while gaining accurate visibility into actual remote work costs. This approach proves more effective than leaving employees to absorb costs with no tax relief available.

Why should finance teams eliminate unreimbursed employee expenses?

The permanent elimination of tax deductibility creates compelling business reasons for organizations to implement comprehensive reimbursement policies rather than relying on employees to absorb work-related costs.

Employee retention and competitive positioning

Employees who regularly incur unreimbursed work expenses effectively subsidize business operations with after-tax personal income.

The real cost to employees: A $5,000 annual unreimbursed expense burden requires $6,500 to $7,000 in pre-tax earnings for an employee in the 25-30% tax bracket.

Organizations competing for talent against companies with comprehensive reimbursement policies face several disadvantages:

• Reduced real compensation value: Out-of-pocket work costs lower the actual value of total compensation packages
• Sophisticated candidate analysis: Informed candidates factor in expected unreimbursed expenses when evaluating offers
• Retention risk: Employees bearing significant work costs are more likely to seek opportunities with better reimbursement policies
• Competitive positioning: Reimbursement policy should be considered a component of compensation strategy

Legal and compliance risks

Several states require employers to reimburse work-related expenses, regardless of their federal tax treatment. California, Illinois, Massachusetts, and other jurisdictions mandate employer reimbursement for necessary business expenses. Failure to comply creates significant legal exposure:

• Wage and hour claims: Employees can file claims for unreimbursed expenses under state labor laws
• Class action liability: Non-compliance across employee populations creates exposure to class action lawsuits
• Penalties and fines: State enforcement agencies can assess penalties for failure to reimburse required expenses
• Attorney fee obligations: Many state laws require employers to reimburse employees for their attorney fees in successful claims

Finance teams managing multi-state operations must ensure automated policy enforcement addresses these varying state requirements.

Accurate financial reporting and cost allocation

Unreimbursed employee expenses create hidden distortions in financial reporting. When employees absorb project costs, departmental budgets, client profitability analysis, and project cost tracking become inaccurate. Finance teams lose visibility into actual operational costs.

Key reporting distortions

• Budget inaccuracy: Departmental spending appears lower than actual costs when employees bear expenses
• Project cost understatement: True project costs remain hidden in employees' personal finances
• Client profitability errors: Margin calculations become unreliable without complete expense visibility
• Resource allocation failures: Strategic decisions lack an accurate cost data foundation

For organizations that track costs by client, project, or department, employee-borne expenses represent unaccounted costs that distort performance metrics. Comprehensive reimbursement policies coupled with proper expense categorization provide accurate visibility.

Internal control and fraud prevention

When employees use personal funds for business expenses, then seek reimbursement through informal processes, internal control weaknesses emerge. Finance teams face several challenges:

• Lack of real-time policy enforcement: Violations are caught retroactively rather than prevented proactively
• Delayed expense reporting: Time lag between expense incurrence and submission complicates verification and documentation
• Inadequate audit trails: Inconsistent documentation standards make it challenging to track expenses accurately and verify business purpose
• Increased fraud risk: Manual processes with inconsistent approval workflows create opportunities for fraudulent submissions

Formal reimbursement programs with automated policy enforcement strengthen internal controls. Real-time policy checks prevent non-compliant spending before it occurs—better than catching violations during retrospective review.

How do accountable plans provide tax-advantaged reimbursement?

Rather than allowing employees to incur unreimbursed expenses and navigate complex tax filing, finance teams should implement accountable plans that provide tax-advantaged reimbursement for both the organization and employees.

Advantages of accountable plans

Properly structured, accountable plans provide significant benefits that exceed allowing unreimbursed expenses or providing taxable allowances:

Tax Efficiency

• Reimbursements under accountable plans are tax-free to employees
• They are deductible by the organization
• Salary increases or taxable allowances create employment tax obligations for both parties
• For organizations reimbursing significant expense volumes, the employment tax savings can be substantial

Accurate Cost Tracking

• Accountable plans require documentation of business purpose
• This enables precise allocation of costs to departments, projects, clients, or cost centers
• This visibility supports better financial management and decision-making

Employee Satisfaction

• Tax-free reimbursements provide more value to employees than equivalent taxable compensation increases
• An employee receiving $5,000 in accountable plan reimbursements retains the full value
• A $5,000 salary increase nets only $3,500 to $4,000 after taxes

Simplified Tax Filing

• Employees receiving accountable plan reimbursements don't need to track expenses for tax purposes
• They don't need to file complex forms or itemize deductions
• This simplification improves employee experience and reduces payroll administration complexity

Critical IRS requirement: Employees must seek reimbursement

Important compliance note

If an employee is entitled to reimbursement under an employer's accountable plan but fails to follow the employer's procedure to seek reimbursement, the IRS does not allow them to claim the expense as a deduction on their personal taxes.

