If anyone on your team takes work calls, answers work texts, or checks work email on a personal cell phone, you may already owe them a monthly payment you have never made. In California, Illinois, and roughly ten other jurisdictions, reimbursing that phone use is not a perk or a goodwill gesture. It is a legal obligation — and it applies even when the employee has an unlimited plan, even when someone else pays the bill, and even when the extra work usage cost them nothing out of pocket.
This surprises most small business owners. A phone stipend feels optional, like free snacks. But state reimbursement statutes treat the employee's phone bill the same way they treat mileage or tools: if the job requires the expense, the employer pays its share. Here is how the rules work, how the tax treatment works, and how to set a defensible monthly amount.
Why a Phone Bill Became a Payroll Issue
Bring-your-own-device is the default at small companies. Buying, provisioning, and managing a fleet of company phones costs money and IT time most small businesses do not have, so employees just use the phone in their pocket. Surveys of employer practice consistently find most companies with a bring-your-own-device setup pay some kind of stipend — an Oxford Economics and Samsung study found typical reimbursements in the $30 to $50 per month range, averaging just over $40 — which means the market has already decided this is an employer cost. The law, in a growing list of states, agrees.
The legal logic is simple: an employer cannot pass its operating expenses onto workers. When you require — or even realistically expect — employees to be reachable, to run a shift-scheduling app, to scan deliveries, or to answer customers from a personal number, part of that phone bill is your business expense wearing their name. The statutes below just make that logic enforceable, with interest, penalties, and attorneys' fees attached.
California: Section 2802 and the "Reasonable Percentage" Rule
California Labor Code Section 2802 is the strictest reimbursement law in the country. It requires employers to indemnify employees for "all necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties." Courts read "necessary" broadly: if the expense is a reasonable cost of doing the job you assigned, it qualifies.
For cell phones, California courts apply what employment lawyers call the Cochran rule: when an employee is required to use a personal cell phone for work, the employer must pay a reasonable percentage of the phone bill. Three points catch employers off guard:
- Unlimited plans do not excuse you. The rule applies regardless of the plan type. The fact that an employee's work calls did not change the dollar amount of their bill is not a defense — the work use still consumed part of a device and plan the employee pays for.
- Who pays the bill does not excuse you. The obligation stands even if a family member or someone else pays for the plan.
- There is no statutory dollar amount. The law says "reasonable percentage," deliberately leaving the math to the employer and, if disputed, to a court. A flat stipend is acceptable if it genuinely approximates the work-related share — more on calculating that below.
California also awards interest on unreimbursed amounts plus the employee's attorneys' fees, which is why these claims often arrive as group actions rather than one employee asking for $40. If you have California employees using personal phones for work and you pay nothing, you are carrying an accrued liability that grows every month.
Illinois and the Other Mandate States
Illinois is the second state every employer should know. Since 2019, the Illinois Wage Payment and Collection Act (820 ILCS 115/9.5) has required reimbursement of all "necessary expenditures" — defined as reasonable expenses required of the employee in the discharge of duties that primarily benefit the employer. Illinois adds mechanics California lacks:
- The expense must be authorized or required. Unlike California's broader "necessary" standard, Illinois ties the duty to expenses you authorized or required, which makes a clear written policy your first line of defense.
- Employees get at least 30 days to submit. Your written policy can require documentation and set a submission deadline, but it cannot demand receipts sooner than 30 calendar days after the expense. You may allow more time, never less.
- No policy means no shield. If you have no written reimbursement policy, you generally cannot deny a claim for failure to follow procedures you never wrote down.
Beyond those two, mandatory-reimbursement jurisdictions include Iowa, Massachusetts, Montana, New Hampshire, North Dakota, South Dakota, the District of Columbia, and Seattle, with narrower reimbursement or deduction-related protections in states such as New York and Pennsylvania. The details vary widely — Massachusetts routes violations through its Wage Act with its famously harsh damages, while some states only require reimbursement of authorized expenses — so multi-state employers should confirm the rule in each state where they have workers rather than assuming one policy fits everywhere.
The trend line points in one direction: states keep adding these laws, and remote work keeps expanding what counts as a required expense. A policy built only for today's footprint will be wrong the day you hire your first out-of-state employee.
No State Law? Federal Law May Still Send You a Bill
There is no general federal statute requiring expense reimbursement. But the Fair Labor Standards Act sets a floor that functions like one for lower-paid workers. Under the Department of Labor's "kickback" regulation at 29 CFR 531.35, an employer cannot require an employee to bear business costs that drag effective pay below the minimum wage or cut into overtime owed.
The math is straightforward. Take a non-exempt employee earning $8.00 an hour for a 40-hour week: $320 in gross pay. If the job requires a personal phone, every dollar of required, unreimbursed cost reduces the effective hourly rate — take any realistic monthly work share, divide it across the month's paychecks, and subtract it from gross pay. If required costs push that rate below $7.25 an hour in any workweek, the employer owes back wages. The regulation's own example is an employee who must supply the "tools of the trade": the cost of required tools counts against the wage. A phone the job requires is no different from a uniform the job requires.
This matters most for hourly workers near the minimum wage — delivery drivers using personal phones for routing and customer contact, warehouse staff on scheduling apps, home health aides documenting visits. If your workforce includes anyone in that band, unreimbursed phone costs are a minimum-wage violation waiting for a payroll audit to find.
The Tax Side: Keep Reimbursements Tax-Free
Getting the labor-law answer right creates a tax question: is the money you pay the employee taxable income? Handled properly, no — for either side. Handled carelessly, your stipend becomes wages, subject to income and payroll tax, and the deduction still costs you the employer share of FICA.
