||2008 Tax Year
This chapter explains where and how to report the expenses discussed in this publication. It discusses reimbursements and
how to treat them under
accountable and nonaccountable plans. It also explains rules for independent contractors and clients, fee-basis officials,
certain performing artists,
Armed Forces reservists, and certain disabled employees. The chapter ends with illustrations of how to report travel, entertainment,
gift, and car
expenses on Forms 2106 and 2106-EZ.
This section provides general information on where to report the expenses discussed in this publication.
You must report your income and expenses on Schedule C or C-EZ (Form 1040) if you are a sole proprietor, or on Schedule
F (Form 1040) if you are a
farmer. You do not use Form 2106 or 2106-EZ.
If you claim car or truck expenses, you must provide certain information on the use of your vehicle. You provide this
information on Schedule C, Schedule C-EZ, or Form 4562.
If you file Schedule C:
Report your travel expenses, except meals, on line 24a,
Report your deductible meals (actual cost or standard meal allowance) and entertainment on line 24b,
Report your gift expenses and transportation expenses, other than car expenses, on line 27, and
Report your car expenses on line 9. Complete Part IV of the form unless you have to file Form 4562 for depreciation or
If you file Schedule C-EZ, report the total of all business expenses on line 2. You can only include 50% of your meals
and entertainment in that
total. If you include car expenses, you must also complete Part III of the form.
If you file Schedule F:
Report your car expenses on line 12. Attach Form 4562 and provide information on the use of your car in Part V of Form 4562.
Report all other business expenses discussed in this publication on line 34. You can only include 50% of your meals and entertainment
See your forms instructions for more information on how to complete your tax return.
Both self-employed and an employee.
If you are both self-employed and an employee, you must keep separate records for each business activity. Report your
business expenses for
self-employment on Schedule C, C-EZ, or F (Form 1040), as discussed earlier. Report your business expenses for your work as
an employee on Form 2106
or 2106-EZ, as discussed next.
If you are an employee, you generally must complete Form 2106 to deduct your travel, transportation, and entertainment
expenses. However, you can use the shorter Form 2106-EZ instead of Form 2106 if you meet all of the following conditions.
You are an employee deducting expenses attributable to your job.
You were not reimbursed by your employer for your expenses (amounts included in box 1 of your Form W-2 are not considered
If you claim car expenses, you use the standard mileage rate.
For more information on how to report your expenses on Forms 2106 and 2106-EZ, see Completing Forms 2106 and 2106-EZ,
If you did not receive any reimbursements (or the reimbursements were all included in box 1 of your Form W-2), the
only business expense you are
claiming is for gifts, and the Special Rules
discussed later do not apply to you, do not complete Form 2106 or 2106-EZ. Instead, claim the
amount of your deductible gifts directly on line 21 of Schedule A (Form 1040).
If you received a Form W-2 and the “Statutory employee
” box in box 13 was checked, report your
income and expenses related to that income on Schedule C or C-EZ (Form 1040). Do not complete Form 2106 or 2106-EZ.
Statutory employees include full-time life insurance salespersons, certain agent or commission drivers, traveling
salespersons, and certain
If you are entitled to a reimbursement from your employer but you do not claim it, you cannot claim a
deduction for the expenses to which that unclaimed reimbursement applies.
Reimbursement for personal expenses.
If your employer reimburses you for nondeductible personal expenses, such as for vacation
trips, your employer must report the reimbursement as wage income in box 1 of your Form W-2. You cannot deduct personal expenses.
If you have travel or transportation expenses related to income-producing property, report your deductible expenses
on the form appropriate for
For example, if you have rental real estate income and expenses, report your expenses on Schedule E, Supplemental
Income and Loss. See Publication
527, Residential Rental Property, for more information on the rental of real estate. If you have deductible investment-related
expenses, report them on Schedule A (Form 1040), line 23.
Vehicle Provided by Your Employer
If your employer provides you with a car, you may be able to deduct the actual expenses of operating that car for business
purposes. The amount you
can deduct depends on the amount that your employer included in your income and the business and personal miles you drove
during the year. You cannot
use the standard mileage rate.
Value reported on Form W-2.
Your employer can figure and report either the actual value of your personal use of the car or the value of the car
as if you used it only for
personal purposes (100% income inclusion). Your employer must separately state the amount if 100% of the annual lease value
was included in your
income. If you are unsure of the amount included in your Form W-2, ask your employer.
Full value included in your income.
You can deduct the value of the business use of an employer-provided car if your employer reported 100% of the value
of the car in your income. On
your 2007 Form W-2, the amount of the value will be included in box 1, Wages, tips, other compensation, and box 12.
To claim your expenses, complete Part II, Sections A and C, of Form 2106. Enter your actual expenses on line 23 of
Section C and include the entire value of the employer-provided car on line 25. Complete the rest of the form.
Less than full value included in your income.
If less than the full annual lease value of the car was included on your Form W-2, this means that your Form W-2 only
includes the value of your
personal use of the car. Do not enter this value on your Form 2106; it is not deductible.
If you paid any actual costs (that your employer did not provide or reimburse you for) to operate the car, you can
deduct the business portion of
those costs. Examples of costs that you may have are gas, oil, and repairs. Complete Part II, Sections A and C, of Form 2106.
Enter your actual costs
on line 23 of Section C and leave line 25 blank. Complete the rest of the form.
This section explains what to do when you receive an advance or are reimbursed for any of the employee business expenses discussed
If you received an advance, allowance, or reimbursement for your expenses, how you report this amount and your expenses depends
on whether the
reimbursement was paid to you under an accountable plan or a nonaccountable plan.
