On September 14, 2011, the IRS released guidance stating the value of employer-provided cell phones is excludable from the employee's income as a fringe benefit. Notice 2011-72 provides that employer provided cell phones are excluded from the employee's income as working condition fringe benefits, and that substantiation requirements for deduction under section 162 are considered satisfied. This applies for tax years beginning after December 31, 2009.
This guidance applies only to cell phones provided for "substantial reasons relating to the employer's business, other than providing compensation to the employee." Cell phones provided for employee morale or good will, or to recruit prospective employees, are not provided for "non-compensatory business purposes."
The IRS has released a memorandum for field examiners which addresses the treatment of reimbursements for the business use of an employee's personal cell phone. Before making reimbursements, churches should generally require employees to submit a copy of the monthly bill with evidence that the bill has been paid.
If a church does not have a substantial noncompensatory business reason for providing a cell phone to an employee, or reimbursing the employee for business use of his or her personal cell phone, the value of the use of the phone, or the amount of the reimbursement is includible in gross income, reportable on Forms 941 and W-2, and for lay employees is subject to federal and state employment tax withholding.
Dan Busby is a CPA and president of the Evangelical Council for Financial Accountability (ECFA).