Some of us consider employer-provided cell phones a much-appreciated necessity. Some of us consider them a burden. The Internal Revenue Service (IRS) considers them income.
I previously blogged that the IRS considers employer-provided cell phones a fringe benefit subject to reporting and consequently, taxation. The initial buzz on this issue, which started about a year ago, focused on a rule from 1989 (remember 1989?) that requires that employers report cell phones distributed to employees as a taxable benefit. It also requires employees to keep detailed records of all calls made on cell phones issued by employers which indicate which calls are business and which calls are personal.
The IRS has just recently updated its stance on this matter by issuing Notice 2009–46, Substantiating Business Use of Employer-Provided Cell Phones. If you’re interested in reading the entire text of the notice, it’s available here from the IRS (it will download as a pdf).
The IRS is considering “three alternative methods to simplify the substantiation requirements.” I love it. In no way does it sound like it’s being simplified – just from the description.
But here’s what they’re proposing:
- Minimal Personal Use Method. Under this method, the IRS would consider all of your cell phone usage for an employer-provided cell phone “for business” and thus, exempt from inclusion as income if you can prove that you had another phone available for personal use (this would include another cell phone) during work hours.
- Safe Harbor Substantiation Method. Under the safe harbor method, the IRS would simply deem a certain percentage of cell phone calls from an employer-provided cell phone as “for business” for the purpose of excluding some – but not all – of your cell phone usage from income. The IRS is considering 75% as its safe harbor business use rate.
- Statistical Sampling Method. This method is the most burdensome for employers. It would allow employers to more or less determine their own “safe harbor” by proving to the IRS the actual percentage of business use of the phones by monitoring employee use.
Is it just me or is the IRS making this incredibly difficult?
As a business owner (and an employee) with an employer-provided cell phone, I’m both relieved and concerned that the IRS is addressing this matter. On the one hand, it’s disconcerting to have the existing rule just hanging out there, which means that it can be used against you at any time (and likely will – it has happened recently in California). On the other hand, I was hoping that cell phones provided by employers would be disregarded altogether and not subject to more complicated rules.
It has been my personal experience – as well as the feedback that I’ve received in response to my prior pieces on the subject – that most employer-provided cell phones are for the convenience of the employer, not the employee. In that regard, it should not be considered compensation to the employee.
Let’s do the math. In 2007 – before the use of wireless and IM increased significantly – a JD Powers study reported that the average cell phone bill was $77 per month. Forbes reported in 2008 that the average cell phone bill was $50 per month. I can tell you that, in my office, it runs closer to $100 per month, so I think the JD Powers number sounds pretty accurate. Using that number, the benefit would increase your total revenue as reported on your form W-2 by nearly $1000 (the actual total is $924).
Using method #1, I’d actually fail to meet the exemption. I do not have another personal phone available during work hours – except for when I’m working from home. During the business day, when I’m at the office, I have a business phone available but no additional personal phone. I’m guessing, except for telecommuters, that’s likely the case for most employees.
Using method #2, I’d be able to exempt 75% of that bill from income. Better. But my money is on that number being slightly lower when the IRS actually issues the Regs on this issue.
Using method #3, I’d probably come out better since I know that my employees rely substantially on their cell phones. That means, however, that as the employer, I’d have to go through a pretty burdensome process to come up with the actual statistical data on that. I’m not sure it’s worth it.
What about you? How will this affect you? The IRS actually wants to hear what you think about this matter.
Comments must be submitted in writing on or before September 4, 2009,
and should include a reference to Notice 2009–46. Mail them to:
Internal Revenue Service
Attn: CC:PA:LPD:PR
(Notice 2009–46), Room 5203
P.O. Box 7604
Ben Franklin Station
Washington, DC 20044
If you live in the DC area, you can also hand-deliver your comments, Monday through Friday between the hours of 8 a.m. and 4 p.m., to:
CC:PA:LPD:PR (Notice 2009–46),
Courier ’s Desk, Internal Revenue Service,
1111 Constitution Avenue, N.W., Washington, DC.
And yes, there’s an email address, too (thank goodness). Send your comments via email to: Notice.comments@irscounsel.treas.gov Include “Notice 2009–46” in the subject line.
Of course, I’d love to hear what you think, too. Let me know in the comments below.
One relatively easy and inexpensive (though not free) way around the #1 alternative is a pay-as-you-go phone like Tracfone or GoPhone. Initial cost could run under $20 and then you can probably go a full year for a total sunk “subscription” cost of about $60-$80.
The next thing the IRS will want to consider will be toilet paper, paper towels and the soap and water (including toilet flushes) the employee uses at work.
Well, I’d go for the safe harbor. Suppose it ends up at 70%. Suppose the cost of employee cellphones is $100 a month each. That means the employee is on the hook for an additional $360 a year in taxable income. Let’s say you pay them well, so their income tax increase would be 1/3 of that or $120 a year or $10 a month. Then bump the salary of each employee who has a “company” cellphone by $15 a month. That will cover their additional income tax obligation, so they come out even. That means your employee cellphone cost goes from $100 to $115 a month.
