HR Hotline: Tax Implications of BYOD
Q: Our employees in the field stay in touch with our main office via smart phone, telephone, text, and email. Some are still using company-issued phones and are allowed to use them for personal business. We are thinking of requiring field staff to use their own equipment for work purposes, the bring-your-own-device-to-work (BYOD) arrangement. If we pay employees a monthly amount as an estimate of the monthly pro rata portion of business vs. personal use, must that amount be reported on their W-2 as taxable income? And what about our past practice of issuing “tax-free” company phones?
To meet the IRS’s criteria that the company phone is for a non-compensatory business purpose, you must be able to show that there are substantial business reasons behind the arrangement. Such reasons include:
- A business need to contact the employee at all times for work-related emergencies
- A requirement that the employee be available to speak with customers or clients at times when the employee is away from the office
- A need to speak with clients located in other time zones at times outside the employee’s normal workday
- If the phone is provided to promote goodwill, boost morale, or attract prospective employees, however, its value must be reported as a form of taxable income, as it is actually provided as a means of providing additional compensation to an employee.
The IRS applies similar criteria to the BYOD arrangement where an employer gives the employee a cash allowance or reimbursement for business use of the employee’s personal cell phone.
There must be a substantial business reason, other than providing compensation to the employee, for requiring the employee’s use of a personal cell phone in connection with the employer’s trade or business.
However, the employee must maintain the type of cell phone coverage that is reasonably related to the needs of the employer’s business, and the reimbursement must be reasonably calculated so as not to exceed expenses the employee actually incurs in maintaining the cell phone.
Additionally, the reimbursement for business use of the employee’s personal cell phone must not be a substitute for a portion of the employee’s regular wages.
Arrangements that replace a portion of an employee’s previous wages with a reimbursement for business use of the employee’s personal cell phone: and arrangements that allow for the reimbursement of unusual or excessive expenses: would result in taxable income to the employee.
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