In September, the IRS issued Notice 2011-72 which gives employers guidance on how to provide cell phones to employees as a non-taxable working condition fringe benefit. Under the Notice, a cell phone provided by an employer primarily for non-compensatory business reasons will be treated as a non-taxable working condition fringe without further substantiation of the actual use of the cell phone.
In 2010, employers received welcome relief when President Obama signed the Small Business Jobs Act which changed the tax rules applicable to employer-provided cell phones and other similar devices (e.g., smart phone, PDA, Blackberry, etc.). Under the Act, employer-provided cell phones ceased to be considered “listed property” for which onerous recordkeeping requirements must be satisfied to avoid treatment as a taxable fringe benefit. The Act, however, still left some questions unanswered. Specifically, to avoid being considered a taxable benefit, employer-provided cell phones still needed to qualify as a working condition fringe and any personal use would need to qualify as a de minimis fringe benefit.
Dow Lohnes Practice Pointer #1
Employers should revisit their cell phone policies to ensure that there is a stated business reason for providing an employee with a cell phone.
Notice 2011-72 states that an employer must have “substantial” reasons relating to the employer’s business for providing an employee with a cell phone in order to avoid adverse tax treatment. By way of example, the Notice indicates that the need to be in touch for work-related emergencies, the need to be in touch with clients when an employee is out of the office, or the need to be in touch with clients outside of the normal work day would all constitute “substantial” reasons for providing a cell phone. Under this new guidance, employers no longer need to keep records detailing the actual use of an employer-provided cell phone in order to avoid taxation of their employees.
In addition to the Notice, the IRS issued a Memorandum to its field examiners that addresses the treatment of employee reimbursements for business use of personal cell phones. Prior to the change in tax treatment of cell phones, some employers had shifted to a stipend or reimbursement for cell phone use in order to avoid the recordkeeping burdens under prior law. Unfortunately, cash payments, without other evidence of business purpose, were taxable to the employees. The Memorandum provides that cash payments need not be considered taxable income. In order for the cash payment to avoid taxation, the employer must have a substantial business reason for requiring the employee to use a personal phone for business purposes (e.g., a need for the employee to keep in touch with clients outside of normal business hours). In addition, the employee’s cell-phone plan must be reasonably related to the business need for the phone, and the reimbursement must be reasonably calculated so as not to exceed the expenses incurred by the employee. As an example, the Memorandum indicates that the reimbursement for a flatrate plan for a phone used by an employee for business reasons to maintain contact with clients after hours will not result in additional income to the employee even though the phone (and minutes under the flat-rate arrangement) are used for personal purposes.
Dow Lohnes Practice Pointer #2
Employers should revisit the structure of their cell phone reimbursement arrangements to align them with the newly issued guidelines that allows employers to avoid taxing employees on such arrangements.