SANTA MONICA, Calif. – Nearly 5 million tax returns were filed with the IRS claiming employee business expenses, Form 2106, for tax year 2004, according to the agency.
What do you think? How many of those employees took deductions for business expenses their employers would have reimbursed — if only they had turned in an expense report? Or turned it in on time? Were you one of them?
The most effective way to cheat yourself on a job is to not turn in expense reports to your company. You lose two ways:
You lose the reimbursement money. After all, even if you take the deduction, your tax savings is rarely more than 35%-40% (IRS and State combined). And your employee deductions are limited by so many things — 2% of your adjusted gross income (line 1 on page 2 of your Form 1040); the itemized deduction phase-out, alternative minimum tax — and even simply, the standard deduction threshold.
So, best case, by not submitting the expense, you've just cost yourself 60-65 cents of every dollar. Even worse. Did you know that the IRS does not allow a deduction for employee business expenses if your company would have reimbursed those expenses? When you're audited, the IRS often asks for your company's written policy on employee reimbursements. If the company has a limit on how much they'll pay you, fine, you're apt to get the deduction. But, if not...and the only limit is when they'll reimburse you — and you didn't get the expense reports in on time — you won't get the deduction, either.
What if the company has no written policy? That will depend on the auditor. Sometimes, they will insist on getting a letter from your company's management outlining their policy. (How humiliating for you!) Or they might just let you get away with the deductions, if you have all the receipts, since the company didn't bother to set limits or define their policy.
When a company actually does have limits, especially when the limits are verbal or implied, it's really in your own best interests to push your company to define their policy and to put it into writing.
Too often, employees don't submit expenses because they are afraid the costs are too high for their boss to approve. When pushed, by their spouses or tax professionals, they're often pleasantly surprised to actually get their expense reports accepted — and to receive a check.
How many times have you just shrugged off missing a deadline to submit your expense reports? Oh well, next time. That could cost you hundreds or thousands of dollars each year. And you're just giving that money to your company? You're not alone. Lots of employees are doing this. Does it make you feel better? Hardly.
Of course, how can you possibly get to those expense reports if you're always on the road, or rushing to meet another deadline, or just generally overstressed? It would save so much time if you simply upload all your data online during the dead time while you're traveling.
There are some tools you could use, if your company could be persuaded to arrange them for you. Not only would they make it possible for all employees to manage expenses, they would help the company define reimbursement policies in writing. Besides, many companies are able to pass on expenses to their clients. So, it's to your employer's advantage to be able improve their expense tracking to raise their gross revenues. Here are a few such tools: ExpenseWatch.com, Gelco Expense Management, Copitrak Complete Cost Recovery.
If you can't get your company to sign up for an online service, then, just track your own expenses. Carry a mid-sized manila envelope with you on each trip. Stick a pad of small sticky notes just inside the envelope. Dump all your receipts into it every time you pay for something. If you pay cash, use one of those sticky notes and write down the date, amount and description of the purchase or tip or fare. At the end of each trip, if you don't have time to do your expense report, hire a part-time student to put them together for you. It's cheaper than not getting your reports submitted — and besides, it's a deductible expense.
More than an employee
Certain employees have the right to bypass the Form 2106 Employee Business Expenses, and to avoid all those limitations described above. Those as statutory employees.
Keith Hall from the National Association for the Self-Employed explains that a statutory employee is a person who receives a W-2 form with box 13, "Statutory employee" checked off.
This includes most full-time life insurance agents, commission drivers, traveling salespersons and certain home workers.
What happens if you've got two W-2s with the Box 13 checked? Or if you have a business on the side? Hall says, a statutory employee who receives trade or business income separate from the W-2, or more than one W-2 with Box 13 checked, must file separate Schedule Cs for each job or business.
Generally, statutory employees get none of their expenses reimbursed. Although you're on payroll, you're usually almost on your own. You often work from home and set your own schedule and travel extensively. Typically, your commissions are higher as a result, and you have more autonomy — as long as you meet your sales or project targets.
Using the Schedule C not only gives you the advantage of taking more deductions with fewer IRS audit triggers than when you file a Form 2106 with large deductions. It also reduces your adjusted gross income because you may have moved $20,000 or more worth of expenses from Schedule A to the front page of your tax return. This means, you may get out of the alternative minimum tax bracket altogether. You might be able to get those child tax credits you've missed when your income was too high. You might qualify for education credits or education deductions. So many more good things happen when you reduce your adjusted gross income.
If your job sounds a lot like a statutory employee and box 13 is not checked on your W-2, have a talk with your boss or payroll department to see if you qualify. It's quite likely, especially in smaller companies, that your employer did not know about this tax quirk. And even if they have to amend your W-2 to make this possible for you — it's like giving you a substantial raise, with practically no cost to them.
As an employee, running up job-related expenses, it's up to you to ensure that you get the full benefit — both tax benefits and reimbursements — of all your expenses.
Eva Rosenberg is the founder of TaxMama.com and an enrolled agent licensed to represent taxpayers before the IRS. She is the author of the new book, "Small Business Taxes Made Easy." Reach her at email@example.com.
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