This section explains the two types of plans, how per diem and car allowances simplify proving the amount of your expenses,
and the tax treatment
of your reimbursements and expenses. It also covers rules for independent contractors.
You are not reimbursed or given an allowance for your expenses if you are paid a salary or commission with the understanding
that you will pay your
own expenses. In this situation, you have no reimbursement or allowance arrangement, and you do not have to read this section
Instead, see Completing Forms 2106 and 2106-EZ,
later, for information on completing your tax return.
Reimbursement, allowance, or advance.
A reimbursement or other expense allowance arrangement is a system or plan that an employer uses to pay, substantiate,
and recover the expenses,
advances, reimbursements, and amounts charged to the employer for employee business expenses. Arrangements include per diem
and car allowances.
A per diem allowance is a fixed amount of daily reimbursement your employer gives you for your lodging, meals, and
incidental expenses when you are away from home on business. (The term “incidental expenses
” is defined in chapter 1 under Standard Meal
A car allowance is an amount your employer gives you for the business use of your car.
Your employer should tell you what method of reimbursement is used and what records you must provide.
If you are an employer and you reimburse employee business expenses, how you treat this reimbursement on your employee's
Form W-2 depends in part
on whether you have an accountable plan. Reimbursements treated as paid under an accountable plan, as explained next, are
not reported as pay.
Reimbursements treated as paid under nonaccountable plans, as explained later, are reported as pay. See Publication 15 (Circular
E), Employer's Tax
Guide, for information on employee pay.
To be an accountable plan, your employer's reimbursement or allowance arrangement must include all of the following rules.
Your expenses must have a business connection — that is, you must have paid or incurred deductible expenses while performing
as an employee of your employer.
You must adequately account to your employer for these expenses within a reasonable period of time.
You must return any excess reimbursement or allowance within a reasonable period of time.
“Adequate accounting” and “returning excess reimbursements” are discussed later.
An excess reimbursement or allowance is any amount you are paid that is more than the business-related expenses that you adequately
to your employer.
The definition of reasonable period of time depends on the facts and circumstances of your situation. However, regardless
of the facts and
circumstances of your situation, actions that take place within the times specified in the following list will be treated
as taking place within a
reasonable period of time.
You receive an advance within 30 days of the time you have an expense.
You adequately account for your expenses within 60 days after they were paid or incurred.
You return any excess reimbursement within 120 days after the expense was paid or incurred.
You are given a periodic statement (at least quarterly) that asks you to either return or adequately account for outstanding
you comply within 120 days of the statement.
Employee meets accountable plan rules.
If you meet the three rules for accountable plans, your employer should not include any reimbursements in your income
in box 1 of your Form W-2. If
your expenses equal your reimbursement, you do not complete Form 2106. You have no deduction since your expenses and reimbursement
If your employer included reimbursements in box 1 of your Form W-2 and you meet all the rules for accountable plans, ask your
employer for a
corrected Form W-2.
Accountable plan rules not met.
Even though you are reimbursed under an accountable plan, some of your expenses may not meet all the rules. Those
expenses that fail to meet all
the rules for accountable plans are treated as having been reimbursed under a nonaccountable plan (discussed later).
Reimbursement of nondeductible expenses.
You may be reimbursed under your employer's accountable plan for expenses related to that employer's business, some
of which are deductible as
employee business expenses and some of which are not deductible. The reimbursements you receive for the nondeductible expenses
do not meet rule (1)
for accountable plans, and they are treated as paid under a nonaccountable plan.
Your employer's plan reimburses you for travel expenses while away from home on business and also for meals when you work
late at the office, even
though you are not away from home. The part of the arrangement that reimburses you for the nondeductible meals when you work
late at the office is
treated as paid under a nonaccountable plan.
The employer makes the decision whether to reimburse employees under an accountable plan or a nonaccountable plan. If you
are an employee who
receives payments under a nonaccountable plan, you cannot convert these amounts to payments under an accountable plan by voluntarily
your employer for the expenses and voluntarily returning excess reimbursements to the employer.
One of the rules for an accountable plan is that you must adequately account to your employer for your expenses. You adequately
account by giving
your employer a statement of expense, an account book, a diary, or a similar record in which you entered each expense at or
near the time you had it,
along with documentary evidence (such as receipts) of your travel, mileage, and other employee business expenses. (See Table
5-1 in chapter 5 for
details you need to enter in your record and documents you need to prove certain expenses.) A per diem or car allowance satisfies
accounting requirement under certain conditions. See Per diem and Car Allowances, later.
You must account for all amounts you received from your employer during the year as advances, reimbursements, or allowances.
This includes amounts
you charged to your employer by credit card or other method. You must give your employer the same type of records and supporting
information that you
would have to give to the IRS if the IRS questioned a deduction on your return. You must pay back the amount of any reimbursement
or other expense
allowance for which you do not adequately account or that is more than the amount for which you accounted.
Per Diem and Car Allowances
If your employer reimburses you for your expenses using a per diem or a car allowance, you can generally use the allowance
as proof for the amount
of your expenses. A per diem or car allowance satisfies the adequate accounting requirements for the amount of your expenses
only if all of the
following conditions apply.
Your employer reasonably limits payments of your expenses to those that are ordinary and necessary in the conduct of the trade
The allowance is similar in form to and not more than the federal rate (defined later).
You prove the time (dates), place, and business purpose of your expenses to your employer (as explained in Table 5-1) within
period of time.
You are not related to your employer (as defined next). If you are related to your employer, you must be able to prove your
expenses to the
IRS even if you have already adequately accounted to your employer and returned any excess reimbursement.
