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These questions are related to the June 2009 policy change for UCSD-provided cell phones and PDAs, which treats the devices as taxable fringe benefits. For general information, see Tax Implications for UCSD-Provided Cell Phones and PDAs.
Background
Policy changes
Personal use
Other technologies
For supervisors
Q: Why is the university treating my cell phone as a taxable benefit?
A: The Internal Revenue Service (IRS) considers cell phone use a taxable fringe benefit if the business and personal use are not substantiated. Only recently has this issue emerged as a problem in IRS audits of colleges and universities, including recent audits of some university of California campuses.
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Q: I have been paying for personal calls made on my university-owned cell phone. Aren’t I meeting the IRS requirements?
A: You would think so, but under IRS regulations it is not enough to simply pay for your personal calls and say all the rest are business. The IRS requires that the use of an employer-provided cell phone be documented in a very detailed manner.
In addition to identifying all personal calls on the employee’s monthly cell phone statement, the employee must note the purpose of each business call. In the absence of such documentation, the IRS can treat all undocumented calls as personal and the value of those calls as additional wages, even if the calls were mostly business calls.
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Q: Why is a cell phone treated differently than the phone on my desk?
A: Because a cell phone is portable and may be taken off the employer’s business premises, Congress established the detailed business substantiation rules applicable to this equipment and similar devices. The business use rules that apply to equipment intended to stay in your office, such as a desk phone, are less restrictive.
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Q: This seems ridiculous. Why are you putting us through this?
A:While the documentation requirements may seem unreasonable to us and to most taxpayers, the IRS takes them very seriously in its audits of business and governmental employers. Legislation has been introduced by both the U.S. House and the Senate to modernize the cell phone substantiation rules, but it is not known when, or if, Congress will take action to approve these bills.
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Q: Why should I have to pay taxes for a phone I don’t own? Is this fair?
A: It doesn’t matter that the phone is owned by the university. The phone only has to be provided for your use in order for the IRS substantiation rules to apply.
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Q: Has the IRS published any guidelines that outline their position on cell phone taxation?
A: Yes. The IRS website includes additional information on employer-provided cell phones.
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Q: How will my university cell phone affect my taxable income?
A:The monthly cost of your cell phone service plan, including the cost of the phone itself, will be treated as imputed income, which will be added to your taxable earnings as additional wages effective with June 2009 earnings.
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Withholding for taxes on the imputed income will be taken from your regular pay. However, you will receive a monthly cash allowance to reimburse you for the taxes on the imputed income. Since the cash allowance itself is taxable, it will be increased or "grossed up" to reimburse you for applicable payroll taxes based on the IRS formula for such taxable payments.
Q: How will the cash allowance be calculated?
A:The monthly cash allowance will be calculated using the following standard tax rates:
- Federal income taxes, 28%
- State of California income taxes, 8.25%
- OASDI or Social Security (if applicable), 6.2%
- Medicare (if applicable), 1.45%
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Q: What if my Federal and State tax brackets are higher than 28% and 8.25%, respectively?
A: Standard income tax rates have been used that approximate an employee’s tax liability. Calculating individual allowances based on an employee’s marginal income tax rates would introduce a new level of complexity that would be at odds with the university’s goal to reduce the administrative burden associated with providing this benefit.
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Q: What If my business usage exceeds the number of minutes available under my service plan? What about excess data charges for e-mail and document downloads, etc?
A: Most of the university’s cell phone carriers provide plans with pooled minutes (and rollover minutes) to absorb excess minutes due to temporary spikes in phone usage. If your plan does not include pooled minutes or if the pool can not absorb the minutes, your department will ask you to review the cell phone bill and note the business purpose for each call exceeding your plan minutes.
Any minutes for personal calls must be reimbursed at the excess minute rate. If there will be an ongoing increase in your business usage, you should ask your department to increase the number of minutes under your plan. Excess data charges would be handled in the same manner if your plan does not provide for unlimited data usage.
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Q: What if my cell phone is lost or stolen or damaged?
A: Notify your department and your carrier immediately. Subject to approval by your department, you will receive a one-time allowance reimbursing you for the imputed income associated with the cost of repairing or replacing your phone.
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Q: What happens after I am approved for a cell phone or cell phone-enabled PDA?
A: The imputed income and cash allowance will be added to your earnings on your next regular pay day, subject to payroll deadlines. The imputed income and cash allowance will remain in effect until your contract is renewed or canceled.
If you renew your contract, or contract with a new carrier, your imputed income and monthly allowance will be adjusted to reflect the cost of your new plan. If your contract is month-to-month, the imputed income and cash allowance will remain in effect until you return your phone to your department.
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Q: If I have to travel to another country for business, will I be reimbursed for the cost to upgrade my phone?
A: Yes. If you need to purchase additional coverage for a business trip overseas, you may be reimbursed for this expense when you submit your travel expense voucher for payment.
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Q: Will the imputed income and cash allowance be included in my income for calculating my retirement or other benefits?
A: No. The imputed income and cash allowance will not be included in your compensation for purposes of determining university retirement coverage or other benefits.
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Q: Are there any exceptions to the imputed income/cash allowance policy?
A: At the discretion or your campus, certain employees or groups of employees may be exempted from the policy due to operational considerations or other factors.
