Do you have to pay taxes on money you receive from your employer to reimburse you for business use of your personal cell phone?

The IRS answered that on September 14, 2011.

In an audit guidance for its examiners, the IRS stated that when employers give money to employees as reimbursement for business use of a personal cell phone, that money is not taxable.

However, it is important that the payment by the employer be for “substantial noncompensatory business reasons.” The idea should not be that the employer is providing some extra money to the employees, but instead that there is a solid business reason for the employer to require employees to maintain and use their personal cell phones for business purposes.

The employer must have substantial business reasons, other than providing compensation to the employees, for requiring the employees’ use of personal cell phones in connection with the employer’s trade or business and reimbursing them for their use. The employee must maintain the type of cell phone coverage that is reasonably related to the needs of the employer’s business, and the reimbursement must be reasonably calculated so as not to exceed expenses the employee actually incurred in maintaining the cell phone. Additionally, the reimbursement for business use of the employee’s personal cell phone must not be a substitute for a portion of the employee’s regular wages. Arrangements that replace a portion of an employee’s previous wages with a reimbursement for business use of the employee’s personal cell phone and arrangements that allow for the reimbursement of unusual or excessive expenses will be examined closely by IRS auditors.

The IRS gives as examples of legitimate noncompensatory business reason for requiring employees to maintain personal cell phones (and providing reimbursement to the employees for that) if the employer needs to be able to contact the employee at all times for work-related emergencies or if the employer requires that the employee be available to speak with clients at times when the employee is away from the office or at times outside the employee’s normal work schedule (i.e., clients are in different time zones).

The employee will be expected to use his or her personal cell phone for personal use as well as business use, of course. So long as the employer has a substantial noncompensatory business reason for requiring the employee to maintain that personal cell phone, reimbursement to the employee — even for the full cost of the employee’s flat-rate plan — for the use of the phone will not be considered taxable income so long as the employee’s plan is a reasonable plan for the business need. However, reimbursement for international or satellite cell phone coverage (when not needed for the employer’s business) or a pattern of reimbursements that deviates significantly from a normal course of cell phone use in the employer’s business would likely receive heightened scrutiny from an auditor.

The IRS issued a Notice in 2011 [click here to view it] that addresses the tax treatment of employer-provided cell phones for noncompensatory purposes. The Notice provides that, for beginning in 2010, the IRS will treat the employee’s use of an employer-provided cell phone for reasons related to the employer’s trade or business as a working condition fringe benefit, the value of which is excludable from the employee’s income. However, the cell phone must be issued primarily for noncompensatory business reasons. For purposes of determining whether the working condition fringe benefit provision in § 132(d) applies, the substantiation requirements that must be satisfied by the employee for an allowable deduction under § 162 are deemed to be satisfied. Additionally, any personal use of the employer-provided cell phone will be treated as a de minimis fringe benefit, excludable from the employee’s gross income under § 132(e) of the Code.