This means that even if an employee incurs a legitimate business expense that would qualify for reimbursement, choosing not to submit it through the proper channels eliminates any potential tax benefit.

Finance teams should:

1. Clearly communicate reimbursement procedures to all employees
2. Make submission processes as simple and accessible as possible
3. Train employees on the importance of following proper reimbursement channels
4. Emphasize that failing to seek available reimbursement means forfeiting any tax relief

This requirement reinforces why comprehensive, easy-to-use reimbursement systems are essential—they ensure employees receive the full benefit of accountable plans while maintaining IRS compliance.

How should finance teams implement accountable plans?

Finance leaders implementing or enhancing accountable plans should address several key considerations:

Policy documentation

Develop written policies that define:

• Eligible expenses
• Documentation requirements
• Substantiation procedures
• Excess reimbursement return processes

Clear policies ensure consistent treatment and compliance.

Technology infrastructure

Implement expense management platforms like Emburse that:

• Capture required substantiation at submission
• Enforce policy rules automatically
• Integrate with accounting systems for proper cost allocation

Manual accountable plan administration becomes impractical at scale.

Employee education

Train employees on:

• Policy requirements
• Documentation standards
• Submission procedures

Clear communication prevents non-compliant submissions and reduces the finance team's workload in reviewing and correcting expense reports.

Periodic review

Regularly review reimbursement patterns to:

• Ensure accuracy and efficiency
• Identify policy gaps
• Ensure business purpose requirements are met
• Verify proper documentation

Proactive review prevents compliance issues and identifies opportunities for policy refinement.

CTA: See how Emburse automates reimbursement compliance →

Who can still deduct unreimbursed employee expenses through 2025?

While most W-2 employees can't deduct out-of-pocket work expenses anymore, the following workers can still write off certain unreimbursed costs required for their job:

Armed forces reservists

Members of the U.S. Army, Navy, Marine Corps, Air Force, or Coast Guard Reserve; Army National Guard; Air National Guard; and Reserve Corps of the Public Health Service can deduct certain reserve-related travel expenses.

Restrictions

• Only for travel more than 100 miles from home to perform reserve duties
• Limited to the regular federal per diem rate (for lodging, meals, and incidental expenses)
• Standard mileage rate (for car expenses), plus parking fees, ferry fees, and tolls

Organizations employing reservists should consider providing full reimbursement for reserve-related travel as an employee benefit and retention tool, particularly for skills-critical positions.

Qualified performing artists

If you're an actor, musician, or other type of performing artist, you can deduct unreimbursed job-related expenses if you satisfy all of the following requirements:

1. You were employed as a performing artist by at least two employers during the tax year
2. You received wages of $200 or more per employer from at least two of those employers
3. You had allowable work-related expenses connected to the performing arts that exceed 10% of your gross income from the performing arts
4. Your AGI is $16,000 or less before deducting work-related expenses

If you're married, you must file a joint return to deduct job-related expenses, unless you didn't live with your spouse at any point during the tax year.

Organizations in the entertainment, hospitality, and related industries that employ performers should develop policies that consider these tax rules and whether comprehensive reimbursement better serves both the organization and its employees.

Fee-basis government officials

You can deduct eligible employee expenses if you're employed by a state or local government and are compensated, in whole or in part, on a fee basis.

Government contractors and organizations working with fee-based officials should be aware of this exception and understand implications for engagement terms and expense handling.

Disabled employees with impairment-related work expenses

This category includes people with physical or mental disabilities. Impairment-related work expenses include:

• Cost of attendant care at your place of employment
• Other workplace-related expenses necessary to be able to work

Finance teams should recognize that comprehensive reimbursement of reasonable accommodations supports multiple goals: legal compliance under ADA and related laws, plus organizational commitment to inclusive employment practices.

Rather than forcing employees to navigate complex tax filing for partial relief, organizations should implement policies that fully reimburse necessary accommodation expenses.

K-12 Educators

Teachers, instructors, counselors, principals, and aides working at least 900 hours annually can deduct up to $300 (2023, 2024, and 2025 amount) of qualified expenses, which include ordinary and necessary expenses paid for:

• Professional development courses related to the curriculum or students they teach
• Books, supplies, equipment, and other materials used in the classroom

Note: Educators will continue to be allowed to deduct qualified expenses even after 2025 unlike any other employees.

While this exception continues beyond 2025, organizations employing educators—including corporate training departments and educational services companies—should consider whether organizational reimbursement programs better serve employee relations and demonstrate commitment to education quality.

What unreimbursed employee expenses are deductible through 2025?

Not every job-related expense paid by an employee described above is deductible. Only "ordinary and necessary" expenses can be deducted.