If the IRS finds that an employer's travel allowance practices are not based on reasonably accurate estimates of travel costs
recognition of cost differences in different areas for per diem amounts), you will not be considered to have accounted to
your employer. In this case,
you must be able to prove your expenses to the IRS.
Related to employer.
You are related to your employer if:
Your employer is your brother or sister, half brother or half sister, spouse, ancestor, or lineal descendant,
Your employer is a corporation in which you own, directly or indirectly, more than 10% in value of the outstanding stock,
Certain relationships (such as grantor, fiduciary, or beneficiary) exist between you, a trust, and your employer.
You may be considered to indirectly own stock, for purposes of (2), if you have an interest in a corporation, partnership,
estate, or trust
that owns the stock or if a member of your family or your partner owns the stock.
The federal rate.
The federal rate can be figured using any one of the following methods.
For per diem amounts:
The regular federal per diem rate.
The standard meal allowance.
The high-low rate.
For car expenses:
The standard mileage rate.
A fixed and variable rate (FAVR).
For per diem amounts, use the rate in effect for the area where you stop for sleep or rest.
Regular federal per diem rate.
The regular federal per diem rate is the highest amount that the federal government will pay to its employees for
lodging, meals, and incidental
expenses (or meals and incidental expenses only) while they are traveling away from home in a particular area. The rates are
different for different
locations. Your employer should have these rates available. (Employers can get Publication 1542, which gives the rates in
the continental United
States for the current year. Publication 1542 is available on the Internet at
The standard meal allowance.
The standard meal allowance (discussed in chapter 1) is the federal rate for meals and incidental expenses (M&IE).
The rate for most small
localities in the United States is $39 a day from January 1, through December 31, 2007. Most major cities and many other localities
qualify for higher
rates. The rates for localities within the continental United States are listed in Publication 1542. You can also find this
information on the
You receive an allowance only for meals and incidental expenses when your employer does one of the following.
Provides you with lodging (furnishes it in kind).
Reimburses you, based on your receipts, for the actual cost of your lodging.
Pays the hotel, motel, etc., directly for your lodging.
Does not have a reasonable belief that you had (or will have) lodging expenses, such as when you stay with friends or relatives
or sleep in
the cab of your truck.
Figures the allowance on a basis similar to that used in computing your compensation, such as number of hours worked or miles
This is a simplified method of computing the federal per diem rate for travel within the continental United States.
It eliminates the need to keep
a current list of the per diem rate for each city.
Under the high-low method, the per diem amount for travel during January through September of 2007 is $246 (including
$58 for M&IE) for certain
high-cost locations. All other areas have a per diem amount of $148 (including $45 for M&IE). (Employers can get Publication
1542 (Revised October
2007) on the Internet, which gives the areas eligible for the $246 per diem amount under the high-low method for all or part
of this period.)
Effective October 1, 2007, the per diem rate for certain high-cost locations decreased to $237 (including $58 for M&IE). The
rate for all other
locations increased to $152 (including $45 for M&IE). However, an employer can continue to use the rates described in the
preceding paragraph for
the remainder of 2007 if those rates and locations are used consistently during October, November, and December for all employees.
Employers who did
not use the high-low method during the first 9 months of 2007 cannot begin to use it before 2008. See Revenue Procedure 2007-63
for more information.
Also see Publication 1542 (available on the Internet at
Prorating the standard meal allowance on partial days of travel.
The standard meal allowance is for a full 24-hour day of travel. If you travel for part of a day, such as on the days
you depart and return, you
must prorate the full-day M&IE rate. This rule also applies if your employer uses the regular federal per diem rate or the
You can use either of the following methods to figure the federal M&IE for that day.
For the day you depart, add ¾ of the standard meal allowance amount for that day.
For the day you return, add ¾ of the standard meal allowance amount for the preceding day.
Method 2: Prorate the standard meal allowance using any method that you consistently apply and that is in accordance with
reasonable business practice. For example, an employer can treat 2 full days of per diem (that includes M&IE) paid for travel
away from home from
9 a.m. of one day to 5 p.m. of the next day as being no more than the federal rate. This is true even though a federal employee
would be limited to a
reimbursement of M&IE for only 1½ days of the federal M&IE rate.
The standard mileage rate.
This is a set rate per mile that you can use to compute your deductible car expenses. For 2007, the standard mileage
rate for the cost of operating
your car for business use is 48½ cents per mile.
Fixed and variable rate (FAVR).
This is an allowance your employer may use to reimburse your car expenses. Under this method, your employer pays an
allowance that includes a
combination of payments covering fixed and variable costs, such as a cents-per-mile rate to cover your variable operating
costs (such as gas, oil,
etc.) plus a flat amount to cover your fixed costs (such as depreciation (or lease payments), insurance, etc.). If your employer
chooses to use this
method, your employer will request the necessary records from you.
Reporting your expenses with a per diem or car allowance.
If your reimbursement is in the form of an allowance received under an accountable plan, the following facts affect
The following discussions explain where to report your expenses depending upon how the amount of your allowance compares to
the federal rate.
Allowance less than or equal to the federal rate.
If your allowance is less than or equal to the federal rate, the allowance will not be included in box 1 of your Form
W-2. You do not need to
report the related expenses or the allowance on your return if your expenses are equal to or less than the allowance.
However, if your actual expenses are more than your allowance, you can complete Form 2106 and deduct the excess amount
on Schedule A (Form 1040).
