IRS Proposes Company Cell Phone Tax Policy

The Internal Revenue Service (IRS) recently proposed that employers assign 25% of employee’s annual cellphone expenses as a taxable benefit. For example, a worker in the 28% tax bracket, whose wireless device costs the company $1,500 a year, could see $105 in additional federal income tax, The Wall Street Journal reports.

The IRS said, employees could avoid tax liability if they showed proof they used personal cell phones for non-business calls during work hours, meaning employees would have to write down every time they called home to say they were going to be late for dinner, and how long the call lasted. The agency also could decide on a set number of phone minutes as “minimal personal use” that would be untaxed, the IRS said.

In a third option proposed by the IRS, employers could use a statistical sampling to determine what portion of workers’ cellphone use is personal and how much is work-related. Workers would be taxed on the difference. The IRS move would mark a stricter enforcement of an existing rule that classifies employer-provided cell phones as a taxable benefit, rather than a 24-hour-a-day work tool.

Under a 1989 law, workers who use company-provided mobile phones for personal calls are supposed to count the value of those calls as income and pay federal income taxes accordingly. But businesses and workers have long ignored the requirement, prompting the IRS to consider steps the agency said would make it easier for businesses and workers to comply. The 1989 law also requires that company-provided wireless services be included in a worker’s gross income unless the employee keeps detailed records showing the device was used only for work.

Among those trying to kill the proposal is of course, the wireless companies. U.S. businesses will spend an estimated $59 billion on cellular voice service for employees in 2009, according to research by In-Stat. The market has been a big revenue source for wireless carriers, despite taking a hit in the recession. Wireless companies argue the IRS rule is outdated. They contend that rates have declined so dramatically in the past decade, with most plans offering free night and weekend calls, that it makes little sense for the IRS to assess employee benefits by nickels and dimes.

The IRS said it will collect comment on its proposal through September before issuing a decision.