Such exceptions might include employees who are required to share a cell phone while on duty and research personnel who use cell phones as data-collection devices for research purposes. In cases where an exception is approved, however, the employee would be required to document the business use of the phone and timely reimburse the university for any personal calls made using the device.
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Q: How will the reimbursement of my business calls be calculated?
A: You are eligible only for reimbursement of your business calls if you incur additional expenses by exceeding your plan minutes for the month.
For example, assume you have 50 minutes of business calls but you exceed your plan minutes by only 30 minutes and incurred overage charges of 40 cents per minute or $12.00 (30 x 40 cents). Your reimbursement would be limited to $12.00 since you incurred only 30 excess minutes. As provided under the current policy, you may not be reimbursed for the additional business calls made within your package minutes or for a percentage of total calls made.
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Q: Can I use my cell phone for personal calls?
A: Yes. Because you will be taxed on the full cost of the phone and service plan, you may use your cell phone for incidental personal calls. However, the cost of your cell phone plan is based on the number of minutes you need for university business use.
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Q: Can I purchase additional minutes for personal use if I pay for the minutes myself?
A: No. Since your cell phone is owned by the university, the number of minutes purchased under your cell phone plan will be based on the estimated number of minutes needed for business purposes.
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Q: Can I add a business phone to an existing family plan if it is cheaper than receiving a new phone and getting a new number under the university’s imputed income/cash allowance policy?
A: No. Employees will not be reimbursed for the purchase of individually-owned cell phones. Under the policy, employees may only receive phones purchased by the university.
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Q: What if I use my personal cell phone for university business, can I get reimbursed for those calls?
A: You may be reimbursed for your business calls but only if you exceed your plan minutes for the month. Your reimbursement will be calculated at the excess minute rate, up to the number of minutes exceeding your plan limit for the month.
You will need to provide your department with a copy of your cell phone statement noting the person called and the business purpose for each call. If you regularly exceed your plan minutes because of business-related calls, you should ask your department to purchase a cell phone for your business use.
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Q: What if I decide I no longer need a cell phone? Can I give my phone back?
A: Yes. The university will make every effort to accommodate employees who want to return their cell phones or cell phone-enabled PDAs. If you no longer need a phone or PDA for business purposes or if you simply decide you do not want to retain your phone or PDA, you may return this equipment to your department.
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Q: What about BlackBerrys and other PDAs?
A: If your job requires that you have access to e-mail, calendaring, custom text messaging, document creation and editing, or other personal digital assistant (PDA) functions in addition to cell phone capability, your department may approve the purchase of a BlackBerry, Palm Treo, or other device that provides these features.
If you receive a cell phone-enabled PDA, the imputed income associated with the cost of the device and service plan will be added to your income. You will also receive a monthly cash allowance to cover the taxes on the imputed income associated with the total cost of the device and service plan. (See Question 19 regarding data-only PDAs.)
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Q: What if the cost of my cell phone or PDA is not included in the monthly service plan costs?
A: In most cases the cost of the device will be included in the service plan costs. However, if this is not the case, the cost of the handset will be prorated over the life your service contract or treated as a one-time cost if the contract is month-to-month.
In either event, you will receive a cash allowance reimbursing you for the taxes on the imputed income related to the cost of the device. If the device was purchased prior to the implementation of the new policy on June 1, 2009, it will be excluded from the imputed income and cash allowance you receive.
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Q: How about accessories like a Bluetooth, batteries, etc.?
A: There has to be a business reason for the purchase of any accessories. Keep in mind that the use of hands-free devices while driving is not permitted under existing policy, which will remain in effect under the new policy.
Any accessories, including batteries, that are needed to operate the phone for business purposes may be approved by your department. The cost of these accessories will be included in the imputed income and cash allowance that you receive.
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Q: Does the new policy cover data-only contracts for PDAs, 911 only calls, pagers, or other devices where no outgoing calls can be made?
A: Communications devices that do not have a cell phone calling capability such as "push-to-talk" devices, walkie-talkies, pagers, and similar devices are excluded from the new policy. PDAs with a data-only capability are also excluded from the policy. Employees who receive devices excluded under the policy are not subject to imputed income or eligible for a cash allowance.
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Q: I am a supervisor, how do I know which is the appropriate plan for an employee?
A: The plan selected must reflect the number of minutes needed by the employee for business purposes. Once a plan has been purchased, departments must also review the monthly cell phone statements to confirm that the business use of the phone is appropriate for the number of minutes included under the plan.
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Q: What if the employee is subject to OASDI during the first part of the year but then goes over the wage limit, should his or her allowance be grossed up for OASDI anyway?
A: No. If the employee is in a salary range that we know in advance will exceed the OASDI wage limit, then his or her allowance should not be grossed up to include OASDI for any pay period during the calendar year. It would not be appropriate to gross up the allowance for OASDI if the employee will exceed the wage limit anyway based on his or her normal earnings.
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Q: What if the employee’s earnings are normally under the OASDI wage limit but the cell phone imputed income and cash allowance causes him or her to exceed the limit? Should the allowance be grossed up for OASDI?
A: Yes. The allowance should be grossed up for OASDI if the employee’s regular earnings will not exceed the wage limit.
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Questions? Contact Sally Brainerd, Associate Controller, (858) 822-1814.
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