Employees May Be Taxed for Texting If IRS Updates Work Cellphone Rules

The law was enacted before BlackBerries became standard workplace tools.
The law was enacted before BlackBerries became standard workplace tools. (By Daniel Acker -- Bloomberg News)
By Kim Hart
Washington Post Staff Writer
Saturday, June 13, 2009

The Internal Revenue Service's proposals to evaluate whether to tax company-issued cellphones could cut deep for work-obsessed Washingtonians. The taxes may also apply to text messages on mobile devices, e-mails on company-issued laptops and wireless cards.

Under several proposals put forth this week, the IRS would more strictly enforce an existing law that classifies company-issued cellphones as a taxable benefit -- an idea decried by employers and wireless companies who argue that mobile phones are now essential tools in the workplace that shouldn't be considered income.

The debate stems from a 1989 law that requires workers who use company cellphones for personal calls to count the value of those calls as income and pay federal income taxes for the minutes used. Employees are supposed to keep detailed records of their calls. Now that sending e-mails on mobile devices is more prevalent, data charges could also be subject to scrutiny.

The law was passed at a time when cellphones were considered a luxury, such as a corporate car or jet, and only used by the wealthiest professionals. Brick-sized phones typically cost $2,000 and $3 per minute. But BlackBerrys, iPhones, PDAs, cellphones and laptops are now common fixtures for workers, and few companies have enforced the tedious record-keeping rule.

Wireless companies, including Sprint Nextel and Verizon Wireless, have lobbied Congress to repeal altogether the law that lists cellphones as a taxable benefit. They say the cost of cellphone services has declined dramatically in the past 20 years, so it does not make sense to tax it as an employee benefit.

"Do we really want employees to, instead of being productive, spend their day logging every e-mail they send, every Web site they browse and every time they use GPS?" asked Howard Woolley, senior vice president of Verizon Wireless.

The law was designed to prevent employees from using company phones for personal calls and then writing them off as a work-related tax deduction. It was also intended to prevent employers from hiding forms of compensation to employees.

Last year, Reps. Sam Johnson (R-Tex.) and Earl Pomeroy (D-N.D.) sponsored legislation to repeal the statute. It passed the House but not the Senate. Those lawmakers, as well as Sens. John F. Kerry (D-Mass.) and John Ensign (R-Nev.), have introduced similar bills this year.

"Cellphones are no longer executive perks or luxury items, and an antiquated tax code shouldn't treat them that way anymore," Kerry said yesterday.

Meanwhile, the IRS said it is trying to simplify the record-keeping requirement of the law to make it easier for employers to comply without spending exorbitant amounts of time and money. After receiving numerous questions about the documentation requirement, the IRS is seeking feedback on how to handle the newer features of cellphones and other devices that didn't exist 20 years ago.

It will take public comment on its proposals until Sept. 4, and said it welcomes alternative ideas from employers and workers.

The agency has suggested three options. One is to deem 75 percent of work cellphone use as related to work and the remaining 25 percent as personal. Employees would be taxed on the value of the personal minutes.

Under the second option, employees would provide proof that they have a personal cellphone to use during work hours. The third option would let employers use a statistical sampling to determine the average workers' personal use of the cellphones.

At the University of Texas at Dallas, several hundred employees carry cellphones so that they can be reached after hours. To get around the need to document every minute of workers' calls, the university instead decided to pay employees a stipend for using their own cellphones. The stipend is added to their income, and is therefore taxable.

"We don't want to penalize an employee we're now asking to be available 24-7," said Calvin Jamison, the university's vice president for business affairs. "And we don't want people to have to carry two phones around."

Staff writer Emma Carew contributed to this story.

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