Update: This article was originally written in 2017 and updated in 2020. Creating a policy for employee mobile phone reimbursement can be tricky. Unlike rules for other business expenses, IRS guidance on cell phone reimbursement is ambiguous and in a state of flux. To date in 2020, no single model of cell phone reimbursement has become an industry norm. Finance departments need to carefully consider their unique model for reimbursing employees for personal technology.
This article presents a tactical approach to creating a cell phone policy. Ultimately, we recommend that you use your employee expense workflow to reimburse each employee either $50 or $75 a month. This policy is IRS-compliant, scalable, and convenient for employees and finance admins. Please note: Abacus does not provide accounting advice. Speak to an accountant to determine the particular needs of your business.
Creating a Cell Phone Reimbursement Policy
First, make three core decisions
The tax regulations of cell phone reimbursement boil down to three questions the company must answer:
- Is reimbursement right for your business? Or do you want to provide company phones?
- If you decide to reimburse employees for their cell phone use, should you do so under an accountable or non-accountable plan?
- How much should you reimburse each employee?
Let’s take these three decisions in order.
BYOD or COPE?
The question: “Is reimbursement right for your business? Or do you want to provide company phones?” It’s time to look into whether to reimburse employees for part of their monthly cell phone bill or to implement a corporate cell phone program — BYOD or COPE.
What is COPE? Eighty percent of enterprises provide mobile devices to employees, which is a policy known as “corporate-owned, personally enabled” technology, or COPE.This approach is attractive to companies with particular concerns over data security and compliance.
But to obtain this added control, companies have to manage big mobile contracts involving dozens — sometimes hundreds — of devices. The COPE cost is almost always higher than a reimbursement policy would be. Employees generally don’t like carrying two devices, and they always prefer using their own.
What is BYOD? The expense and hassle of providing corporate-owned cell phones is what has led to the rise of reimbursement plans, colloquially known as “bring your own device.” BYOD is a more scalable, affordable, employee-oriented policy than COPE.
The security trade-off is small for most companies: you probably don’t need to listen in on employee conversations and track their physical movements. You just need them to be able to speak to clients and work remotely.
The answer: Since most companies only need to meet that limited use case, BYOD — or reimbursing employees for personal devices — is simpler and cheaper than providing phones. But COPE options do exist.
Accountable or non-accountable?
The question: If you decide to reimburse employees for part of their monthly cell phone bills, the next question is whether to do it under an accountable or non-accountable plan.
Choosing an accountable plan means that you, the employer, are willing to be responsible for collecting and reporting extra documentation to the IRS in order to spare your employee from reporting their reimbursement as taxable income. In order to be accountable, your cell phone reimbursement policy must satisfy three requirements:
- The expense has to prove a business connection. This requirement is met by showing that the use of a cell phone is ordinary and necessary, and that it took place as part of the employee performing their job.
- It has to be accounted to the employer in a timely manner.
- The employee must return any excess reimbursement. The best way to handle this is simply to not reimburse them in excess of what they’re owed. We’ll cover this in the next section.
Any plan that fails on one of these points is non-accountable and requires your employee to either write you a check for the excess amount or report their reimbursement as income. Luckily, you can meet all these requirements with a system you already use every day: your employee expense workflow.
Reimbursing cell phone use through your expense management software ensures that each reimbursement will be accompanied, in a timely manner, by the date, documentation, and business purpose of the expense. After all, that’s already the standard for all your deductible expenses. It’s the same reason why record-keeping and reporting will be easy. Employees already know how the submission process works, and they’ll definitely be happy to not pay unnecessary taxes.
The answer: Having employees submit their cell phone expenses as T&E, as opposed to handling reimbursement via payroll or another Accounts Payable process, allows you to pay your people under an accountable plan without changing any of your workflows.
What level of cell phone reimbursement do we provide?