If you are using actual expenses, you must be able to prove to the IRS the total amount of your expenses and reimbursements
for the entire year. If
you are using the standard meal allowance or the standard mileage rate, you do not have to prove that amount.
In April, Jeremy takes a 2-day business trip to Denver. The federal rate for Denver is $176 per day. As required by his employer's
plan, he accounts for the time (dates), place, and business purpose of the trip. His employer reimburses him $176 a day ($352
total) for living
expenses. Jeremy's living expenses in Denver are not more than $176 a day.
Jeremy's employer does not include any of the reimbursement on his Form W-2 and Jeremy does not deduct the expenses on his
In June, Matt takes a 2-day business trip to Boston. Matt's employer uses the high-low method to reimburse employees. Since
Boston is a high-cost
area, Matt is given an advance of $246 a day ($492 total) for his lodging, meals, and incidental expenses. Matt's actual expenses
Since Matt's $700 of expenses are more than his $492 advance, he includes the excess expenses when he itemizes his deductions.
Matt completes Form
2106 (showing all of his expenses and reimbursements). He must also allocate his reimbursement between his meals and other
expenses as discussed later
under Completing Forms 2106 and 2106-EZ.
Nicole drives 10,000 miles a year for business. Under her employer's accountable plan, she accounts for the time (dates),
place, and business
purpose of each trip. Her employer pays her a mileage allowance of 35 cents a mile.
Since Nicole's $4,850 expenses computed under the standard mileage rate (10,000 miles × 48½ cents) are more than her $3,500
reimbursement (10,000 miles × 35 cents), she itemizes her deductions to claim the excess expenses. Nicole completes Form 2106
(showing all of
her expenses and reimbursements) and enters $1,350 ($4,850 - $3,500) as an itemized deduction.
Allowance more than the federal rate.
If your allowance is more than the federal rate, your employer must include the allowance amount up to the federal
rate in box 12 of your Form W-2.
This amount is not taxable. However, the excess allowance will be included in box 1 of your Form W-2. You must report this
part of your allowance as
if it were wage income.
If your actual expenses are less than or equal to the federal rate, you do not complete Form 2106 or claim any of
your expenses on your return.
However, if your actual expenses are more than the federal rate, you can complete Form 2106 and deduct those excess
expenses. You must report on
Form 2106 your reimbursements up to the federal rate (as shown in box 12 of your Form W-2) and all your expenses. You should
be able to prove these
amounts to the IRS.
Laura lives and works in Austin. Her employer sent her to Albuquerque for 2 days on
business. Laura's employer paid the hotel directly for her lodging and reimbursed Laura $65 a day ($130 total) for meals and
Laura's actual meal expenses were not more than the federal rate for Albuquerque, which is $49 per day.
Her employer included the $32 that was more than the federal rate (($65 - $49) × 2) in box 1 of Laura's Form W-2. Her employer
$98 ($49 a day × 2) in box 12 of her Form W-2. This amount is not included in Laura's income. Laura does not have to complete
however, she must include the $32 in her gross income as wages (by reporting the total amount shown in box 1 of her Form W-2).
Joe also lives in Austin and works for the same employer as Laura. In May the employer sent Joe to San Diego for 4 days and
paid the hotel directly
for Joe's hotel bill. The employer reimbursed Joe $75 a day for his meals and incidental expenses. The federal rate for San
Diego is $64 a day.
Joe can prove that his actual meal expenses totaled $380. His employer's accountable plan will not pay more than $75 a day
for travel to San Diego,
so Joe does not give his employer the records that prove that he actually spent $380. However, he does account for the time,
place, and business
purpose of the trip. This is Joe's only business trip this year.
Joe was reimbursed $300 ($75 × 4 days), which is $44 more than the federal rate of $256 ($64 × 4 days). The employer includes
as income on Joe's Form W-2 in box 1. The employer also enters $256 in box 12 of Joe's Form W-2.
Joe completes Form 2106 to figure his deductible expenses. He enters the total of his actual expenses for the year ($380)
on Form 2106. He also
enters the reimbursements that were not included in his income ($256). His total deductible expense, before the 50% limit,
is $124. After he figures
the 50% limit on his unreimbursed meals and entertainment, he will include the balance, $62, as an itemized deduction.
Debbie drives 10,000 miles for business. Under her employer's accountable plan, she gets reimbursed 55 cents a mile, which
is more than the
standard mileage rate. Her total reimbursement is $5,500.
Debbie's employer must include the reimbursement amount up to the standard mileage rate, $4,850, in box 12 of her Form W-2.
That amount is not
taxable. Her employer must also include $650 ($5,500 - $4,850) in box 1 of her Form W-2. This is the reimbursement that is
more than the
standard mileage rate.
If Debbie's expenses are equal to or less than the standard mileage rate, she would not complete
Form 2106. If her expenses are more than the standard mileage rate, she would complete Form 2106 and report her total expenses
(shown in box 12 of her Form W-2). She would then claim the excess expenses as an itemized deduction.
Returning Excess Reimbursements
Under an accountable plan, you are required to return any excess reimbursement or other expense allowances for your business
expenses to the person
paying the reimbursement or allowance. Excess reimbursement means any amount for which you did not adequately account within
a reasonable period of
time. For example, if you received a travel advance and you did not spend all the money on business-related expenses, or you
do not have proof of all
your expenses, you have an excess reimbursement.
“Adequate accounting” and “reasonable period of time” were discussed earlier in this chapter.
You receive a travel advance if your employer provides you with an expense allowance before you actually have the
expense, and the allowance is
reasonably expected to be no more than your expense. Under an accountable plan, you are required to adequately account to
your employer for this
advance and to return any excess within a reasonable period of time.
