With so many more employees working remotely over the last couple of years, many employers have had to grapple with whether to provide workers with cell phones or allow them to use personal phones for business purposes.
From a fringe benefits perspective, two questions typically arise when this matter comes up. First, will the IRS view employer-provided phones as a nontaxable fringe benefit — even if employees sometimes use the phones for personal calls? And second, instead of providing phones, could the employer reimburse employees on a nontaxable basis for business use of their personal phones?
Providing the phone
Business use of an employer-provided cell phone may be treated as a nontaxable working condition fringe benefit so long as the phone is provided “primarily for noncompensatory business purposes.” Examples of noncompensatory purposes include the need to be accessible to an employer at any time for work-related emergencies, or to be accessible to customers outside of normal business hours or when away from the office.
If the noncompensatory business purposes test is met, the value of any personal use of an employer-provided phone will be treated as a nontaxable “de minimis” fringe benefit. However, an employer-provided phone will fail the test — and trigger taxable income — if the phone is provided as a substitute for compensation, or to attract new employees or boost staff morale.
Reimbursements for personal phones
The IRS has indicated that it will analyze the reimbursement of employees’ expenses for their personal cell phones similarly. Reimbursements generally won’t be considered additional income or wages so long as three conditions are met:
- The employer has substantial business reasons for requiring employees to use their personal phones and reimbursing employees for that use.
- The reimbursements are reasonably related to the needs of the employer’s operations and are reasonably calculated not to exceed the expenses that an employee typically incurs in maintaining the phone.
- The reimbursements aren’t a substitute for a portion of an employee’s regular wages.
So, let’s say an employer reimburses an employee for a basic cell phone plan that charges a flat monthly rate for a specified number of minutes of domestic calls, and some of those minutes are used for personal calls. In such a case, the portion of the cost attributable to personal use can be deemed a nontaxable “de minimis” fringe benefit if all three requirements noted above are met.
These rules also apply to “similar telecommunications equipment.” Although the IRS doesn’t define that phrase with complete clarity, the agency has affirmed that tablet devices are eligible.