As mobile communication devices become more of a necessity than a "nice-to-have" item in the workforce today, a wide array of options, along with new mobile device policies, has emerged. The popular trend has been the "bring your own device" policy (or BYOD as it is commonly referred to in industry). This trend is depicted in the pie chart comparison below, which shows a 10% increase in just one year in the use of personally-owned devices (instead of company-owned devices) for business applications.
Each mobile device policy presents its own unique set of advantages and disadvantages; therefore, it's increasingly important that as a new mobile device policy is proposed, all appropriate business units (e.g., IT, tax, human resources, etc.) be involved early in the process. The tax implications and income reporting rules vary depending on the type of mobile device policy your company has adopted. This article focuses primarily on the tax implications and income reporting rules of various mobile device policies, but also addresses how each policy affects the company from a non-tax perspective (e.g., enterprise data security concerns).
Four common types of mobile device policies adopted by companies today include:
- Stipend ---- employer provides fixed dollar amount;
- Employer all-inclusive ---- employer provides mobile device and service plan;
- Reimbursement ---- employer reimburses employee for actual mobile device and service plan expenses; and
- BYOD ---- employee provides personal mobile device and employer provides service plan.
Prior to 2010, if an employer provided an employee with a mobile device (or "other similar telecommunications equipment"), it was considered listed property (subject to special heightened substantiation rules) and treated as a fringe benefit. The entire value of the mobile device benefit was included in the employee's wages, unless it was explicitly excluded from gross taxable income by another section of the Internal Revenue Code (i.e., a working-condition fringe benefit). Likewise, personal use of the employer-provided mobile device constituted a fringe benefit, and was to be included in an employee's wages.
The Small Business Jobs Act of 2010 removed mobile devices from the definition of listed property (thus not subjecting mobile devices and service plans to the heightened substantiation rules) for taxable years beginning after December 31, 2009. The Act did not alter the treatment of employer-provided mobile devices as a taxable fringe benefit, the value of which was required to be included in an employee's wages.
IRS Notice 2011-72 altered the IRS position on the treatment of mobile devices as a fringe benefit. The notice mandated that after December 31, 2009, the IRS was to treat an employee's use of an employer-provided mobile device for business purposes as a working-condition fringe benefit, the value of which is excludable from an employee's wages. Additionally, any personal use of the employer-provided mobile device constitutes a de minimis fringe benefit, which is also excludable from an employee's wages.
According to this notice, an employer can be said to have provided an employee with a mobile device for non-compensatory business purposes if there are several significant reasons related to the business that require the employee to obtain a mobile device ---- for example, the need to contact the employee at all times for work-related emergencies, the employer's requirement that the employee be available to speak with clients at times outside the employee's normal work schedule, etc.
There are a few situations when the relief provided in Notice 2011-72 (allowing the value of business and personal use of an employer-provided mobile device to be excluded from an employee's wages) may not apply. For example, providing an employee with a service plan that contains excessive features (i.e., international calling feature when the employee's clients and business contacts are located domestically) could be a problem. Providing an employee with a newly released mobile device to increase morale or to attract a prospective employee during the recruitment process could also be a problem.
What about the Treatment of Employee-Owned Devices?
While Notice 2011-72 made it clear that employer-owned devices and service plans (provided for business purposes) could be excluded from an employee's wages (for both business and personal use), the notice was silent regarding employee-owned devices. This caused much confusion, from a tax and income reporting perspective, for companies that were allowing their employees to bring their own device. Subsequent to the issuance of Notice 2011-72, the IRS released a memorandum that provided field examiners with instructions on how to treat reimbursements to employees for the business use of employee-owned mobile devices. The memorandum instructs examiners to analyze reimbursements to employees for business and personal use in a similar manner as described in Notice 2011-72.
If employees receive a reimbursement from their employer pursuant to a mobile device policy, three requirements must be satisfied for the reimbursement to be excluded from the employees' wages. Employees must (1) demonstrate to the employer that the mobile device and service plan have a required business connection, (2) substantiate the expense to the employer (e.g., produce an expense report with accompanying receipts) and (3) return any reimbursement received in excess of the substantiated amount. Collectively, these requirements are referred to as the "Accountable Plan Rules."
Determining the Mobile Device Policy Your Company Uses
Because mobile device policies have evolved along with mobile device technology, it is crucial that your tax department be aware of the type of policy (or policies) your company has adopted (or may be considering adopting). Many companies have multiple policies in force at any given time as contracts expire and renew. Additionally, it is not uncommon for a company to have a combination (or hybrid) of mobile device policies, further compounding the complexity of the identification, taxation and income-reporting requirements.
A stipend is when an employer provides employees with an allotted amount of money (usually in the form of a fixed monthly amount) for the employees to purchase a mobile device and service plan of their choice (typically within a specified range of options). A stipend is treated as wages to the employee on Form W-2, and is subject to income tax and employment tax withholding (FICA, FUTA and SUTA, if applicable). The stipend is treated as additional wages because the payment is not made in accordance with the Accountable Plan Rules (as outlined previously).
Example: An employer provides an employee for her first month of employment an initial payment of $100 ($70 to purchase a mobile phone and $30 to purchase a monthly service plan). The employee then purchases a mobile phone for $60 and obtains a service plan for $30 per month. The entire value of the stipend ($100 for the first month and $30 each month for the service plan thereafter) will be included in the employee's wages. Regardless of the actual cost incurred by the employee ($90 for the first month and $30 each month for the service plan thereafter), the employee is subject to income tax and employment tax withholding on the full amount of the stipend ($100 for the first month and $30 each month for the service plan thereafter).
