Can Your Employer Pick Up The Tab For Your Cell Phone Or Internet
Is your organization or some of its key employees working remotely? By now, the work should be flowing well and your employees should be transitioning nicely to performing their jobs at home. Everything probably seemed ok, up until your employees realized that according to the TCJA if they are employed they are not allowed to take the home office deduction. So now, many are most likely asking about reimbursement for cell phones, computers, and internet. This leads to the question, with more employees working remotely, how much of their business expenses can employers reimburse tax-free?
Employers may need to pay employees back for some infrastructure improvements they had to make so they could work remotely. If an employee had to upgrade their home internet service to handle extra data requirements, they may be entitled to reimbursement for those costs. An employer may have to cover the cost of upgrading or replacing a worker’s laptop that is ok for entertainment but too slow for work.
Under federal law, employers only have to reimburse employees if job-related expenses reduce their pay below minimum wage. State laws, however, vary widely in their reimbursement requirements.
Some Background: Listed property (technically, tax code Section 280F) is luxury property. If luxury property is used for business, heightened substantiation requirements apply. At one time, cell phones and computers were both listed property. Cell phones were removed early in the last decade. The TCJA removed computers and peripherals.
After cell phones, tablets, etc., were removed from the listed property category, the IRS released guidance waiving the accountable plan rules requirements for employer-provided equipment. Employees don't have to keep track of their business use. Their personal use is considered a tax-free de minimis fringe benefit.
The only limitation is that employers must have a substantial non-compensatory reason for providing phones to employees. But even there, the bar is set pretty low. You have a substantial non-compensatory business reason if you need to contact employees in a work-related emergency. Conveniently, "work-related emergency” was never defined.
Importantly, the IRS applied the same rules to employees who use their own phones for business. So, you can reimburse employees for their substantiated basic monthly phone and data plan charges (i.e., employees have to submit their bills to you) and employees don't have to account to you for the percentage of their business use.
With so many EEs working from home right now, are there any reimbursement rules that apply when employers pick up the tab for employees' internet access? The IRS never released similar guidance after computers and peripherals were removed. That has left everyone to guess what rules apply when employers reimburse employees who use their home internet access for business.
Reimbursement rules for internet and cell phones
The IRS Small Business Division says you can reimburse employees' home internet access as a business expense, but the regular accountable plan rules apply. The accountable plan rules, which set the rules for tax-free reimbursements of employees’ business expenses, require that:
- Employees incur expenses in connection with their performance of services for their employers and have a business connection for accessing the internet (working at home would suffice),
- Employees must substantiate their business use by submitting an accounting of their internet use by providing you with their cable or phone bill and the percentage used for business.
- Employees substantiate their expenses within a reasonable period of time
Due to the pandemic, cellphones become more and more essential to everyday operations and work, so the question about reimbursement for usage is fair.
When it comes to reimbursing employees or providing a monthly stipend for the use of their personal cellphones for business purposes, yes, this a non-taxable fringe benefit - provided that your reimbursement is reasonably calculated to actually reimburse the employees for the actual costs of maintaining the phone.
The Internal Revenue Code provides that gross income includes compensation for services, including fees, commissions, fringe benefits, and similar items. A fringe benefit provided by an employer to an employee is presumed to be income to the employee unless it is specifically excluded from gross income by another section of the Code. Luckily, the Internal Revenue Code also permits an employer to take deductions for any "ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.
So an employer could deduct as a business expense the costs of providing telephone services to its employees. For this reason, the IRS has concluded that the value of cellphone services provided by an employer will not be taxable to the employee if there are substantial reasons relating to the employer's business, and the reimbursement is not simply a way to provide tax-free compensation to the employee.
If you would like to reimburse workers for the cost of their cellphones, you need to adhere to the regular accountable plan rules mentioned above. However, if you provide cellphone reimbursements to boost morale, promote goodwill, or for recruiting purposes, the IRS will consider the phone costs taxable wages.
Sensitive company material and client information should not be stored on employees' personal computers. That makes buying your telecommuters separate laptops a wise investment. These are working condition fringe benefits, which you can provide to employees tax-free. Employees must be told they can only use the new devices for work; any personal use of a laptop is taxable.
Can you reimburse employees who need to purchase computer desks and chairs in order to work from home? These items could qualify as fringe benefits, but employees would have to keep track of their business and personal use, which isn't reasonable.
Instead it would be better to buy those items for employees but keep the items on the company's books. Depreciate them, as you would any business property, or write them off. If this is a long term move to reduce office space, you could allow employees to take their office stuff home. You must normally value and tax items employees take home, but if the value is de minimis because the stuff is old or been depreciated down to $0, you probably won't have a problem.