In the past, the use of cell phones (including iPhones, Droids, Blackberries, etc.) with a business purpose have always been treated as listed property, which requires detailed usage records to substantiate the business and personal use. With the passing of the Small Business Jobs Act of 2010, the requirement to treat cell phones as listed property has been removed.
Employer Provided Cell Phones
The IRS has determined that if the phone can pass a “primarily-for-noncompensatory-business-purpose test”, an employer provided cell phone considered a tax-free de minimus fringe benefit. By qualifying as a free de minimus fringe benefit the cell phone will be exempt from both income and employment taxes. The primarily-for-noncompensatory-business-purpose test can be passed by the employer having a need to contact the employee at all times, the employee needing to communicate with clients while away from the office or communicate with clients outside normal business hours.
However, if an employer does not pass the primarily-for-noncompensatory-business-purpose test and provides its employees with a cell phone; then the personal usage by the employee is considered taxable compensation subject to income and employment taxes. An employer provided phone will not pass the required test if the phone is provided to the employee to improve morale, attract prospective employees or to simply provide addition compensation.
Employer Reimbursement for Use of Personal Cell Phone
The IRS has also unofficially released guidance on the reimbursement to employees for their cell phone costs, which state the reimbursement by the employer for the use of a personal cell phone for business use is exempt from federal income and employment taxes if the cell phone usage is primarily for noncompensatory business purposes.
In summary, when an employer provides an employee with a cell phone or reimburses an employee for cell phone cost incurred related to business use, the result is a non-taxable benefit requiring no record keeping to substantiate business use. The changes listed above can make major differences in tax on behalf of both the employer and employee, which can require some careful consideration if these issue affect you. Please contact HBE at (402) 423-4343 if you have any questions or comments related to employer provided or employer reimbursed cell phones.