Employers that have a noncompensatory business purpose for providing cell phones or related equipment—that includes smartphones and personal digital assistants—to employees may treat their business use as a tax-free working conditionand their personal use as a tax-free de minimis fringe benefit.
Good: Employees don’t have to keep any records of their business and personal use.
Better: The IRS is advising auditors to use a similar analysis when evaluating employers’ reimbursements to employees for business use of their personal phones. These rules apply to employees’ use of cell phones beginning in 2010. (Notice 0211-71, IRB 2011-38; SBSE-04-0911-083)
Noncompensatory business purpose. As generous as this guidance is, it’s limited to employers that have a substantial noncompensatory business purpose for supplying employees with phones or requiring employees to use their own phones for business.
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 in other time zones.
Reimbursement for business use of personal phones. Phone plans charge a flat rate per month for an allotment of minutes for domestic calls (emails and texts, too). You may reimburse employees for those basic monthly expenses. The IRS, however, placed limits on this, too. IRS: Reimbursements are tax-free if employees’ calling/data plans are reasonably related to the employer’s business needs, and reimbursements don’t exceed expenses.
SORRY, WRONG NUMBER: Phones given to employees to promote morale or good will, to attract new employees or to provide additional pay aren’t provided for substantial noncompensatory business purposes. That means those employees’ personal use is fully taxable. Auditors probably won’t question an employee who upgrades his or her cell phone to a smartphone, but their interest may be piqued if the new phone is a satellite phone. Likewise, auditors will question reimbursements that deviate significantly from normal use (e.g., reimbursements increase from $100 to $500 a quarter).