What Are Unreimbursed Employee Expenses?

Unreimbursed employee expenses are work-related costs that employees pay out of pocket and are not reimbursed for by their employer, such as:

• Business travel expenses like airfare, lodging, or meals
• Mileage driven for work using a personal vehicle
• Tools, equipment, or office supplies purchased for work use
• Licensing fees, professional dues, or continuing education
• Work-related phone or internet expenses

Although these costs are job-related, most employees can no longer deduct them from their federal taxes.

Are Unreimbursed Employee Expenses Deductible on Federal Taxes?

Before 2018, W-2 employees could deduct unreimbursed work expenses as a miscellaneous itemized deduction, provided those costs exceeded 2% of their adjusted gross income (AGI). However, the Tax Cuts and Jobs Act (TCJA) has suspended this deduction until 2026.

In short, your employees cannot deduct unreimbursed business expenses on their federal tax returns during the suspension period unless they fall under specific exceptions.

This change affects many employees who previously relied on these deductions to offset work-related expenses. According to a 2023 WalkMe survey, nearly half of employees experience job stress due to unreimbursed work expenses, with 28% stating these expenses negatively impact their financial situation.

For employers, this reinforces the need for clear, proactive reimbursement policies. Without proper systems, businesses risk exposing employees to unreimbursed costs that now carry no federal tax relief, leading to frustration, reduced morale, and potential compliance blind spots.

Are There Any Exceptions to This Rule?

Yes—but only in narrowly defined cases. If your company employs individuals in these categories, it’s essential to understand the IRS rules and ensure your expense reimbursement processes support full compliance.

Armed Forces Reservists

Reservists who travel 100+ miles from home for reserve duties may deduct unreimbursed travel expenses within the limits of the federal per diem, standard mileage rate, and qualifying travel fees.

Compliance tip

Ensure your expense policy can identify and track travel under military orders. Employees must retain mileage logs, itineraries, and receipts to substantiate deductions.

Qualified Performing Artists

Employees who work in the performing arts may still deduct certain job-related expenses, provided they meet specific criteria, including:

• Working for at least two employers
• Earning a minimum amount per employer
• Having a total AGI below IRS thresholds

Compliance tip

Because eligibility is based on income and employer count, finance teams should document employment terms and earnings. Qualifying artists must retain receipts for performance-related expenses like costumes, makeup, or equipment.

Fee-Basis Government Officials

State or local officials paid on a fee basis (not salaried) may deduct ordinary expenses and necessary expenses incurred in performing their official duties.

Compliance tip

Flag these roles in your records. Track and categorize these expenses separately, ensuring documentation links them directly to official responsibilities.

Employees with Impairment-Related Work Expenses

Employees with a physical or mental disability may deduct the cost of goods or services needed to perform their jobs, such as assistive technology or support services.

Compliance tip

Privacy is key. While supporting accessibility, organizations should provide guidance on documenting how each expense enables job performance without overstepping personal health information.

For full details and the latest updates on eligibility and documentation requirements, see IRS Publication 529.

How to Claim a Deduction?

If your employees fall into one of the exception categories, they must complete Form 2106 to calculate the total amount of deductible expenses.

Reservists, performing artists, and fee-basis government officials should report the deduction as an above-the-line deduction on Schedule 1 of Form 1040. This reduces AGI, potentially increasing eligibility for other tax benefits.

Meanwhile, employees with impairment-related work expenses must itemize deductions on Schedule A of Form 1040. Only the portion of these expenses exceeding a set percentage of AGI may be deductible.

Types of Deductible Expenses

For employees who qualify under the exceptions outlined above, an eligible deductible expense may include:

• Travel expenses for business related expense purposes
• Lodging costs during business trips
• Transportation costs (e.g., airfare, rental car expenses, taxi fares)
• Meals during business travel (generally limited to 50% of the cost)
• Work-related tools and supplies
• Professional organization dues
• Work-related education expenses
• Vehicle expenses for business use (excluding commuting expenses)

Why is Understanding Unreimbursed Employee Expenses Important?

Although most unreimbursed expenses aren't currently deductible for W-2 employees, understanding how they work remains critical for tax planning, policy development, and long-term financial management.

Enables Precise Tracking and Reduces Audit Risk

Whether or not a deduction is allowable, expense data must be captured, categorized, and stored per IRS expense reporting requirements.

For exception-based deductions, accurate tracking is the only way to ensure compliance. For everyone else, clarity around what’s reimbursable (and what’s considered an unreimbursed employee expense) helps avoid inconsistent documentation, misreported expenses, and audit exposure.

Supports Tax Compliance for Blended Workforce Models

Many organizations now engage a combination of full-time employees and independent contractors. Unlike W-2 staff, 1099 workers can still deduct a qualified business expense.

Companies must clearly distinguish between employee types across policy and process to reduce misclassification risk and enable compliant support for all segments.

Builds Scalable, Transparent Financial Operations

A lack of clear guidance around unreimbursed expenses leads to breakdowns across finance, operations, and employee experience. Without well-defined policies, teams waste time navigating gray areas, managing exceptions, and manually validating claims.

That’s why understanding unreimbursed expenses across roles, policies, and processes is essential for managing them effectively at scale.

What Are the Best Ways to Handle Unreimbursed Employee Expenses?

Standardize Tracking for Eligible Exceptions

If your organization employs workers who may qualify for deductions, create exception-specific tracking protocols, such as mileage logs or tagged expense categories, that align with IRS requirements.

Proper tracking not only supports compliance but ensures employees don’t miss out on eligible tax relief due to incomplete documentation.

Establish and Communicate Clear Reimbursement Policies

Employees should never have to guess which expenses will be reimbursed—or when. Clearly define what qualifies as reimbursable, outline required documentation, and set expectations around submission timelines and approval workflows.

Provide employees with clear channels for submitting employee business expenses, and store all records in a centralized, searchable system to support audits and exception-based deductions when applicable.

Leverage Digital Tools to Streamline the Process

While clear policies are essential, automation is what truly closes the gap between intent and execution. Modern expense management platforms—like Emburse—eliminate these gaps by automating approvals, flagging out-of-policy spend, and capturing all required documentation from the start.

These solutions help finance teams reduce manual work, improve accuracy, and ensure that every employee is supported, regardless of their role or expense reimbursement needs.

How Can Emburse Automate Expense Tracking?

Emburse was designed to eliminate manual busywork challenges by automating every step of the expense lifecycle, enabling organizations to:

• Automatically categorize a business expense and flag policy violations
• Streamline approvals and eliminate paper-based processes
• Empower employees to submit receipts on the go with AI expense capture
• Centralize documentation for easy audit preparation and reporting
• Reduce reliance on personal spend by issuing secure virtual cards

Automation doesn’t just save time—it drives compliance, improves accuracy, and ensures every employee can spend confidently without unnecessary delays or out-of-pocket stress.

In fact, businesses using Emburse have seen meaningful operational improvements—saving up to 20 hours per month on manual tasks, drastically reducing receipt submission delays, and achieving full ROI in as little as three months.

Whether you're overseeing finance, managing distributed teams, or navigating complex spend environments, Emburse helps you maintain visibility, reduce friction, and support every employee equitably.

Ready to stop letting unreimbursed business expenses slip through the cracks?

Explore Emburse to see how automation can help your organization spend smarter, stay compliant, and better support every employee—no exceptions.