Implementing a mobile phone program seems like a straightforward way to keep your team connected, but the "hidden" costs—ranging from tax liabilities to data breaches—can be significant.
Whether you provide company-owned hardware or utilize a Bring Your Own Device (BYOD) model, the way you structure your policy dictates your exposure to cyberthreats and tax audits.
Before you cut another reimbursement check or hand out the latest smartphone, you must ensure your policy satisfies specific regulatory and security benchmarks.
Security risks
In general, the biggest security risk associated with mobile phones is that they may lack robust protections against phishing, malware and other cyberthreats. Hackers could use an employee’s phone to access your business’s IT network, leading to theft of customer payment details, payroll data, intellectual property and other sensitive information. An illicit entry could even result in a ransomware incident.
If you allow employees to use phones to access company data, use a mobile device management system that enforces strong security protocols. And instruct phone users to avoid using public Wi-Fi networks (such as those in airports) that could expose them to data interception and malware.
Tax rules for work-issued phones
Another consideration is taxes. Business use of an employer-provided phone typically is treated as a nontaxable working condition fringe benefit if it’s provided “primarily for noncompensatory business purposes.” For example, you may need to reach employees at any time for work-related emergencies.
If the noncompensatory business purposes test is met, the value of any personal use of an employer-provided smartphone will generally be treated as a nontaxable “de minimis” fringe benefit. However, these phones will trigger taxable income if they’re provided to replace compensation, attract new hires or boost staff morale.
Guidelines for employee-owned devices
The IRS has indicated that it analyzes expense reimbursement for employees’ personal phones similarly to how it treats employer-provided phones. So reimbursements generally won’t be considered additional income or wages if:
- You have substantial business reasons for requiring employees to use their personal phones and reimbursing them for doing so,
- Reimbursements are reasonably related to the needs of your operations and calculated not to exceed the expenses that employees typically incur in maintaining their phones, and
- Reimbursements aren’t made as a substitute for a portion of employees’ regular wages.
Employer reimbursements for employees’ actual expenses must usually be made under a so-called accountable plan (contact us for more information). Alternatively, you could provide employees with flat monthly stipends. But stipends that exceed reasonable amounts may be treated as taxable wages.
Formal usage policies
To protect productivity, it’s critical to create written phone-usage policies. Discourage employees from using company-owned phones or their personal devices to make long personal calls, access their social media accounts or stream non-work-related videos during work hours.
If you allow employees to use their own phones at work, be sure to establish a bring-your-own-device (BYOD) policy. In addition to proper usage, it should address such issues as security, data ownership, privacy (for example, your ability to view employee phone data) and proper use. Your BYOD policy might also detail procedures for wiping personal devices when employees leave your employment.
Pros and cons
Many positions call for the frequent use of mobile phones — your executives, salespeople and other “road warriors” are only a few who probably need them. Depending on the nature of your business, it may make sense to issue or reimburse the use of personal phones as a fringe benefit to other employees. Your Rudler, PSC advisor can help you review the pros and cons related to equipment costs, security, taxes and productivity. Contact us at 859-331-1717.
RUDLER, PSC CPAs and Business Advisors
This week's Rudler Review is presented by Chris Seitz, Senior Client Accounting Specialist and Heather Davis, CPA.
If you would like to discuss your particular situation, contact Chris or Heather at 859-331-1717.
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