If you do not adequately account for or do not return any excess advance within a reasonable period of time, the amount
you do not account for or
return will be treated as having been paid under a nonaccountable plan (discussed later).
If you do not prove that you actually traveled on each day for which you received a per diem or car allowance (proving
the elements described in
Table 5-1), you must return this unproved amount of the travel advance within a reasonable period of time. If you do not do
this, the unproved amount
will be considered paid under a nonaccountable plan (discussed later).
Per diem allowance more than federal rate.
If your employer's accountable plan pays you an allowance that is higher than the federal rate, you do not have to
return the difference between
the two rates for the period you can prove business-related travel expenses. However, the difference will be reported as wages
on your Form W-2. This
excess amount is considered paid under a nonaccountable plan (discussed later).
Your employer sends you on a 5-day business trip to Phoenix in March 2007 and gives you a $400 ($80 × 5 days) advance to
cover your meals
and incidental expenses. The federal per diem for meals and incidental expenses for Phoenix is $59. Your trip lasts only 3
days. Under your employer's
accountable plan, you must return the $160 ($80 × 2 days) advance for the 2 days you did not travel. You do not have to return
difference between the allowance you received and the federal rate for Phoenix (($80 - $59) × 3 days). However, the $39 will
on your Form W-2 as wages.
A nonaccountable plan is a reimbursement or expense allowance arrangement that does not meet one or more of the three rules
listed earlier under
In addition, even if your employer has an accountable plan, the following payments will be treated as being paid under a nonaccountable
Excess reimbursements you fail to return to your employer, and
Reimbursement of nondeductible expenses related to your employer's business. See Reimbursement of nondeductible expenses,
earlier, under Accountable Plans.
An arrangement that repays you for business expenses by reducing the amount reported as your wages, salary, or other pay will
be treated as a
nonaccountable plan. This is because you are entitled to receive the full amount of your pay whether or not you have any business
If you are not sure if the reimbursement or expense allowance arrangement is an accountable or nonaccountable plan, ask your
Reporting your expenses under a nonaccountable plan.
Your employer will combine the amount of any reimbursement or other expense allowance paid to you under a nonaccountable
plan with your wages,
salary, or other pay. Your employer will report the total in box 1 of your Form W-2.
You must complete Form 2106 or 2106-EZ and itemize your deductions to deduct your expenses for travel, transportation,
meals, or entertainment. Your meal and entertainment expenses will be subject to the 50% limit discussed in chapter 2. Also,
your total expenses will
be subject to the 2%-of-adjusted- gross-income limit that applies to most miscellaneous itemized deductions.
Kim's employer gives her $1,000 a month ($12,000 total for the year) for her business expenses. Kim does not have to provide
any proof of her
expenses to her employer, and Kim can keep any funds that she does not spend.
Kim is being reimbursed under a nonaccountable plan. Her employer will include the $12,000 on Kim's Form W-2 as if it were
wages. If Kim wants to
deduct her business expenses, she must complete Form 2106 or 2106-EZ and itemize her deductions.
Kevin is paid $2,000 a month by his employer. On days that he travels away from home on business, his employer designates
$50 a day of his salary
as paid to reimburse his travel expenses. Because his employer would pay Kevin his monthly salary whether or not he was traveling
away from home, the
arrangement is a nonaccountable plan. No part of the $50 a day designated by his employer is treated as paid under an accountable
Rules for Independent Contractors and Clients
This section provides rules for independent contractors who incur expenses on behalf of a client or customer. The rules cover
the reporting and
substantiation of certain expenses discussed in this publication, and they affect both independent contractors and their clients
You are considered an independent contractor if you are self-employed and you perform services for a customer or client.
Accounting to Your Client
If you received a reimbursement or an allowance for travel, entertainment, or gift expenses that you incurred on behalf of
a client, you should
provide an adequate accounting of these expenses to your client. If you do not account to your client for these expenses,
you must include any
reimbursements or allowances in income. You must keep adequate records of these expenses whether or not you account to your
client for these expenses.
If you do not separately account for and seek reimbursement for meals and entertainment in connection with providing services
for a client, you are
subject to the 50% limit on those expenses. See 50% Limit in chapter 2.
As a self-employed person, you adequately account by reporting your actual expenses. You should follow the recordkeeping
rules in chapter 5.
How to report.
For information on how to report expenses on your tax return, see Self-employed
at the beginning of this chapter.
Required Records for Clients or Customers
If you are a client or customer, you generally do not have to keep records to prove the reimbursements or allowances you give,
in the course of
your business, to an independent contractor for travel or gift expenses incurred on your behalf. However, you must keep records
You reimburse the contractor for entertainment expenses incurred on your behalf, and
The contractor adequately accounts to you for these expenses.
Contractor adequately accounts.
If the contractor adequately accounts to you for entertainment expenses, you (the client or customer) must keep records
documenting each element of
the expense, as explained in chapter 5. Use your records as proof for a deduction on your tax return. If entertainment expenses
are accounted for
separately, you are subject to the 50% limit on entertainment. If the contractor adequately accounts to you for reimbursed
amounts, you do not have to
report the amounts on an information return.
Contractor does not adequately account.
If the contractor does not adequately account to you for allowances or reimbursements of entertainment
expenses, you do not have to keep records of these items. You are not subject to the 50% limit on entertainment in this case.
You can deduct the
reimbursements or allowances as payment for services if they are ordinary and necessary business expenses. However, you must
file Form 1099-MISC to
report amounts paid to the independent contractor if the total of the reimbursements and any other fees is $600 or more during
the calendar year.
