The IRS speaks: guidance on cell phones & worker classification.

• Author: Josephs, Stuart R.
• Position: FedTax

Many employers provide employees with cell phones, primarily for noncompensatory business reasons. IRS Notice 201 1 -72 provides the following tax treatment for these cell phones.

The value of the business use of an employer-provided cell phone is excludable from an employee's income as a working condition fringe to the extent that, if the employee paid for the use of the cell phone, such payment would be deductable under IRC Sec. 162 for the employee.

An employer will be considered to have 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 employee with a cell phone.

Possible substantial noncompensatory business reasons include the employer's need to contact the employee at all times for work-related emergencies, the employer's requirement that the employee be available to speak with clients at times when the employee is away from the office and the employee's need to speak with clients located in other time zones at times outside of the employee's normal work day.

A cell phone provided to promote an employee's morale or goodwill, to attract a prospective employee or as a means of furnishing additional compensation to an employee is not provided primarily for noncompensatory business purposes.

Notice 2011-72 states that, when an employer provides an employee with a cell phone primarily for noncompensatory business reasons, the IRS will treat the employee's use of the 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 and, solely for purposes of determining whether the working condition fringe benefit provision in Sec. 132(d) applies, the substantiation requirements that the employee would have to meet for a deduction under Sec. 162 to be allowable are deemed to be satisfied.

Also, the IRS will treat the value of any personal use of a cell phone provided by the employer primarily for noncompensatory business purposes as excludable from the employee's income as a de minimis fringe benefit.

Notice 2011-72 applies to any use of an employer-provided cell phone occurring after 2009. The application of the working condition and de minimis fringe benefit exclusions under Notice 2011-72 apply solely to employer-provided cell phones and do not apply to other fringe...