Tax Pro Plus: Small Business Tax Tips - Personal Cell Phones

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When an employer provides an employee with a cell phone primarily for noncompensatory business reasons, the business and personal use of the cell phone are generally nontaxable to the employee as an excludable fringe benefit. Excludable fringe benefits are not included in wages. If the cost of an item is deductible by an employee as a business expense, it may be excludable from the employee’s wages as a working condition fringe benefit if provided by the employer. The IRS will not require record keeping of the phone’s business use from individuals who receive this tax free treatment.

When a business provides the employee with a cash allowance or reimbursement to pay for a personal cell phone used for business purposes, the amount is also considered an excludable fringe benefit and nontaxable. However, the employee must maintain the type of cell phone coverage that is reasonably related to the needs of the employer’s business. Plus, 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.

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