According to the IRS:

• An expense is ordinary if it's common and accepted in your trade, business, or profession
• An expense is necessary if it's appropriate and helpful to your business (doesn't have to be required)

Plus, even if an expense is "ordinary and necessary," there may be additional limitations on the amount you can deduct. And the costs can't be reimbursed by your employer.

Common deductible employee expenses (with limitations)

Additional restrictions: Even if you're a member of one of the listed groups, additional restrictions may apply. You still might not be able to deduct an "ordinary and necessary" job-related expense.

What does not qualify as a deductible business expense?

Even for the few groups of employees who still qualify for limited expense deductions—such as educators, reservists, or performing artists—the IRS disallows many everyday costs. Finance and HR leaders should understand these restrictions to prevent confusion during expense audits or tax season.

Personal and lifestyle expenses

Items that relate to an employee's personal life rather than business activity are not deductible:

• Childcare or eldercare costs
• Personal grooming or wellness services (gym memberships, spa treatments)
• Household expenses such as rent, mortgage payments, or groceries

Entertainment and meal costs

The IRS no longer allows deductions for entertainment-related spending. While some business meals remain partially deductible, any meal tied to an entertainment event (like a concert or sports game) is excluded unless the meal cost is clearly separated and directly business-related.

Fines, penalties, and fees

Any fines or penalties assessed against an employee cannot be deducted or reimbursed:

• Traffic or parking tickets
• Late payment fees
• Compliance or regulatory fines

Charitable contributions

Donations to charities or nonprofit organizations are personal contributions, not business expenses—even if made under a company's name or during business hours.

Commuting and personal travel

Commuting between home and a regular work location is a personal cost. Deductible travel must meet strict business-purpose criteria. Non-deductible travel includes:

• Daily commuting costs (gas, tolls, parking)
• Travel primarily for personal reasons
• Assignments lasting more than one year in the same location (classified as "indefinite" by the IRS)

Education and training

Only training that maintains or improves skills in an employee's current role may be deductible. The IRS disallows:

• Education that qualifies an employee for a new trade or profession
• Courses meeting minimum education requirements for a job

Clothing and uniform upkeep

Clothing suitable for general wear—even if required by the employer—does not qualify. Uniform cleaning or maintenance costs are only deductible if the uniform is not suitable for everyday use and is required for the job (e.g., safety gear).

Gift and entertainment limits

Employee or client gifts are limited to $25 per person per year for deductibility. Anything exceeding that amount is considered non-deductible.

Union or professional dues

Only portions of union dues related to professional activity are deductible. Amounts covering sick leave, pension funds, or death benefits are not.

How do you claim a deduction for unreimbursed employee expenses?

It's important to follow the IRS guidelines carefully. All taxpayers who claim unreimbursed employee expenses on their tax returns need to keep proof of purchase records, such as receipts, canceled checks, or credit card statements, to prove they paid for the business expenses and weren't reimbursed.

Filing Form 2106

Most employees who qualify for one of the above categories complete Form 2106 (Employee Business Expenses) to calculate their deduction and then report it on Form 1040.

Form 2106 is relatively straightforward compared to other tax forms. In Part I of the form, you enter your expenses and any partial reimbursements received from your employer. Then, net the two figures to calculate your total unreimbursed business expenses.

Reservists, fee-basis public officials, and qualifying performing artists can report their total amount of unreimbursed business expenses as an above-the-line deduction on Schedule 1 of Form 1040, which means they can claim either the standard deduction or itemized deductions.

Driving your personal vehicle for work is a little more complicated. In that case, you need to complete Part II of Form 2106 and provide the total miles you drove during the year and the miles you drove for business. Then, you calculate your deduction using the standard mileage rate or actual vehicle expenses.

Disabled workers with impairment-related work expenses must also use Form 2106 to calculate their deduction. But their deductions are reported as an itemized deduction on Schedule A (Form 1040). As a result, you can't claim the deduction for impairment-related expenses if you take the Standard Deduction (since you must choose between the Standard Deduction and itemized deductions).

Educators are not required to file Form 2106 to claim the educator expense deduction. Instead, they report their deductions directly on Schedule 1 (Form 1040) as above-the-line deductions.

Understanding IRS resources

While you can no longer claim miscellaneous deductions for unreimbursed employee expenses, IRS Publication 529 (Miscellaneous Deductions) covers any exceptions for the groups described above. If you think you may fall into one of those categories, it's important to understand Publication 529 to ensure you are accurately documenting your deductions.

The IRS also offers additional resources, including instructions for Form 2106, Employee Business Expenses, and other related reimbursement information. It's always best to head directly to the source with tax-related questions, as the IRS keeps its website updated with the latest developments.

How does Emburse simplify tracking and managing unreimbursed employee expenses?

