Clarity for cell phone rules

The IRS has a clear signal for employers and employees regarding taxes on cell phones. Cell phones were ‘de-listed,’ or taken off of the list of taxable fringe benefits, about a year ago. The new rules adopted on September 14, 2011 apply to all tax years after December 31, 2009. There are essentially two categories:

Employer-provided cell phones
– When provided for business reasons and not intended as compensation, neither the business nor personal use of the phone are considered income to the employee. Therefore no laborious recordkeeping is needed because this benefit does not constitute additional taxable income to the employee. On the employer’s side, the expense is fully deductible.

For tax purposes, the cell phone is a working condition fringe benefit (WCFB), which means that if the employee paid for the cell phone or service personally, the business portion would be an allowable deduction on their personal tax return. However, the employee would only be allowed to deduct the expense if he or she itemized, and could only deduct the expenses that exceeded 2% of his or her adjusted gross income.  It’s generally better for the employee if the employer provides the cell phone, since most employees will lose their deduction either because they don’t itemize, or it does not exceed the threshold to deduct it.

Personal use of a phone provided for business is a tax-free ‘de minimis’ fringe benefit because the amount is typically negligible. Examples of business phone use include being available to talk with clients or coworkers when outside of the office and being available for emergency-related calls.

Reimbursements for personal phones used for business – The employer may reimburse an employee for business use of an employee’s personal phone, but the amount may not exceed expenses incurred by the employee. The reimbursement amount is not taxable for the employee, as the phone is a working condition fringe benefit. Additionally, the reimbursement amount must not be considered a substitute for regular wages.