J.K. Lasser's Small Business Taxes 2013: Your Complete Guide to a Better Bottom Line

Employees

If you do not own any interest in a business but are employed by one, you may still have to account for business expenses. Your salary or other compensation is reported as wages in the income section as seen on page 1 of your Form 1040. Your deductions (with a few exceptions), however, can be claimed only as miscellaneous itemized deductions on Schedule A. These deductions are subject to 2 limitations. The total is deductible only if it exceeds 2% of adjusted gross income.

Under the 2% rule, only the portion of total miscellaneous deductions in excess of 2% of adjusted gross income is deductible on Schedule A. Adjusted gross income is the tax term for your total income subject to tax (gross income) minus business expenses (other than employee business expenses), capital losses, and certain other expenses that are deductible even if you do not claim itemized deductions, such as qualifying IRA contributions or alimony. You arrive at your adjusted gross income by completing the Income and Adjusted Gross Income sections on page 1 of Form 1040.

Example

You have business travel expenses that your employer does not pay for and other miscellaneous expenses (such as tax preparation fees) totaling $2,000. Your adjusted gross income is $80,000. The amount up to the 2% floor, or $1,600 (2% of $80,000), is disallowed. Only $400 of the $2,000 expenses is deductible on Schedule A.

If you fall into a special category of employees called statutory employees, you can deduct your ...