If you provide your employees with a cell phone for business use, both their business and personal use of the cell phone is a non-taxable fringe benefit. More importantly, the IRS will not require record keeping of business use in order to receive this tax-free treatment: If your cell phone policies meet the requirements for exclusion from income, then the employee's expenses are considered to be substantiated.
This tax-free treatment is available only if you provide the phone for a non-compensatory business use. This test is met if you have substantial business reasons for providing the employee with a cell phone. Once the non-compensatory business use test is met, all of the employee's use of the phone, whether business or personal, is non-taxable. The following are examples of substantial business reasons for providing a cell phone:
- you need to contact the employee at all times for work-related emergencies;
- the employee is required to stay in contact with other employees outside of the employee's normal working hours;
- an employee must contact clients or customers when the employee is away from the office, or
- the employee needs to speak with clients located in other time zones at times outside of the employee's normal work day.
Caution. A cell phone provided to promote the morale or good will of an employee, to attract a prospective employee or as a means of furnishing additional compensation to an employee is not provided primarily for non-compensatory business purposes. In this case, the value of the cell phone must be included in the employee's income as a taxable fringe benefit.
Reimbursement for Phone Use Is Also Non-Taxable
Small businesses often don't provide a cell phone to their employees; instead, a small business owner will provide a cash allowance or reimbursement for the employees' work-related use of their personal cell phones. In recognition of this, the IRS also determined that a similar administrative approach will apply to these arrangements. If you require your employees to use their personal cell phones for business purposes, reimbursements of the employees' expenses for reasonable cell phone coverage will be considered non-taxable. However, the use must be primarily for non-compensatory business reasons; the expenses can not be unusual or excessive expenses and the reimbursements can not be made as a substitute for any part of the employee's regular wages.