Personal calls on your employer's cell phone? New tax rules may soon apply
Editor's Note: In the days since this article was written, the IRS has reversed its position on taxation of personal use of a business cell phone and has asked Congress for permission to stop treating cellular phones as listed property.
It's not a new idea... taxing the personal use of a business cell phone. Actually it's a law that has been around for two decades and it permits businesses that provide employees with cell phones to treat an employee's personal use of that phone as a taxable fringe benefit. At the time the law was passed in 1989 cell phones themselves were more expensive than they are today and so were calls. These days, with phones everywhere and unlimited call plans easily accessible, the rules need a facelift.
The rules as they are now
Cell phones are considered "listed property" that may easily be subject to personal use. So businesses that wish to deduct the cost of cell phones have to abide by cumbersome substantiation rules, according to the existing law. That means employees are expected to keep a record of each call, the time it was made or received, and the business purpose if applicable. Supporting documentation must be kept and submitted to the employer. The employer then must then calculate the personal use amount, along with a pro rata share of service charges. That amount is then included in the employee's wages. If the personal use percentage can't be determined, the entire value of the cell phone for that period is deemed taxable income.
Possible changes
Because cell phones are still considered listed property, any changes that are made must still include substantiation to prove the business and personal use. But the IRS is considering making the rules less cumbersome to better reflect the way we use cell phones today. An unnamed IRS official told reporters the IRS is proposing a plan that will "reduce how much employers have to spend trying to comply with the tax law."
A bill to repeal the existing law almost passed last year, but not quite. This year, Senator John Ensign (R-NV) and Senator John Kerry (D-MA) are trying it again with a similar bill.
In addition, a number of industry associations have sent letters to Capitol Hill, arguing that the tracking requirements expected of businesses are too big a burden to be worthwhile.
IRS Notice 2009-46 puts forward three options for simplifying the accounting for cell phone use, for which they seek comment on or before September 4, 2009.
- Minimal personal use method. Under this plan, 75 percent of work-cell phone use would be considered business, and the remaining 25 percent, personal. For an individual in the 35% tax bracket, with a $500 cell phone bill, the tax on 25% of that bill would amount to $43.75
- Safe harbor substantiation method. This method allows employees to provide proof that they supply their own personal cell phones during working hours so that there is no question of personal use of the employer's phone.
- Statistical sampling method. This method lets employers determine personal use by figuring the average personal use for all employees.
As of this month, the tax agency is seeking public comment on how to best revamp the current system so that it makes sense.
You can read more information on the taxability of employee cell phones.
- 10201 reads
Indirect Taxes
What government fails to consider in most circumstances is the cost to capture this information. What about the indirect tax on employers having to track this information? How much tax revenue can be generated from this tax?
-- Levi Spires
Taxable Cell phones?
How do they expect to enforce this tax? If we want to raise real money, how about taxing the medical and fringe benefits of Congressmen and Senators? Throw in the President’s security service, travel expenses for his spouse and other perks that could be considered fringe benefits. Also include their discretionary budgets since they get to decide how to spend that money and let’s levy an “inconvenience tax” on political TV ads aired during prime time.
Samuel BarrettThe Woodlands, TX
As the IRS searches for revenue
As the IRS searches for revenue, it always beats up on the peons and serfs since the feudal lords of the Corporations and Wall Street have used their wealth and the legal systems to perpetuate their privileged positions. Even Democrats in the White House and Congress do not have the courage to arrest these persons for grand theft and fine them their "legal" salary, bonus and perks. Oh well, there were Egyptian pharoahs, Roman emperors, Medieval kings, entertainment poo-bahs and gifted athletes. Maybe an asteroid will land on this planet and the apes will have a chance to be really human. Catharsis!!!
Cell phone use
I think delisting should be the way to go. Most employer-provided phones (land or cell) are used minimally for personal calls, and should fall under the deminimis fringe benefits rather than listed property. And I disagree with the 75/25 estimate in the article. I know on my cell phone, I probably have 95% or more of my calls for business purposes in any given month. Sure, there are some individuals who might have more personal use than me, and some that have less. The recordkeeping alone already takes up so much time, I can't imagine a large company really keeping up with this, especially when some companies that provide phones expect them to be answered after hours (not counting emergency-type workers). If I were expected to be on call and available for work, and not receive any additional compensation, the few personal cell phone calls shouldn't constitute a penalty.
Splitting Hairs
What about work related cell phone use on a personal cell phone? Do those abide by the same reverse use? Instead of each call reimbursed by the company can sales reps and other company officials deem 75% of the use is the companies and 25% personal and bill back accordingly? Since cell phone bills are usually a package deal most employees no longer bill back to employers for work related calls. Splitting hairs? I think so.
The minimal amount most employees use the phones for personal use it would generate more work for Payroll employees than would benefit anybody. This is usually considered a perk and when negotiating wage increases employers use this as a bargaining issue with employees.
I understand benefits are benefits but I think things go too far, what next tax us for employer paid insurance benefits?
I totally concur.
I totally concur. How ridiculous to revive this item. Most cell phones today (example is Sprint at $99) let you talk and text and web as much as you want. And now to keep a log that one hour out of 80 hours might be personal use? And as you cite, a business landline can be used with NO consequences to employee.
yapping on the phone is yapping on the phone
From a substance over form perspective, what is the difference between using the company's landline system to make personal calls vs. the company's mobile phone? Granted the "listed" element comes into play, but in both cases you are using company resources for personal communications. Chalk another one up to the "stupid rules that should be scrapped but because of the inexhaustible supply of stupid people, it will never happen" list.
Time to get real
Logging phone calls is like counting portions of a penny. It is excessive record keeping and is only designed to eliminate reported (even though it is incurred and necessary) expense to increase taxes. I have an unlimited account on my cell phone. I also have internet access. It is used for almost all of my data retrieval, transmission, e-mail, and business phone calls. I see no personal reason to own or use a cell phone (my downtime is MY time and the cell phone does not enhance that, but only interferes with it). The rule should be that the cell phone or smartphone fees are not listed property. There should be no reason to log, or justify an expense which is ordinary and necessary. It should simply be de-listed.
Taxation of CellPhones
I have thought the verification level required was ridiculous. Most businesses are not doing it so why should my clients be penalized because I follow the rules? I would really like the 75%biz/25%personal and be done with it.
Delist Cell Phones
Delist the cellular telephone. It is no longer in danger of extinction!!