The tax code specifies that "de minimis fringe benefits" are not taxable to an employee. This refers to benefits that are so immaterial in value that it would be unreasonable and or administratively impractical to account for them. This exception would apply, for example, to an employee who uses an employer-provided internet connection for a few minutes each month. It would not apply to employees who use an employer-provided internet connection several times each month for significant amounts of time. Internet usage is considered to be a "utility" expense by the Tax Court, and as a result is not subject to the strict substantiation rules that apply to listed property. To illustrate, in a recent case the Tax Court noted that "internet expenses are utility expenses. Strict substantiation therefore does not apply, and the Court may … estimate petitioners' deductible expense, provided that the Court has a reasonable basis for making an estimate."
There are many employers, including many charities, that have adopted "cell phone and internet usage" policies. While the use by employees of their employer's Internet connection for personal purposes is not listed property, it is nonetheless taxable. So, like cell phones, the personal use needs to be segregated, valued, and then reported as taxable income.
The substantiation rules for internet use are less stringent than those that apply to cell phones, but the income recognition for personal use is the same. What several employers have done is to adopt a policy with the following features: (1) the employer no longer provides cell phones to any employee (after current contracts expire); (2) the employer grants employees (with a need for a cell phone) a monthly taxable stipend with which the employees can purchase and pay the monthly fees for their own cell phone; (3) the employer grants employees (with employer-provided internet access) a monthly taxable stipend to cover the personal use of the internet. This is an increasingly popular way for employers to handle these issues.