Good News for Employees with Employer Provided Cell Phones

The IRS just issued special guidance on the taxability of employer provided cell phones. In sum, where an employer provides employees with cell phones primarily for noncompensatory business reasons, neither the business nor personal use of the phone results in income to the employee, and no recordkeeping of usage is required. And, in most instances, an employer's reimbursement to employees for their providing a cell phone for bona fide business use won't be taxable. The guidance applies for all tax years after Dec. 31, 2009.

IRS Notice 2011-72 provides that an employer is treated as having provided an employee with a cell phone primarily for noncompensatory business purposes if there are substantial reasons relating to the employer's business, other than providing compensation to the employee, for providing the phone. Examples include contacting the employee at all times for work-related emergencies, or the employee's availability to speak with clients when he's away from the office or call clients in other time zones after his normal workday is over. However, a cell phone provided to promote employee morale or goodwill, to attract prospective employees, or to provide additional compensation to employees is not provided primarily for noncompensatory business purposes.

When an employee is provided with a cell phone primarily for noncompensatory business reasons, IRS will treat his use of the cell phone for reasons related to the employer's trade or business as an excludable fringe benefit.

A Sept. 14, 2011, IRS memo addresses the situation of employers that have substantial, noncompensatory business reasons for requiring employee use of personal cell phones in connection with their businesses, and reimburse them for their use. Here, IRS examiners are told that they "should not necessarily assert that the employer's reimbursement of expenses incurred by employees after December 31, 2009, results in additional income or wages to the employee."

These rulings are taxpayer friendly. Had they gone the other way, employees would have to keep records of all calls to separate business and personal use.