2. Employer All-Inclusive
For an employer all-inclusive policy, the employer provides the employee with both the mobile device and service plan at no cost to the employee. As long as there is a substantial business reason for providing the mobile device and service plan to the employee, the business and personal use of the device meets the requirements as a working-condition fringe benefit and a de minimis fringe benefit, respectively.
Example: An employer purchases a bulk quantity of BlackBerry devices that cost $60 each. The employer is able to negotiate a standard service plan for each mobile device that costs $25 month. The entire cost of providing a company-owned mobile device and monthly service plan to the employee will be considered a working-condition fringe benefit, exempting the employer from including the cost of the BlackBerry and monthly service plan in the employee's wages.
The typical reimbursement policy is where employees are instructed to purchase a mobile device and monthly service plan by their employer to use for business purposes (usually the employee is limited to a selection of predetermined devices). The employer then reimburses the employee for the cost of the initial purchase of the mobile device and the monthly service plan charge each month upon receiving substantiating documents (i.e., expense report with accompanying receipts). The reimbursement is excluded from the employee's wages. To utilize this policy, the reimbursements must be made in accordance with the Accountable Plan Rules.
Example: An employer instructs an employee to purchase a mobile device and monthly service plan that will accommodate the employer's business needs. The employee purchases a $50 mobile device and a $30 monthly service plan. The company then reimburses the employee for $80 (both the cost of the initial mobile device and the first monthly service plan charge) and $30 each month thereafter. The reimbursement amount is excluded from the employee's wages as long as the employee (1) demonstrates to the employer that the mobile device and service plan have a required business connection, (2) substantiates the expense to the employer (i.e., expense report with accompanying receipts) and (3) returns any reimbursement received in excess of the substantiated amount. Note that care must be taken to avoid changes in the service plan if the changes are not warranted for business purposes (i.e., addition of international calling feature if the employee's clients and other business contacts are located domestically).
The typical BYOD policy requires employees to have a mobile device for business purposes. Employees use their personally-owned mobile device, and the employer typically provides the service plan for the device. If the entire cost of the mobile device is borne by the employee, there is no impact to the employee's wages reported on the Form W-2. In fact, the employees may be entitled to take an itemized deduction (subject to a 2 percent of adjusted gross income limitation) on their personal tax return.
The service plan for the BYOD policy is provided at no cost to the employee. Similar to an employer all-inclusive policy, as long as there is a substantial business reason for providing the service plan to the employee, the business and personal use of the service plan meet the requirements as a working-condition fringe benefit and a de minimis fringe benefit, respectively.
Example: An individual purchases an iPhone for $200 a few months prior to being hired by Company A. Company A requires the employee to provide a mobile device of his choosing (typically limited to a few specific device types) for necessary business purposes. In turn, Company A pays the $50 monthly service plan charge for the employee directly to the service provider. The cost of the monthly service plan will not be included in the employee's wages, as the business and personal use of the service plan meets the requirements as a working-condition fringe benefit and a de minimis fringe benefit, respectively. The employee may be entitled to take an itemized deduction (subject to a 2 percent of adjusted gross income limitation) on his personal tax return for a portion (or potentially all) of the cost the employee incurred to purchase the iPhone.
A company can structure a BYOD policy in various ways, with the policy described above as just one method. As a company structures a mobile device policy that provides greater flexibility for the employee (e.g., numerous mobile device options and applicable service plans and/or service providers, full or partial reimbursement of the employee's mobile device, etc.), the tax implications can become very convoluted. This is why having the tax function included in the early stages of mobile device policy development is a must.
Which Policy Is Best?
After analyzing the ins and outs of each mobile device policy combination mentioned above, you are probably asking yourself, "Which policy is ultimately the best? Is there a mobile device policy that is generally better than the others? Is a BYOD policy the best fit for my company and situation?"
The answer is...it depends. That is, you should try to select one or two of the options mentioned above and then tailor the policy so to balance the company's needs and requirements with the employees' preferences (for a potential productivity boost). The following chart describes some considerations for each of the common types of mobile device policies:
(1) Reimbursements are not treated as wages to employees if made pursuant to an accountable plan.
Alvarez & Marsal Taxand Says:
The overall takeaway from this analysis is that the most appropriate mobile device policy depends on which benefits your company wishes to maximize and which costs it aims to minimize. Although the IRS has clarified the tax treatment of mobile device policies, the critical element lies in correctly identifying which type of mobile device policy (or policies) your company has adopted.
The use of a stipend as a means to provide mobile devices to employees for business purposes is generally the least tax-effective policy (for both the employer and employee), because the employer is required to treat the stipend as additional wages to the employee, which are subject to income tax and employment tax withholding requirements. The other policy options allow the employer to exclude the benefits from the employee's wages as a working-condition fringe benefit, eliminating the income tax and employment tax withholding requirements.
Ultimately, it is imperative that you understand the tax ramifications these new mobile device and service plan policy variations have on your company. As IT departments continue to update policies and roll out new mobile devices, correctly reporting income to employees becomes increasingly more difficult for companies. With tax and income reporting updates, continual technological advances in mobile devices and the increased complexity of adopting multiple variations of mobile device policies, it is important to have top-notch communication between employees, the tax department, and the IT department.
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Doug Friesen, Director, contributed to this article.
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