Completing Forms 2106 and 2106-EZ
This section briefly describes how employees complete Forms 2106 and 2106-EZ. Table 6-1 explains what the employer reports
on Form W-2 and what the
employee reports on Form 2106. The instructions for the forms have more information on completing them.
If you are self-employed, do not file Form 2106 or 2106-EZ. Report your expenses on Schedule C, C-EZ, or F (Form 1040). See
the instructions for
the form that you must file.
You may be able to use the shorter Form 2106-EZ to claim your employee business expenses. You can use this form if
you meet all of the following
You are an employee deducting expenses attributable to your job.
You were not reimbursed by your employer for your expenses (amounts included in box 1 of your Form W-2 are not considered
If you are claiming car expenses, you are using the standard mileage rate.
If you used a car to perform your job as an employee, you may be able to deduct certain car expenses. These are generally
figured on Form 2106,
Part II, and then claimed on Form 2106, Part I, line 1, Column A. Car expenses using the standard mileage rate can also be
figured on Form 2106-EZ by
completing Part II and Part I, line 1.
Information on use of cars.
If you claim any deduction for the business use of a car, you must answer certain questions and provide information
about the use of the car. The
information relates to the following items.
Mileage (total, business, commuting, and other personal mileage).
Percentage of business use.
Date placed in service.
Use of other vehicles.
Whether you have evidence to support the deduction.
Whether or not the evidence is written.
Employees must complete Form 2106, Part II, Section A, or Form 2106-EZ, Part II, to provide this information.
Standard mileage rate.
If you claim a deduction based on the standard mileage rate instead of your actual expenses, you must complete Form
2106, Part II, Section B. The
amount on line 22 (Section B) is carried to Form 2106, Part I, line 1. In addition, on Part 1, line 2, you can deduct parking
fees and tolls that
apply to the business use of the car. If you file Form 2106-EZ, complete Part I, line 1, for the standard mileage rate and
line 2 for parking fees and
tolls. See Standard Mileage Rate
in chapter 4 for information on using this rate.
If you claim a deduction based on actual expenses, you cannot use Form 2106-EZ. You must complete Form 2106, Part
II, Section C. In addition,
unless you lease your car, you must complete Section D to show your depreciation deduction and any section 179 deduction you
If you are still using a car that is fully depreciated, continue to complete Section C. Since you have no depreciation
deduction, enter zero on
line 28. In this case, do not complete Section D.
If you claim car rental expenses on Form 2106, line 24a, you may have to reduce that expense by an inclusion amount
as described in chapter 4. If
so, you can show your car expenses and any inclusion amount as follows.
Compute the inclusion amount without taking into account your business use percentage for the tax year.
Report the inclusion amount from (1) on Form 2106, Part II, line 24b.
Report on line 24c the net amount of car rental expenses (total car rental expenses minus the inclusion amount computed in
The net amount of car rental expenses will be adjusted on Form 2106, Part II, line 27, to reflect the percentage of business
use for the tax
Show your transportation expenses that did not involve overnight travel on Form 2106, line 2, Column A, or on Form
2106-EZ, Part I, line 2. Also
include on this line business expenses you have for parking fees and tolls. Do not include expenses of operating your car
or expenses of commuting
between your home and work.
Employee business expenses other than meals and entertainment.
Show your other employee business expenses on Form 2106, Column A, lines 3 and 4, or Form 2106-EZ, lines 3 and 4.
Do not include expenses for meals
and entertainment on those lines. Line 4 is for expenses such as gifts, educational expenses (tuition and books), office-in-the-home
trade and professional publications.
If line 4 expenses are the only ones you are claiming, you received no reimbursements (or the reimbursements were all included
in box 1 of your
Form W-2), and the Special Rules discussed later do not apply to you, do not complete Form 2106 or 2106-EZ. Claim these amounts
Schedule A (Form 1040), line 21. List the type and amount of each expense on the dotted lines and include the total on line
Meal and entertainment expenses.
Show the full amount of your expenses for business-related meals and entertainment on Form 2106, line 5, Column B.
Include meals while away from
your tax home overnight and other business meals and entertainment. Enter 50% of the line 8, Column B, meal and entertainment
expenses on line 9,
If you file Form 2106-EZ, enter the full amount of your meals and entertainment on the line to the left of line 5
and multiply the total by 50%.
Enter the result on line 5.
Hours of service limits.
If you are subject to the Department of Transportation's “hours of service
” limits (as explained earlier under Individuals subject to
“hours of service” limits
in chapter 2), use 75% instead of 50% for meals while away from your tax home.
Enter on Form 2106, line 7 (you cannot use Form 2106-EZ) the amounts your employer (or third party) reimbursed you
that were not reported to you in
box 1 of your Form W-2. This includes any amount reported under code L in box 12 of Form W-2.
Allocating your reimbursement.
If you were reimbursed under an accountable plan and want to deduct excess expenses that were not reimbursed, you
may have to allocate your
reimbursement. This is necessary when your employer pays your reimbursement in the following manner:
Pays you a single amount that covers meals and/or entertainment, as well as other business expenses, and
Does not clearly identify how much is for deductible meals and/or entertainment.
You must allocate that single payment so that you know how much to enter in Form 2106, Column A and Column B of line 7.
Rob's employer paid him an expense allowance of $12,000 this year under an accountable plan. The $12,000 payment consisted
of $5,000 for airfare
and $7,000 for entertainment and car expenses. The employer did not clearly show how much of the $7,000 was for the cost of
Rob actually spent $14,000 during the year ($5,500 for airfare, $4,500 for entertainment, and $4,000 for car expenses).
