We previously asked church leaders about the following situation:
The Internal Revenue Service recently issued
guidance designed to clarify the tax treatment of employer-provided cell phones. As a result the way it views cell phones is now more in line with how church employees use church-provided cell phones.
The popularity of cell phones has grown considerably over the years as more and more individuals and businesses have seen their advantages as a productivity tool as well as a convenience. Nevertheless, the Internal Revenue Services tax treatment has been stuck back in the days when cell phones were first introduced. If you remember that far back, cell phones were much more costly than they are today.
Fortunately that changed with the enactment of the Small Business Jobs Act of 2010 in September 2010, which removed cell phones from the definition of listed property.
It took the IRS nearly a year, but recently it released guidance on the tax treatment of cell phones that could affect how churches go about providing cell phones to church staff.
Previously the required record keeping was considerable. Many churches opted to provide staff they considered should have a cell phone with a taxable stipend in addition to any other compensation that they provided. When the stipend covered most or all of having a cell phone, it allowed the staff member to forego keeping detailed records of calls placed and received. The extra cost to the employee due to the resulting taxes seemed to be more acceptable than the hassle of keeping necessary detailed records separating business and personal calls.
The IRS new approach, which is retroactive to tax years after December 31, 2009, allows churches to provide cell phones as a working condition fringe benefit for employees they deem need one to perform their job duties. In such cases the cost paid by the church for the cell phone service is excluded when reporting the employees income to the IRS. In addition, personal minutes used are now considered a de minimus fringe benefit. In other words, they now consider personal minutes not worth the hassle of tracking and as a result dont require payment of any additional tax.
Sounds great, doesnt it? Hold on though, before you open the flood gates and take a van load of employees down to the local Cell-O-Rama store to sign everyone up for the latest feature-ladened Smartphones. There is an important requirement that still must be met.
In the IRS memo it issued to its examiners at the same time it released its updated guidance to the public it states,
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 employers business, other than providing compensation to the employee.
In the memo it goes on to say that such substantial reasons include the ability to contact the employee at all times for work-related emergencies or the need for the employer or a client of the employer to speak with the employee when they are away from the office or outside their normal work schedule. These and other similar substantial business reasons for the church to provide an employee with a cell phone is now not taxable.
Whats still taxable is when you want to use providing a cell phone to a valued employee to boost employee morale or good will.
The IRS memo also says that employers can reimburse employees for the business use of their personal cell phones using similar criteria for allowed employer provided cell phones. When reimbursing employees for the business use of their personal cell phones, there are a couple of important caveats. First, the employee must maintain the type of cell phone coverage that is reasonably related to the needs of the employers business. And second, the reimbursement must be reasonably calculated so as not to exceed expenses the employee actually incurred in maintaining the cell phone.
For example, if the employee has a Smartphone and pays for a separate data plan but the church only expects them to maintain calling and text messaging plans, the church cannot reimburse them for the data plan portion of the bill.
As with other reimbursements for business expenses that employees receive, the church needs to have an Accountable Reimbursement Plan in place and reimbursements cannot be a substitute for a portion of employees regular wages. If you need help resolving these two issues, Church Administrative Professionals can help. Please call us.
Before we wrap up this discussion we think it important that we share one more note of caution. When an employee carries an employer-provided cell phone the Wage and Hour people in the Labor Department consider them working. For an employee who is exempt from the Fair Labor Standards Act, such as an ordained minister, that doesnt present a problem. However, if the employee is considered non-exempt under the act, requiring them to carry a cell phoneregardless of who provides itcauses them to be considered on the clock. This means that the church must pay them for that time. If that time adds up to more than 40 hours a week (in some states overtime pay starts after theyve worked eight hours in a day so check your state laws) you also owe them time and a half in overtime pay. Ouch!
Cell phones can be great way to improve productivity because often they allow people to be reached even if they are out of the office. The IRS has now made providing cell phones to your employees easier and with less of a tax burden on them. But remember to limit church-provided cell phones for only those employees who are considered exempt and who need them to do their job.
In case youre interested, the IRS guidance dealing with the tax treatment of cell phones is available by clicking HERE. There you will also find a link to the memo sent to their examination field offices.
Please Note: This information is provided with the understanding that Church Administrative Professionals is not rendering professional advice or service.