Sure, it costs you more, but as “safe harbor” you know the IRS can’t dispute you on this. And the extra cost probably more than compensates you for not having to use the irksome statistical sampling method.
Of course, this means that the company is shouldering the total cost+taxes of the cellphone, which probably is justified if the employer “requires” the employee to have the phone.
Of course, this doesn’t address whether or not employer-provided “mandatory” cellphones should get split treatment in the first place. That’s a different argument.
Wouldn’t you just be able to turn around at tax time and deduct the “income” as a business expense? I mean if the company requires it, shows it as an income to you, then you should be able to deduct it, shouldn’t you? I truly don’t know… but it sounds like it makes sense… OMG I forgot we were talking about the IRS. sorry…
David,
I don’t think so. If the IRS settles on a certain split (say, 75% business and 25% personal) and you’re taxed on the personal use, then you can’t deduct that on your personal income taxes as a business expense. It’s already been determined that it’s not.
KPE-
The “safe harbor” rule is obviously the best for all concerned – and still a good deal for the average applicable taxpayer. I have no doubt that an employee given a free cellphone by his employer uses it for personal use at least 1/3 – if not more – of the time.
This method involves the least amount of work and agita on the part of the employee, the employer, and the IRS auditor.
Could we turn this around and also create a safe harbor for taxpayers (employee and self-employed) deducting the business use of a personally paid for cell phone of 75% of total cost? So they would not have to be required to keep a daily useage log as documentation. Those who want to keep a log to show more than 75% business use would still be allowed to do so.
FYI, I do not have a cell phone, business or otherwise, so this would not affect me personally.
TWTP
I dunno that the safe harbor rule is actually as easy as it sounds. For my own employees, I’d have to compute their individual compensation based on a review of their respective portion of the phone bills each year – so each employee gets taxed on 25% of their portion of the bill. That means combing through the bills and keeping track of which part of the bill is attributable to each employee – not all employees have the same plan or use the same minutes. My employee who regularly travels to Germany has a much higher bill than my employee who regularly visits court in Norristown, one county over. While that’s not calculus, it does considerably add to the administrative burden of the employer especially a smaller business like mine.
KPE-
But, as you say, Method 3 would be “the most burdensome for employers” and to employees as well.
Method 2 would not need employee input at all.
And Method 1 would also be burdensome, as I expect most employees do not carry around two (2) cellphones – one used just for business and one used just for personal. And I personally believe that employees given cellphones use them excessively for personal calls – and not just minimal usage.
If Method 1 is going to assume a “minimal personal use”, which is a great deal for the individual employee and employer (no paperwork and no tax cost), it should not have qualifications.
What do you think about safe harbor for deducting business use of personally paid cellphones?
TWTP
When I was a teenager, I worked at a Boy Scout of America Camp. The camp had a ranger with a wife that lived in a house provided by the BSA.
That ranger lived all year on the campground. The home was not taxable income since it was for the convenience of the employer.
To me a cell phone that is provided by the employer, is obviously for the convenience of the employer. No matter, how much of it is used by the employee, it is for the convenience of the employer unless the personal use costs the employer additional expenses. If the employer incurred no additional expenses for the personal usage of the cell phone, there should be no taxable income.
I think it will only be a matter of time, until someone gets “socked” by the IRS and the employee decides what is right is right and goes to Tax Court, and he will prevail, when he shows that the employer incurred no additional expenses for the personal usage of the phone.
Someone above mentioned about the deductability of that expense on his tax return, can’t imagine the likliehood of that working. That will be subject to 2% on schedule A. Not going to get there.
Jeff Day EA
Evansville, IN
I believe that the “minimal personal use method” for substantiating that the entire amount of an employee’s use of a business-provided cell phone is a good idea. However, it should be broadened to apply to circumstances that are substantially similar to the employee maintaining a non-employer-provided cell phone for personal use during work hours.
(a) [Personal] “cell phone” should at least be replaced by “personal (non-employer-provided) telephonic service.” The reason for this change is that individuals can have services that are functionally equivalent to cell phones that do not use cellular technology, including Voice-Over-Internet (VOIP) services operating over WiFi or other noncellular networks.
(b) Individuals who work from home and/or work from home offices typically have personal land-line phones; in such cases the employer-provided cell phone is provided in order to make business transactions, while the personal land line is available for sending and receiving personal calls.
My wife and I are partners in a business with no other employees, and we each have a cell phone that is used for primarily business calls, but occasionally for personal use. Will this new rule affect us in the same manner as it does a business with 50 employees?
I think so – which is part of the problem. I encourage you, as a small biz owner, to provide a comment to the IRS. I know that I am (I’m a small biz owner – also in business with my spouse!).
We get free coffee at work. Should I be tallying up the cups consumed and adding it to my gross income at tax time? (sarcastic)