Since the airfare allowance was clearly identified, Rob knows that $5,000 of the payment goes in Column A, line 7, of Form
2106. To allocate the
remaining $7,000, Rob uses the worksheet from the instructions for Form 2106. His completed worksheet follows.
Enter the total amount of reimbursements your employer gave you that were not reported to you in box 1 of
Enter the total amount of your expenses for the periods covered by this reimbursement
Of the amount on line 2, enter your total expense for meals and entertainment
Divide line 3 by line 2. Enter the result as a decimal (rounded to at least three places)
Multiply line 1 by line 4. Enter the result here and in Column B, line 7
Subtract line 5 from line 1. Enter the result here and in Column A, line 7
On line 7 of Form 2106, Rob enters $8,297 ($5,000 airfare and $3,297 of the $7,000) in Column A and $3,703 (of the $7,000)
in Column B.
After you complete the form.
After you have completed your Form 2106 or 2106-EZ, follow the directions on that form to deduct your expenses on
the appropriate line of your tax
return. For most taxpayers, this is line 21 of Schedule A (Form 1040). However, if you are a government official paid on a
fee basis, a performing
artist, an Armed Forces reservist, or a disabled employee with impairment-related work expenses, see Special Rules,
Limits on employee business expenses.
Your employee business expenses may be subject to any of the three limits described next. They are figured in the
following order on the specified
1. Limit on meals and entertainment.
Certain meal and entertainment expenses are subject to a 50% limit. If you are an employee, you figure this limit
on line 9 of Form 2106 or line 5
of Form 2106-EZ. (See 50% Limit
in chapter 2.)
2. Limit on miscellaneous itemized deductions.
If you are an employee, deduct your employee business expenses (as figured on Form 2106 or 2106-EZ) on line 21 of
Schedule A (Form 1040). Most
miscellaneous itemized deductions, including employee business expenses, are subject to a 2%-of-adjusted- gross-income limit.
This limit is figured on
line 26 of Schedule A (Form 1040).
3. Limit on total itemized deductions.
If your adjusted gross income (line 38 of Form 1040) is more than $156,400 ($78,200 if you are married filing separately),
the total of certain
itemized deductions, including employee business expenses, may be limited. See your form instructions for information on how
to figure this limit.
This section discusses special rules that apply only to Armed Forces reservists, government officials who are paid on a fee
artists, and disabled employees with impairment-related work expenses.
Armed Forces Reservists Traveling More Than 100 Miles From Home
If you are a member of a reserve component of the Armed Forces of the United States and you travel more than 100 miles away
from home in connection
with your performance of services as a member of the reserves, you can deduct your travel expenses as an adjustment to gross
income rather than as a
miscellaneous itemized deduction. The amount of expenses you can deduct as an adjustment to gross income is limited to the
regular federal per diem
rate (for lodging, meals, and incidental expenses) and the standard mileage rate (for car expenses) plus any parking fees,
ferry fees, and tolls. See
Per Diem and Car Allowances earlier for more information. Any expenses in excess of these amounts can be claimed only as a miscellaneous
itemized deduction subject to the 2% limit.
Member of a reserve component.
You are a member of a reserve component of the Armed Forces of the United States if you are in the Army, Naval, Marine
Corps, Air Force, or Coast
Guard Reserve, the Army National Guard of the United States, the Air National Guard of the United States, or the Reserve Corps
of the Public Health
How to report.
If you have reserve-related travel that takes you more than 100 miles from home, you should first complete Form 2106
or Form 2106-EZ. Then include
your expenses for reserve travel over 100 miles from home, up to the federal rate, from Form 2106, line 10, or Form 2106-EZ,
line 6, in the total on
Form 1040, line 24. Subtract this amount from the total on Form 2106, line 10, or Form 2106-EZ, line 6, and deduct the balance
as an itemized
deduction on Schedule A (Form 1040), line 21.
You cannot deduct expenses of travel that does not take you more than 100 miles from home as an adjustment to gross
income. Instead, you must
complete Form 2106 or 2106-EZ and deduct those expenses as an itemized deduction on Schedule A (Form 1040), line 21.
Officials Paid on a Fee Basis
Certain fee-basis officials can claim their employee business expenses whether or not they itemize their other deductions
on Schedule A (Form
Fee-basis officials are persons who are employed by a state or local government and who are paid in whole or
in part on a fee basis. They can deduct their business expenses in performing services in that job as an adjustment to gross
income rather than as a
miscellaneous itemized deduction.
If you are a fee-basis official, include your employee business expenses from Form 2106, line 10, or Form 2106-EZ, line 6,
in the total on Form
1040, line 24.
Expenses of Certain Performing Artists
If you are a performing artist, you may qualify to deduct your employee business expenses as an adjustment to gross income
rather than as a
miscellaneous itemized deduction. To qualify, you must meet all of the following requirements.
During the tax year, you perform services in the performing arts as an employee for at least two employers.
You receive at least $200 each from any two of these employers.
Your related performing-arts business expenses are more than 10% of your gross income from the performance of those services.
Your adjusted gross income is not more than $16,000 before deducting these business expenses.
Special rules for married persons.
If you are married, you must file a joint return unless you lived apart from your spouse at all times during the tax
year. If you file a joint
return, you must figure requirements (1), (2), and (3) separately for both you and your spouse. However, requirement (4) applies
to your and your
spouse's combined adjusted gross income.
Where to report.
