Tax
Treatment of Cell Phones
Plus: Guidance on worker
classification
By
Stuart R. Josephs, CPA
Many employers provide
employees with cell phones,
primarily for noncompensatory
business reasons. IRS Notice
2011-72 provides the following
tax treatment for these cell
phones.
The value of the
business use of an
employer-provided cell phone is
excludable from an employee’s
income as a working condition
fringe to the extent that, if
the employee paid for the use of
the cell phone, such payment
would be deductable under IRC
Sec. 162 for the employee.
An employer will be
considered to have provided an
employee with a cell phone
primarily for noncompensatory
business purposes if there are
substantial reasons relating to
the employer’s business, other
than providing compensation to
the employee, for providing the
employee with a cell phone.
Possible substantial
noncompensatory business reasons
include the employer’s need to
contact the employee at all
times for work-related
emergencies, the employer’s
requirement that the employee be
available to speak with clients
at times when the employee is
away from the office and the
employee’s need to speak with
clients located in other time
zones at times outside of the
employee’s normal work day.
A cell phone provided to
promote an employee’s morale or
goodwill, to attract a
prospective employee or as a
means of furnishing additional
compensation to an employee is
not provided primarily for
noncompensatory business
purposes.
Notice 2011-72
states that, when an employer
provides an employee with a cell
phone primarily for
noncompensatory business
reasons, the IRS will treat the
employee’s use of the cell phone
for reasons related to the
employer’s trade or business as
a working condition fringe
benefit—the value of which is
excludable from the employee’s
income and, solely for purposes
of determining whether the
working condition fringe benefit
provision in Sec. 132(d)
applies, the substantiation
requirements that the employee
would have to meet for a
deduction under Sec. 162 to be
allowable are deemed to be
satisfied.
Also, the IRS
will treat the value of any
personal use of a cell phone
provided by the employer
primarily for noncompensatory
business purposes as excludable
from the employee’s income as a
de minimis fringe benefit.
Notice 2011-72 applies to
any use of an employer-provided
cell phone occurring after 2009.
The application of the working
condition and de minimis fringe
benefit exclusions under Notice
2011-72 apply solely to
employer-provided cell phones
and do not apply to other fringe
benefits.
Voluntary Classification
Settlement Program (VCSP)
This IRS program permits
taxpayers to voluntarily
reclassify workers as employees
for federal employment tax
purposes (Ann. 2011-64). The
program allows eligible
taxpayers to obtain relief
similar to that obtained in the
existing Classification
Settlement Program (CSP).
For taxpayers under IRS
examination, the CSP is
available to resolve federal
employment tax issues related to
worker misclassification—if
certain criteria
are met.
The VCSP is optional and
provides taxpayers with an
opportunity to reclassify
workers as employees for future
tax periods with limited federal
unemployment tax liability for
the past nonemployee treatment.
VCSP participants must:
- Meet the eligibility
requirements below;
- Apply to participate by
filing IRS Form 8952 at
least 60 days before they
want to begin treating the
workers as employees; and
- Enter into a closing
agreement with the IRS.
To be eligible, a taxpayer
must have consistently treated
the workers as nonemployees and
filed all required Forms 1099
for the workers for the previous
three years.
The taxpayer
cannot be under an IRS audit or
under an audit concerning the
classification of the workers by
the Department of Labor or by a
state agency.
A taxpayer
previously audited by the IRS or
the Department of Labor
concerning worker classification
will only be eligible if the
taxpayer complied with the
audit’s results.
A
taxpayer who participates in the
VCSP will agree to prospectively
treat the class of workers as
employees for future tax
periods. In exchange, the
taxpayer will:
- Pay 10 percent of the
employment tax liability
that may have been due on
compensation paid to the
workers for the most recent
tax year, determined under
the reduced rates of Sec.
3509;
- Not be liable for any
interest and penalties on
the liability; and
- Not be subject to an
employment tax audit with
respect to the worker
classification of the
workers for prior years.
Additionally, a taxpayer
participating in the VCSP will
agree to extend the period of
limitations on assessment of
employment taxes for three years
for the first, second and third
calendar years beginning after
the date on which the taxpayer
has agreed under the VCSP
closing agreement to begin
treating the workers as
employees.
Stuart R.
Josephs, CPA, has a San
Diego-based Tax Assistance
Practice that specializes in
assisting practitioners in
resolving their clients’ tax
questions and problems. Josephs
is chair of the Federal
Subcommittee of CalCPA’s
Committee on Taxation.
