The IRS has introduced new rules for taxation of business and personal use of employer-provided cell phones. Under the new rules, effective retroactive to January 1, 2010, the cell phone must be provided for non-compensatory business reasons. The personal use of the cell phone is then nontaxable as a working-condition fringe benefit.
In addition, if an employer requires employees to maintain and use personal cell phones for business purposes, reimbursement of their monthly charges is also tax free.
Example: Employee pays $39.99/month for an unlimited usage cell phone plan. Employer requires employees to use their cell phone to contact clients outside of normal office hours. The employer can reimburse the full $39.99/month and not include this amount in the employee’s income because it is tax free.
The IRS defines non-compensatory business purposes as those that have a substantial business-related reason including, but not limited to:
- The need to contact the employee at all times for work-related emergencies;
- A requirement that an employee be available to speak with clients when the employee is away from the office; and
- The need to speak with clients located in other time zones at times outside of the employee’s normal work day.
Examples of usage that would not be tax free would include excessive charges for international calls when the company has only US based clients.
