It’s hard to imagine life without cell phones.
These devices have become essential for just about everyone, and in particular many businesses, whose employees are often required to use one.
But in the cases of companies, there are tax ramifications that depend on whether the firm or the employee owns the phone. Strict substantiation requirements have been removed, so it’s easier for employer-provided cell phones to qualify for tax-free treatment. Otherwise, your firm’s payroll professionals will report amounts as taxable income to employees.
In some cases, employees occasionally will use a personal cell phone for business purposes, mainly for their convenience. There’s nothing wrong with that, but this article is devoted to times when employees are required to use cell phones for their jobs. (Employees paying their own costs may be eligible for miscellaneous expense deductions on their personal tax returns.)
2 Ways to Go
Assuming that cell phone use is part and parcel of the job, the starting point is to decide who owns the phones, employer or employee. Generally there are advantages to your company to furnishing cell phones for business use. It helps to keep a lid on costs, protect confidential information and it offers legal advantages. But this route may still be full of problems. With that in mind, here are the two most common ways to approach the issue:
1. Employer-owned cell phones. You call the shots on the plan being used. In other words, you pay only what you think the company needs based on the job. This includes voice, text and data services. Typically, but not always, business rates are lower than those for personal cell phone plans.
What’s more, you will own the phone numbers, so you are less likely to miss important calls if an employee leaves the company.
Also, remember that you are often responsible for client data. This is a critical legal issue. By owning the cell phones, you can set passwords and use applications for greater protection. Conversely, if employees own their cell phones, it’s more likely that problems will occur, especially when they control decisions on carriers and services.
Finally, if you purchase phones for employees, tech support will be simplified. It’s recommended that you use a single platform for a small-to-midsized business. This will further improve security and reduce exposure to outside hackers.
2. Employee-owned cell phones. Despite the advantages outlined above, owning cell phones is not always a slam-dunk for employers. Consider the following:
- Cost. Employee-owned phones may be less costly for employers, particularly if the employee has a family plan, or a spouse’s employer covers the entire cost. When analyzing the costs, be sure to take all the relevant factors into account.
- Personal use. Face it — the phones belong to the employees and they will be using them for personal reasons. If you’re uncomfortable with that, you might choose to reimburse employees for business use. Besides, do you really expect employees to carry two phones?
- Data use. Personal use may push employees over the allotment. That means a line-by-line examination of the bills will be necessary.
- Deactivation. If a departing employee refuses to give up a company-provided phone, you’ll have to take steps to deactivate it and re-route the number to another person. This hassle won’t exist with employee-owned phones.
Usually, employers reimburse employees for substantiated business use, but not for personal use. As an alternative, you could use another form of reimbursement, such as a flat monthly amount of $50 or $100. If an employee doesn’t have a cell phone and can’t afford to buy one, you could arrange to pay for the phone initially and have the employee take over the payments at a later time.
Tax Consequences of Reimbursements
The Small Business Jobs Act made it easier to qualify for tax-free treatment. The IRS explained the basic guidelines in Notice IR-2011-93. As long as certain requirements are met, the value of employer-provided cell phones or reimbursements may be treated as a “working condition fringe benefit.”
But this tax break isn’t automatic. To qualify, the cell phones must be provided to employees for “noncompensatory business reasons.” In other words, there must a bona fide business purpose. The tax exclusion is extended to employer-paid cell phone plans.
The IRS provides three common examples of noncompensatory business reasons.
1. The employer must be able to contact the employee at all times for work-related emergencies,
2. The employer requires the employee to be available to speak with clients or customers at all times when away from the office, or
3. Employees must speak with clients located in other time zones at times outside the regular work time.
If the employer reimburses employees with personal cell phones for business use, it can count as a noncompensatory business reason. However, the amounts must be limited to the cell phone charges. Any excess should be returned to the employer or it will be treated as taxable compensation. Rely on your payroll providers to determine the taxable value.
Also, the value of personal use of an employer-provided cell phone used primarily for noncompensatory business reasons is a tax-free de minimis fringe benefit, provided such use is minimal.
In a memorandum to examiners, the IRS outlined an administrative approach for small businesses that provide cash allowances and reimbursements. Employers that require employees to use personal cell phones primarily for noncompensatory business reasons may treat reimbursements as being tax-free.
If there isn’t a noncompensatory business reason for cell phone use, the value is reported to the IRS as taxable income. Employees may owe tax, which is relatively small, but otherwise they get the phone for free. You may want to set up this arrangement when you want to:
- Boost morale among employees,
- Encourage new-hires,
- Add to the compensation of employees, or
- Reimburse or pay international coverage for a service technician with only local clients or customers.
IRS examiners have been instructed to ferret out reimbursement arrangements that appear out of the norm. For example, reimbursements that are substantially back-loaded to the end of the year could be disguised compensation. Consult with your Cornwell Jackson payroll provider to determine which route your company should take to avoid any problems.