Human Resources News & Insights

IRS cuts cell phone tax headache

Great news: The IRS has eliminated one major headache for employers associated with a common fringe benefit — cell phones.

The Internal Revenue Service (IRS) recently updated guidance on the tax treatment of employer-provided cell phones and the reimbursement of employee-owned cell phones.

It says that employers no longer need to include any use of a company-provided cell phone in an employee’s wages, as long as the phone was provided for “noncompensatory business reasons.”

The IRS says noncompensatory business reasons include:

  • An employer’s need to contact an employee at all times for work-related emergencies
  • A requirement that the employee be able to speak with clients at times when the employee is out of the office, and
  • An employee’s need to speak with clients located in other time zones outside of the employee’s normal work hours.

The IRS has even said it’ll consider the value of any personal use of a cell phone as a nontaxable de minimis fringe benefit, as long as the phone is used primarily for noncompensatory business purposes.

That means employers no longer have to determine which calls by employees are personal and which aren’t — and then include the value of personal calls in the employees’ taxable income.

Taxable use

However, cell phones provided for any of the following reasons will be considered for compensatory business purposes — and require employers to track and tax their use:

  • To promote the morale or goodwill of an employee
  • To attract a prospective employee, or
  • As a means of furnishing additional compensation.

The new rules are effective for all taxable years beginning Jan. 1, 2010. They apply to both employer-provided cells and the reimbursement of employee-owned cells.

Now that the IRS has eased its rules, employers may want to consider doing the same. If you’ve got a policy restricting the personal use of cell phones, it may be time to lift some of those restrictions.

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