September 27, 2023
You’d be hard-pressed to find many employees these days who don’t use smartphones for some aspect of their jobs. Even someone who works behind a point-of-sale device may use a phone to interact with a supervisor or log work hours.
For business owners, this situation creates both problems and opportunities. On the downside, there are security and productivity issues to grapple with. However, on a more positive note, you could provide a fringe benefit related to smartphones or their usage. Employees will likely appreciate the gesture, but you’ll need to think carefully about the tax ramifications. What if you provide the phone? Let’s say you decide to provide employees with smartphones — for work purposes, of course.
Business use of an employer-provided phone may be treated as a nontaxable working condition fringe benefit so long as it’s provided “primarily for noncompensatory business purposes.” Examples of such purposes include a need to be accessible: To the company at any time for work-related emergencies, and To customers outside of normal business hours or when away from the office.
If the noncompensatory business purposes test is met, the value of any personal use of an employer-provided smartphone will generally be treated as a nontaxable “de minimis” fringe benefit.
However, an employer-provided phone will fail the test — and trigger taxable income — if it’s provided as a substitute for compensation, or to attract new employees or boost staff morale. What if you reimburse employees for their phones? Instead of providing smartphones, you might consider reimbursing employees on a nontaxable basis for business use of their personal phones. The IRS has indicated that it will analyze the reimbursement of employees’ expenses for their personal smartphones similarly to how they look at employer-provided phones.
That is, reimbursements generally won’t be considered additional income or wages so long as three conditions are met: The employer has substantial business reasons for requiring employees to use their personal phones and reimbursing employees for doing so.
The reimbursements are reasonably related to the needs of the employer’s operations and are reasonably calculated not to exceed the expenses that employees typically incur in maintaining their phones.
The reimbursements aren’t a substitute for a portion of employees’ regular wages. So, let’s say your company reimburses employees for a basic phone plan that charges a flat monthly rate for a specified number of minutes of domestic calls, and some of those minutes are used for personal calls. In such a case, the portion of the cost attributable to personal use can be deemed a nontaxable “de minimis” fringe benefit if all three requirements noted above are met.
Need help with the decision? The IRS generally applies the rules described above to other “similar telecommunications equipment,” though it doesn’t define that phrase with absolute clarity. Nonetheless, tablet devices are presumably included.
We can help you decide whether and how to address smartphones as part of your company’s fringe benefits. © 2023
BG Advisors CPA, LTD. is a full-service CPA firm committed to helping growing businesses reach their goals. Combining decades of diverse corporate finance and tax experience allows us to bring world-class expertise to every client we serve.