The financial crisis must be over and the economy must be fixed, because apparently things are getting pretty slow at the Treasury Department. There is time now to consider how to tax employer-provided cell phones, an issue that sat on the back burner for 20 years.
Since 1989, the Internal Revenue Code has required companies and workers to document every call made on an employer-furnished phone. Employers are supposed to report the value of any personal calls employees make as wages, and employees are supposed to pay taxes on those wages. Employers also are supposed to remit Social Security and Medicare taxes based on the value of employees’ personal calls.
The rules made at least minimal sense two decades ago. Back then, cell phones cost $800 or more, and calls could cost close to $1 per minute. There were no million-minute calling plans and no “friends and family” deals. Most of those early brick-sized phones were used primarily for work. But early marketing created a different image, like this 1989 commercial that showed happy, well-to-do people using the phones to coordinate a get-together on the family speedboat. Congress smelled an under-the-table perk and demanded that the business purpose of each call be documented, just as the business reason for each trip in a company car is supposed to be recorded.
Neither taxpayers nor tax auditors ever had much stomach for the mountain of paperwork that would have resulted had they followed this Congressional directive, and so the documentation rules were blissfully ignored by all. Until now, that is.
Various newspapers have reported that a creative tax examiner used the cell-phone rule to dun the University of California system for hundreds of thousands of dollars of uncollected payroll taxes. It probably made the examiner an office hero. After all, it is not easy to squeeze taxes out of a tax-exempt agency like a state university.
The Internal Revenue Service announced in Notice 2009-46 earlier this month that it is considering various ways to “simplify” the substantiation requirements. One so-called simplified approach would let employers use statistical sampling to determine employees’ personal use of the phones. Another would disregard any personal use, as long as the employee can somehow prove to the employer that the employee carries a second, personal cell phone and uses the personal phone for nonbusiness calls during working hours. The third alternative would simply deem that 25% of cell phone usage is nonbusiness and, therefore, taxable.
Employers would have to report the fair market value of an employee’s nonbusiness use of the cell phone as part of the employee’s income. Ominously, the notice asserts: “An employer’s cost to provide the cell phone is not determinative of the fair market value of an employee’s fringe benefit.” Translation: Even if the employee’s personal use costs the company nothing, the employee still must report income.
The Treasury and its wholly-owned subsidiary (in this case the Internal Revenue Service, not General Motors) understand that there are a lot of holes in these proposals. The notice requests your comments and suggestions by Sept. 4.
If you write, you might point out a few things that have changed since 1989. Cell phones these days have email, web access, instant messaging, push-to-talk features and cameras. All of these tools can be used for business or personal use. In many cases, the company-provided cell phone is used more for these other features than for old-fashioned voice calling. Notice 2009-46 does not mention any of these services.
The whole thing has become something of an embarrassment. Lobbyists for the wireless industry are hastily trying to get Congress to repeal the 1989 rules before businesses simply give up on providing phones to employees. Even as the government looks to belatedly tax the cell phone “fringe benefit,” as Notice 2009-46 declares it, the government also is paying to provide free (and tax-free) cell phones to low-income individuals, as The New York Times reported yesterday. Talking on the go has become one of life’s necessities, like visiting the bathroom during working hours.
On second thought, forget I said that. We might have to start keeping records to document the business purpose of that “fringe benefit,” too.
Posted by Larry M. Elkin, CPA, CFP®
The financial crisis must be over and the economy must be fixed, because apparently things are getting pretty slow at the Treasury Department. There is time now to consider how to tax employer-provided cell phones, an issue that sat on the back burner for 20 years.
Since 1989, the Internal Revenue Code has required companies and workers to document every call made on an employer-furnished phone. Employers are supposed to report the value of any personal calls employees make as wages, and employees are supposed to pay taxes on those wages. Employers also are supposed to remit Social Security and Medicare taxes based on the value of employees’ personal calls.
The rules made at least minimal sense two decades ago. Back then, cell phones cost $800 or more, and calls could cost close to $1 per minute. There were no million-minute calling plans and no “friends and family” deals. Most of those early brick-sized phones were used primarily for work. But early marketing created a different image, like this 1989 commercial that showed happy, well-to-do people using the phones to coordinate a get-together on the family speedboat. Congress smelled an under-the-table perk and demanded that the business purpose of each call be documented, just as the business reason for each trip in a company car is supposed to be recorded.
Neither taxpayers nor tax auditors ever had much stomach for the mountain of paperwork that would have resulted had they followed this Congressional directive, and so the documentation rules were blissfully ignored by all. Until now, that is.
Various newspapers have reported that a creative tax examiner used the cell-phone rule to dun the University of California system for hundreds of thousands of dollars of uncollected payroll taxes. It probably made the examiner an office hero. After all, it is not easy to squeeze taxes out of a tax-exempt agency like a state university.
The Internal Revenue Service announced in Notice 2009-46 earlier this month that it is considering various ways to “simplify” the substantiation requirements. One so-called simplified approach would let employers use statistical sampling to determine employees’ personal use of the phones. Another would disregard any personal use, as long as the employee can somehow prove to the employer that the employee carries a second, personal cell phone and uses the personal phone for nonbusiness calls during working hours. The third alternative would simply deem that 25% of cell phone usage is nonbusiness and, therefore, taxable.
Employers would have to report the fair market value of an employee’s nonbusiness use of the cell phone as part of the employee’s income. Ominously, the notice asserts: “An employer’s cost to provide the cell phone is not determinative of the fair market value of an employee’s fringe benefit.” Translation: Even if the employee’s personal use costs the company nothing, the employee still must report income.
The Treasury and its wholly-owned subsidiary (in this case the Internal Revenue Service, not General Motors) understand that there are a lot of holes in these proposals. The notice requests your comments and suggestions by Sept. 4.
If you write, you might point out a few things that have changed since 1989. Cell phones these days have email, web access, instant messaging, push-to-talk features and cameras. All of these tools can be used for business or personal use. In many cases, the company-provided cell phone is used more for these other features than for old-fashioned voice calling. Notice 2009-46 does not mention any of these services.
The whole thing has become something of an embarrassment. Lobbyists for the wireless industry are hastily trying to get Congress to repeal the 1989 rules before businesses simply give up on providing phones to employees. Even as the government looks to belatedly tax the cell phone “fringe benefit,” as Notice 2009-46 declares it, the government also is paying to provide free (and tax-free) cell phones to low-income individuals, as The New York Times reported yesterday. Talking on the go has become one of life’s necessities, like visiting the bathroom during working hours.
On second thought, forget I said that. We might have to start keeping records to document the business purpose of that “fringe benefit,” too.
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