Modern expense management solutions transform the way finance teams manage organizational spending, employee reimbursements, and compliance requirements. Emburse provides comprehensive platforms specifically designed to address the pain points of finance teams: policy enforcement, compliance management, and spend visibility.

Automated policy enforcement at the point of transaction

Rather than catching policy violations during retrospective expense report review, Emburse applies policy rules in real-time as expenses occur. When employees attempt to book travel, make purchases, or submit expenses that violate policy, the system prevents or flags the transaction immediately.

This proactive automated policy enforcement:

• Reduces the workload of finance teams reviewing violations
• Improves policy compliance rates
• Prevents non-compliant spending before it impacts organizational budgets

Finance teams configure policy rules reflecting organizational guidelines, regulatory requirements, and budget constraints. Rules can:

• Enforce spending limits
• Restrict expense categories
• Require specific approval chains
• Flag high-risk transactions for additional review

The system applies rules consistently across all employees and transactions, eliminating the inconsistent enforcement that occurs with manual review.

AI-powered receipt processing and data extraction

Emburse utilizes advanced AI and machine learning to automatically extract data from receipt images, eliminating the need for manual data entry for both employees and finance teams. When employees photograph receipts using mobile applications, the system automatically captures merchant details, transaction amounts, dates, and expense categories.

This automation dramatically:

• Reduces processing time
• Improves data accuracy
• Eliminates chasing employees for missing receipt details
• Frees staff capacity for higher-value analysis and strategic activities

Integrated reporting and financial system connectivity

Emburse integrates directly with ERP systems, accounting platforms, and financial management tools. This enables seamless data flow from expense capture through final accounting entry. Approved expenses automatically post to the general ledgers with proper cost center, department, project, and account coding.

This integration:

• Eliminates manual data entry
• Reduces reconciliation requirements
• Accelerates financial close cycles

Finance teams gain real-time visibility into organizational spending without waiting for month-end expense report batches. Dashboard analytics from Emburse provide insights into spending patterns, policy compliance rates, budget utilization, and exception trends. This visibility supports proactive management rather than retrospective analysis of historical spending.

Mobile-first employee experience

Emburse mobile applications enable employees to capture receipts, submit expenses, and track reimbursement status from anywhere. This mobile-first approach improves employee satisfaction and reduces the finance team's burden of chasing receipts and following up on pending submissions.

Employees photograph receipts immediately at the time of the transaction rather than accumulating paper receipts for later submission. This real-time capture:

• Prevents lost receipts
• Improves data accuracy
• Ensures timely expense recording

Finance teams benefit from higher submission rates, better documentation quality, and reduced period-end backlogs.

Configurable approval workflows

Finance teams design approval workflows reflecting organizational hierarchies, spending authorities, and risk-based review requirements. Expense reports automatically route to the appropriate approvers based on amount thresholds, expense categories, policy violations, or custom business rules.

Approvers receive notifications and review expenses with complete supporting documentation. They approve or reject with audit trails maintained throughout the process. This automated routing:

• Eliminates manual tracking of approval status
• Ensures proper segregation of duties
• Maintains management oversight

VoteRiders saves 20 hours monthly with virtual card automation

Organizations implementing Emburse solutions experience quantifiable benefits spanning operational efficiency, employee satisfaction, and financial control.

VoteRiders reduced receipt submission lag and streamlined volunteer reimbursements, saving 20 hours per month by utilizing automated processes and virtual card programs from Emburse Cards.

The organization's finance team:

• Eliminated manual check processing
• Maintained strong controls over organizational spending
• Enabled real-time spending authorization and tracking
• Eliminated reimbursement delays that previously frustrated volunteers

The 20-hour monthly time savings resulted in increased capacity for the finance staff, redeployed to strategic initiatives rather than transactional processing.

For finance teams evaluating expense management automation, this case study demonstrates tangible ROI. Whether managing employee reimbursements, tracking project costs, or ensuring regulatory compliance, Emburse Spend provides finance teams with the tools they need to eliminate manual processing, strengthen controls, and gain visibility into organizational spending patterns.

Manage unreimbursed employee expenses with Emburse

The permanent elimination of unreimbursed employee expense deductions fundamentally changed how finance leaders must approach corporate expense policies and employee compensation strategies.

Organizations must now design comprehensive reimbursement programs that:

• Support employee satisfaction
• Ensure legal compliance
• Provide accurate financial reporting
• Maintain competitive positioning in talent markets

Modern expense management platforms provide the automation, policy enforcement, and integration capabilities that transform expense processing from a transactional burden to a strategic asset.

Request a demo from Emburse today to discover how automated expense management can strengthen your financial controls, improve employee satisfaction, and provide real-time visibility into organizational spending patterns.

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