If you meet all of the above requirements, you should first complete Form 2106 or 2106-EZ. Then you include your performing-arts-related
from Form 2106, line 10, or Form 2106-EZ, line 6, in the total on Form 1040, line 24.
If you do not meet all of the above requirements, you do not qualify to deduct your expenses as an adjustment to gross
income. Instead, you must
complete Form 2106 or 2106-EZ and deduct your employee business expenses as an itemized deduction on Schedule A (Form 1040),
Impairment-Related Work Expenses of Disabled Employees
If you are an employee with a physical or mental disability, your impairment-related work expenses are not subject to the
2%-of-adjusted-gross-income limit that applies to most other employee business expenses. After you complete Form 2106 or 2106-EZ,
impairment-related work expenses from Form 2106, line 10, or Form 2106-EZ, line 6, on Schedule A (Form 1040), line 28, and
identify the type and
amount of this expense on the dotted line next to line 28. Enter your employee business expenses that are unrelated to your
disability from Form 2106,
line 10, or Form 2106-EZ, line 6, on Schedule A (Form 1040), line 21.
Impairment-related work expenses are your allowable expenses for attendant care at your workplace and other expenses in connection
workplace that are necessary for you to be able to work.
You are disabled if you have:
A physical or mental disability (for example, blindness or deafness) that functionally limits your being employed, or
A physical or mental impairment (for example, a sight or hearing impairment) that substantially limits one or more of your
activities, such as performing manual tasks, walking, speaking, breathing, learning, or working.
You can deduct impairment-related expenses as business expenses if they are:
Necessary for you to do your work satisfactorily,
For goods and services not required or used, other than incidentally, in your personal activities, and
Not specifically covered under other income tax laws.
You are blind. You must use a reader to do your work. You use the reader both during your regular working hours at your place
of work and outside
your regular working hours away from your place of work. The reader's services are only for your work. You can deduct your
expenses for the reader as
You are deaf. You must use a sign-language interpreter during meetings while you are at work. The interpreter's services are
used only for your
work. You can deduct your expenses for the interpreter as business expenses.
The following examples illustrate the reporting of travel, entertainment, gift, and transportation expenses on Forms 2106
and 2106-EZ. Business use
of a car is shown using actual car expenses in Example 1 and the standard mileage rate in Example 2. Sample records that prove
some of the claimed expenses are also shown.
David Pine purchased a new car for $24,500 (including sales tax) on January 5, 2007. In 2007, he used the car 70% for business
purposes. A sample
page from David's logbook is illustrated in Table 6-2. He records his business mileage (but not his personal miles) and expenses
David uses Form 2106 to claim actual car expenses. He completes Part II, Section A, as shown later on his illustrated form.
He does not claim the
section 179 deduction. He uses the MACRS double declining balance method (200% DB) to determine his depreciation deduction.
David's total depreciation deduction would normally be $3,430 ($24,500 (unadjusted basis) × 70% (business use) × 20% (from
However, it is limited in the first year to $2,142 ($3,060 (from the Maximum Depreciation Deduction for Cars table shown in chapter 4)
× 70%). He enters these amounts in Part II, Section D.
His other car expenses included $5,150 for gas, oil, repairs, and insurance. He enters this amount in Part II, Section C,
and multiplies it by the
70% business use. He adds this amount ($3,605) to the depreciation deduction ($2,142) and reports the total ($5,747) on Part
I, line 1.
His other transportation expenses for parking fees, tolls, and taxis were $1,320. He enters this amount on Part I, line 2.
reimbursed him a total of $4,800 for his car and transportation expenses. This amount was paid from an accountable plan and
was not shown on David's
Form W-2. However, since he is claiming expenses that are more than his reimbursements, he must show the entire reimbursement
amount on Part I, Column
A, line 7. Since David had no meal or entertainment expenses, he enters his excess deductible expenses ($2,267) on Part I,
line 10. He can deduct
these expenses (subject to the 2%-of-adjusted-gross-income limit) on Schedule A (Form 1040), line 21, if he itemizes his deductions.
Bill Wilson is an employee of Fashion Clothing Co. in Manhattan, NY. In a typical travel week, Bill leaves his home on Long
Island on Monday
morning and drives to Albany to exhibit the Fashion line for 3 days to prospective customers. Then he drives to Troy to show
Fashion's new line of
merchandise to Town Department Store, an old customer. While in Troy, he talks with Tom Brown, purchasing agent for Town Department
Store, to discuss
the new line. He later takes John Smith of Attire Co. out to dinner to discuss Attire Co.'s buying Fashion's new line of clothing.
Bill purchased his car on January 3, 2004. He uses the standard mileage rate for car expense purposes. He records his total
mileage, parking fees, and tolls for the year. Bill records his expenses and other pertinent information in his Weekly Traveling Expense and
Entertainment Record, shown in Table 6-3. He obtains receipts for his expenses for lodging and for any other expenses of $75 or more.
During the year, Bill drove a total of 25,000 miles of which 20,000 miles were for business. Following the instructions for
Form 2106-EZ, Part II,
he answers all the questions and figures his car expense to be $9,700 (20,000 × 48½ cents per mile).
His total employee business expenses are shown in the following table.
|Type of Expense
Parking fees and tolls
Lodging, laundry, dry cleaning
Gifts, education, etc.
Bill received an allowance of $33,000 ($2,750 per month) to help offset his expenses. Bill did not have to account to his
employer for the
reimbursement and the $33,000 was included as income in box 1 of his Form W-2.
Because Bill's reimbursement was included in his income and he is using the standard mileage rate for his car expenses, he
files Form 2106-EZ with
his tax return.
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