The question: How much should our cell phone reimburse policy actually reimburse employees?Another way to avoid excess reimbursement is to require the employee to submit the cell phone bill as part of the expense, the way you’d require a receipt for a client meal expense. That way, you’ll be able to see the total bill amount and avoid reimbursing more than that.
Thanks to a few rule changes over the past few years, IRS guidelines now require far less documentation to support the dollar amount of mobile reimbursements. Back when cell phones were treated as listed property, companies had to be prepared to justify the level of reimbursement based on the percentage of business versus personal usage the phone had each month.
That meant call logs with highlighted line-items and inconsistent reimbursements month-to-month.Now that the reporting requirements have relaxed, you mostly need to ensure that you reimburse reasonably and not in excess. Simple.
Solve the reasonable part by being consistent. With standard, company-wide reimbursement levels, it’s easy to defend any given reimbursement, should the need arise. That’s probably why so many businesses use this approach.Implement a two-tier system that applies to everyone in the company who needs cell phone reimbursement. Pay a set dollar amount to lighter cell phone users and a higher dollar amount to more frequent users.
The answer: You’ll decide on your own reimbursement levels, but we suggest $50 for low business use and $75 for high business use. The average monthly cell phone bill last year was $99, according to the Bureau of Labor Statistics Consumer Expenditure Survey. This means that high-use cellular bills probably exceed that amount comfortably. Also, $75 is an informal de minimis threshold for expenses, since below that IRS regulations don’t require receipts to accompany deductible expense claims.
Regardless of where you set your dollar amounts, it’s critical that any reimbursement be less than the employee’s total bill. Even if an employee uses their personal cell phone entirely for business, but pays only $73 a month, you’re still not allowed to reimburse them $75. That’s $2 in excess, which constitutes income, which means they either have to return that money to the business or report their entire reimbursement as income. Reimburse them at a lower tier and avoid this problem.
Our recommendation for your cell phone reimbursement policy
Every company will have different mobile technology needs, but our suggestion for an optimally scalable mobile policy is to:
- Reimburse personal cell phone use,
- Through your expense management workflow,
- In two consistent tiers across the company, always less than the total amount of the bill.
Make sure you have a mobile policy
Some companies don’t have any cell phone policy at all, and thus do not offer any reimbursement or COPE phones. If you choose to go this route, be sure that your employees in no way feel that they need to use phones to do their jobs. Otherwise, you could be held liable.
In 2014, an appellate court in California ruled against an employer who didn’t reimburse employees for personal cell phone use.
The company’s logic was that since employees pay for personal cell phone plans regardless of their work, businesses don’t need to subsidize what is essentially a personal choice.
The lower court actually agreed with the company, but the higher court didn’t, and set a precedent of ambiguous legal impact around the requirements of BYOD employers.Best practice is to avoid this problem entirely.
Times have changed, and even if you’ve never had a BYOD or COPE policy before, now is the time to create one.
Don’t navigating an immature cell phone policy
The goal of a corporate cell phone policy is to provide your workforce the mobile technology they need in a way that is compliant with IRS guidance, consistent, and fair to employees. It sounds simple, but a quick look at how businesses handle their mobile policies reveals a confusing array of approaches.Why do so many businesses have immature business policies? It’s because even 13 years after the debut of the iPhone, the IRS still hasn’t streamlined the process of reporting and deducting mobile technology costs.
To solve this problem, the IRS should consider creating a federal rate for cell phone reimbursements like they’ve done for vehicle mileage, per diems, and other common expenses. Mobile technology is taking over the world, and as businesses find innovative ways to leverage wearable technology and the Internet of Things, the line between personal and enterprise technology will continue to blur.
A Safe Harbor rate would lighten the reporting burden of finance teams and the IRS itself.But you don’t need to wait to craft your own consistent, compliant cell phone reimbursement policy. Have employees submit reimbursements as T&E — like 35% of Abacus customers do — and rest easy knowing your company’s mobile strategy isn’t being held up by tax concerns.
Abacus does not provide accounting advice. Speak to an accountant to determine the particular needs of your business.