Notice 2011-72, issued from the IRS in September, in tandem with a Memorandum for All Field Examination Operations.

The effect helps to simplify the rules regarding what is taxable and what isn’t regarding cell phones that you allow employees to use.

The new guidance states that as long as the cell phone use is “primarily for noncompensatory business reasons”, the cost of the phones and their service should not be treated as employee income. Rather, all the expenses should be treated as business expenses. So, if you let employees use company cell phones "primarily for noncompensatory business reasons," then there you don’t have to track or substantiate the calls anymore – the entire use of the phone is non‐taxable to the employee. This mean it doesn’t show on their W-2. As the employer, your company can take the full deduction for the cost of the cell phone (and related data plans).

Primarily for noncompensatory means the phone is issued because:

  1. Employer's need to contact the employee at all times for work‐related emergencies,
  2. Employer's requirement that the employee be available to speak with clients at times when the employee is away from the office
  3. Employee's need to speak with clients located on other time zones outside the employee's normal work day.

On the other hand, the following will make the phone and its service be treated as employee income is it is provided:

  1. To promote the morale or good will of the employee,
  2. To attract a prospective employee
  3. As a means of furnishing additional compensation to the employee. 

These new rules state that costs of a cell hone provided by an employer is excludable from the employee's income according to Code section 132(d). Also, the value of any personal use of the phone provided by the company is also excluded from gross income as a de minimis fringe benefit under Code section 132(e).

Keep in mind, these new rules have nothing to do with how expenses are allocated for other electronic hardware and services, like laptop computers.

Here’s more information, directly from the IRS:
http://www.irs.gov/newsroom/article/0,,id=245741,00.html

Modern Business Associates is an HR company that focuses on payroll and HR outsourcing. We routinely work with clients on a variety of topics related to withholdings and taxation. As a Professional Payroll and HR outsource organization, our clients rely on us to help them effectively deal with these kinds of topics.