Does your company provide cell phones to employees or reimburse employees for a portion of their personal cell phone bills attributable to business use? For years, the Internal Revenue Service attempted to tax employee cell phone usage and imposed burdensome recordkeeping requirements. In September of 2011, the IRS issued guidance that simplified the taxability of cell phone usage by employees and relaxed the standards for maintaining records.
IRS Notice 2011-72 prescribes two treatments for cell phones provided by employers: the portion of usage for business is a working condition fringe benefit and the personal use is a de minimis fringe benefit. This means that both benefits are nontaxable to employees as long as the noncompensatory business criteria for cell phone usage are met. The IRS does not require records of business usage in order to receive this tax-free treatment.
An employer is considered to have provided an employee with a cell phone primarily for noncompensatory business purposes if there are substantial reasons relating to the employer’s business, other than providing compensation to the employee, for providing the employee with a cell phone. Examples of such reasons include the employer’s need to contact the employee at all times for work-related emergencies or an employer requirement that the employee be available to speak with clients when the employee is away from the office.
Although the Notice provided guidance for employer-provided cell phones, there were still questions regarding employee-owned cell phones. Shortly after issuing Notice 2011-72, the IRS sent a memorandum to its field agents instructing them to apply the same analysis and conclusions described in Notice 2011-72 to situations where businesses provide reasonable reimbursement to employees for work-related use of their personally-owned cell phones, as long as the noncompensatory business criteria are met.
Although these simplified rules are favorable for employers, there could still be adverse tax consequences for companies that don’t properly follow the IRS guidance, including documentation of the company cell phone policy and how the noncompensatory business criteria are satisfied. Please contact us at Levin Swedler Kennedy if you need any assistance.
Written by: Todd M. Kennedy, CPA