Cellphones are increasingly becoming an essential business tool.
According to a survey by Oxford Economics, close to 80 percent of the organizations said that employees couldn’t do their job efficiently without cellphones.
Despite being an integral part of daily work, many companies still do not have an effective cell phone reimbursement policy in place. The cloud of ambiguity hovering around cell phone usage has put the finance department in a fix, not knowing how to handle them.
In this article, we discuss the guidelines one must keep in mind while devising a cell phone reimbursement policy. Additionally, we also discuss how Fyle can make cell phone reimbursements effortless for your company.
How does IRS treat cell phone reimbursement?
Prior to 2010, if a company provides a cell phone (or any communication equipment) to the employee, IRS considered it as listed property and treated it as a fringe benefit. The employer includes the value of the equipment in the wages, unless it is a working condition fringe benefit.
Things changed, after the Small Business Jobs Act of 2010. Cell phones or any mobile devices were no longer a listed property for the tax year starting from December 31, 2009. The value of the cell phone was still to be included in the employee’s wages as a taxable fringe benefit.
However, after IRS Notice 2011-72, a company-provided cell phone for business purposes is treated as a working condition fringe benefit. Employers exclude the value of the device from the employee's wages. Any personal use of the cell phone is considered a de minimis fringe benefit, also excluded from the wages. This would not be applicable if the cell phone is provided to boost morale or attract employees.
That said, there was no clarity on how to treat cell phone reimbursement of employee-owned phones. As a result, the IRS released a memorandum on how to manage reimbursement to employees of employee-owned cell phones. If employees receive cell phone reimbursement, it can be excluded from the employee's wages; provided the company follows the accountable plan by the IRS.
3 things to keep in mind while creating a cell phone reimbursement policy
What we need today may seem unnecessary a year later. With constant updates and advancements in cell phone technology, it only makes sense that you create a cell phone policy that can adapt to change.
Creating a cell phone policy is no easy feat. You need to ensure that it is homogenous and complies with your existing expense policy stipulations. Here are the top three things you need to keep in mind while creating a cell phone policy:
Choose if you are going for the accountable plan or non-accountable plan
What do you mean by accountable plan?
Accountable plan lets you reimburse employees by following IRS regulations on business expenses. According to the IRS regulations:
- The employee must show that the cell phone and the accompanying service plan was used for a business purpose.
- The employee must produce an expense report, along with the receipts.
- The employee must return the excess amount to the employer.
By opting for the accountable plan, the company takes the responsibility of collating and submitting the documents to the IRS. Employees do not have to report the reimbursement as taxable income.
What is Non Accountable plan?
Simply put, any company that does not follow the rules mentioned under the Accountable plan, comes under the non-accountable plan (aka Allowance plan). According to the non accountable plan, employees receive a monthly allowance for expenses that wouldn’t need any documents for proof. This allowance is considered taxable income and should appear in the employee’s W-2 form.
Determine the cell phone policy for your company
Once the company decides the plan, the next step would be to choose the cell phone policy. The following are the policies you can implement:
- Stipend policy: Per the non-accountable plan, the employer provides a monthly allowance to buy a phone and a service plan. The employer records the allowance in W-2 and can consider it for employment tax withholding and income tax.
- Company Owned, Personally Operated (COPE): In a COPE plan, the company purchases both the cell phone and the service plan. As long as there is a business connection, it is considered a working condition fringe benefit. Personal use of COPE phones come under de minimis fringe benefit. Ensure that your policy follows the guidelines set in the accountable plan.
- Expense reimbursement: In a typical reimbursement policy, employees purchase a cell phone (from a list of company-approved devices) along with the service plan. The company then reimburses the initial cost of the cell phone and the service plan fees each month on receiving the associated receipts.
- Bring your own device (BYOD): In BYOD, the employee must have a personally owned cell phone that can be used for business purposes as well. If the employee buys the phones themselves, it is not included on Form W-2. The employee can take an itemized deduction (limited to 2 percent of their adjusted gross income) on their income tax. Quite similar to COPE, the company will take care of the service plan. Tax treatment is the same as COPE, for business and personal use.
That said, it is not a one-size-fits-all scenario. Your policy depends on factors like acquisition costs, data security, ease of access, etc. While BYOD reduces the acquisition costs for the employer, it comes at the cost of data security. Similarly, although COPE takes care of data security and improves productivity, it entails a lot of hidden costs. Employers can mix and match two or three of these options to see what works best for them.
From the tax-saving point of view, stipends are the least tax-effective option. Employers include stipend as additional wages in W-2 and it is subjected to income tax and employment tax withholding requirements. The remaining options (BYOD, COPE and reimbursement) exclude cell phone reimbursements from wages, thereby contributing to tax-saving.
Lastly, use automated expense management software
No matter what accounting plan or cell phone policy you choose, automation can help both employees and finance teams. With an automated software, employees can simply click and upload a picture of their cell phone bill. Once submitted, managers can approve these expenses in a click of a button. This helps convert an otherwise long and tedious task into something that just takes a few minutes to report and manage.
How can Fyle help your business with cell phone reimbursement?
With Fyle, you can manage all your employee cell phone reimbursements with ease.
- Fyle allows you to create an expense directly from the cell phone bill.
- Our in-built policy checks ensures that your employees stick to the set expense policy limits.
- With advanced analytics, you let the numbers do the talking. It will give some clarity on the spending pattern of your employees and helps in optimizing the company budget.
- No matter how complicated your approval workflow is, Fyle can manage it with ease with its multi-level approval flow.
- With Duplicate detection, you can keep fraudsters at bay and rest assured that your expense management is in good hands.
Try it out yourself and let us know what you think.