Run payments through an accountable plan
The IRS lets employers reimburse employee business expenses tax-free under an "accountable plan," which has three requirements:
- Business connection. The payment must reimburse expenses the employee incurred performing services for you. A phone stipend tied to required work use qualifies; a flat "phone allowance" paid regardless of work use looks like extra pay.
- Substantiation. The employee must account for the expense — amount, time and place, business purpose — within a reasonable time. The IRS treats 60 days as reasonable. For recurring stipends, that means an initial showing of the plan cost and work-use share, refreshed periodically, not a receipt taped to every paycheck.
- Return of excess. Amounts beyond the substantiated expense must be returned within a reasonable time (120 days is the regulatory safe harbor).
Miss any prong and the whole payment is treated as wages. The most common failure is number one: a stipend with no documented link to actual work use or actual cost is just salary with a phone-shaped label.
Employer-provided phones get simpler treatment
If you go the other direction and issue company phones, IRS Notice 2011-72 makes the tax side easy. When you provide a phone primarily for noncompensatory business reasons — needing people reachable for work, for example — the business use is excluded from income as a working-condition fringe benefit, substantiation is deemed satisfied, and incidental personal use is treated as a tax-free de minimis fringe. No call logs required. That notice is a genuine simplification, and for businesses with heavy phone-dependent roles, issuing devices can be cheaper than administering per-person reimbursement math.
How to Calculate a "Reasonable Percentage"
No statute hands you a formula, so build one you can defend. Three approaches cover nearly every small business:
1. Allocate the actual bill
Ask the employee for the monthly plan cost and estimate the work share — from call and data history, from role-based expectations (a field tech versus an office worker who occasionally takes a call), or from a short sampling period. Pay that percentage of the bill. This is the most precise method and the strongest in a dispute, but it takes the most administration and needs refreshing when plans or roles change.
2. Pay a benchmarked flat stipend
Pick a fixed monthly amount grounded in real data: the average cost of a basic individual plan in your area, or the published $30 to $50 market range, adjusted for how phone-dependent the role is. Many employers use tiers — a base stipend for light use, a higher one for roles that live on the phone. A stipend is defensible when you can show your homework: the benchmark you used, why it approximates the work share, and when you last checked it. A round number chosen because it sounded fine is not a methodology.
3. Reimburse a stated percentage
Set a policy percentage — say 25 percent of the employee's plan up to a cap — and apply it uniformly within each role tier. This splits the difference between precision and simplicity, and the cap keeps one employee's premium unlimited family plan from becoming your problem.
Whichever method you choose, do three things: put the methodology in writing, apply it consistently within each tier, and revisit it at least annually. Phone plan prices move, roles drift, and a stipend that was reasonable in 2023 may not be reasonable now. Also remember that data-only stipends can underpay employees whose work runs through voice and text on metered plans — match the stipend to how the work actually uses the phone.
A BYOD Policy That Survives Contact With Reality
Your written reimbursement policy does triple duty: it satisfies states like Illinois that reward having one, it documents your accountable plan for the IRS, and it sets expectations before disputes arise. A policy that covers phones should address:
- Who qualifies. Which roles are required or authorized to use personal phones for work, and what "required" means at your company — scheduled on-call rotations, customer contact from a personal number, required apps.
- What is covered. The work-related share of service costs, and whether accessories, repairs, or overage caused by work use qualify.
- How to claim it. What documentation you need (plan cost at enrollment, periodic re-attestation), where to submit it, and the deadline — remembering Illinois-style floors of at least 30 days.
- How much and how often. The stipend tiers or percentage, the pay cycle it rides on, and the annual review date.
- Security and separation terms. If work data lives on personal phones, state what management software or wipe authority the employee consents to, what happens at termination, and how company data is removed. Get that consent in writing before enrollment, not during an exit interview.
- The alternative. Whether employees can opt for a company-issued device instead. Offering the choice strengthens your position that the stipend reflects genuine work use.
Keep the policy short enough that managers can explain it and employees will actually read it. A twelve-page document nobody opens protects no one.
Mistakes That Turn a $40 Stipend Into a Lawsuit
- Believing the unlimited-plan myth. "Their bill would be the same anyway" is the single most common — and most clearly rejected — defense. Budget the stipend regardless of plan type.
- Running stipends through payroll as extra pay. A phone payment with no expense documentation is wages. It costs you payroll tax and does not satisfy reimbursement statutes that require actual reimbursement.
- Letting managers make verbal deals. "I'll throw in $50 for your phone" creates undocumented, inconsistent payments across the team — the exact pattern that turns one complaint into a class-wide claim.
- Forgetting remote workers' other costs. Once you build the reimbursement habit for phones, apply it to home internet shares, required software, and equipment. The same statutes cover all of them.
- Setting one stipend forever. Roles change, plans reprice, and heavy-use employees subsidize the company when the stipend lags reality. Review annually and keep the worksheet.
- Ignoring new states. Every hire in a new state is a new compliance check. The day your first Illinois or California employee starts is the day your "we don't do stipends" stance becomes a liability.
Keep Your Reimbursements Organized From Day One
Every stipend you pay is a deductible business expense — but only if your books can show what it was, who got it, and which expense it reimbursed. Track reimbursements in their own expense accounts, separate from wages, with the policy methodology and employee attestations filed where a payroll audit can find them. That paper trail is what converts a monthly payment from a tax risk into a clean deduction.
As your team and your multi-state footprint grow, maintaining clear financial records for reimbursements, stipends, and every other employee expense is essential. Beancount.io provides plain-text accounting that gives you complete transparency and control over your financial data — no black boxes, no vendor lock-in. Get started for free and see why developers and finance professionals are switching to plain-text accounting.
