To qualify as a tax-free benefit, employers must have a substantial noncompensatory business purpose for supplying employees with phones or requiring employees to use their own phones for business. The rule applies to smartphones and personal digital assistants, as well as regular cell phones.
You can meet that standard if, for example, you need to contact employees at any time for work-related emergencies, or employees must be available to speak to clients when they’re not in the office or to clients who are located in other time zones.
Phones given to employees to promote morale or good will, to attract new employees or to provide additional pay aren’t provided for substantial business purposes. That means those employees’ personal cell phone use is fully taxable.
Read IRS Notice 2011-72, which explains the change, at www.irs.gov/pub/irs-drop/n-11-72.pdf.