Question: I am in sales/marketing with a low salary and heavy commissions. I was wondering what receipts I should keep during the year – gas, lunch, dry cleaning, etc. Thank you for any help, I really appreciate it.
– Patrick in Illinois
Jacob Dayan, Co-Founder of Community Tax, responds…
The answer depends largely on whether you are classified as an employee or as an independent contractor.
If you are an employee, your employer will deduct income tax, Medicare, and Social Security from your paycheck – and will issue you a W-2 at the end of the year. If you are an independent contractor, your employer will not deduct any taxes from your paychecks – and will issue you a “1099-Misc” at the end of the year.
Let’s drill down further…
How long should you keep receipts if you’re an employee?
If you are classified as an employee, there is no need to keep track of any expenses. That’s because those expenses are no longer deductible for 2018 and beyond.
For tax years 2017 and prior, employees could deduct business expenses that were not reimbursed by their employer as itemized deductions on their tax returns. However, the Tax Cuts and Jobs Act (TCJA) of 2017, which made significant changes to the income tax laws, eliminated the employee expense deduction and replaced it with a larger standard deduction. (That’s $12,000 for individuals and $24,000 for married filing jointly.)
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Because of the removal of this deduction for 2018 and beyond, keeping track of all associated expenses – from an income tax perspective – is a waste of time. However, keeping track of these expenses may still be useful for other purposes, such as negotiating a higher base salary in the future.
If you are an employee and you incur significant expenses to earn your commission (and those expenses are no longer deductible) you are, in effect, taking a pay cut under the new tax laws. So keeping track of these newly un-deductible expenses may give you some leverage at the negotiating table.
How long should you keep receipts if you’re a contractor?
If you are an independent contractor, your business expenses are still deductible under the old rules.
Your most significant deductible expense will likely be vehicle expenses. There are two methods to deduct vehicle expenses: claiming “actual expenses” or claiming the standard mileage rate.
You are allowed to deduct your “actual” expenses for the business portion of your gas, license, parking, maintenance, etc. Or you can claim the standard mileage rate of $.545 cents per mile in 2018.
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From a practical standpoint, keeping track of miles is much easier than keeping every gas and parking receipt. I recommend you go that route. The best way to keep track of miles is to keep a log book in your vehicle. That way you can write down your odometer readings before and after any business travel. You are also able to deduct travel and lodging expenses. If you travel by train or by plane or need to stay overnight at a remote location, you can.
My other recommendations
I would also recommend keeping receipts tracking other business expenses. Especially your cellphone, supplies, and business equipment like a laptop. Those are likely deductible for a sales/marketing professional.
It is also important to note which expenses are not deductible and therefore not worth keeping track of. Meal expenses are not deductible unless you are with a client or prospect. There is a clear business purpose for picking up the check. Expenses like “lunch” for yourself while out on the road are not deductible and therefore not worth keeping track of. Dry cleaning is only deductible if it is for clothes that are required for and worn exclusively for work – not for everyday wear. So dry cleaning for suits and ties and polo shirts is not deductible, but a museum quality Babe Ruth baseball uniform worn to clients’ offices to convince them your products are a “home run” probably would be deductible.
In summary, if you are classified as an employee, keeping track of gas or any other business expense is not worth the time because it is no longer deductible. If you are classified as an independent contractor, I recommend keeping track of your miles, cellphone, supplies, and meals and entertainment expense when you are with clients.