Some of us consider employer-provided cell phones a much appreciated necessity. Some of us consider them a burden. The 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 their 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:
1, 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.
2, 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 their safe harbor business use rate.
3, 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 tele-commuters, 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., Wash-
ington, 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.
