Employers can pay employees in cryptocurrency, but they should be aware of logistical and compliance-related concerns before jumping in, payroll experts said June 23.
Cryptocurrencies, or digital assets, and virtual currencies, which often rely on blockchain technology for greater anonymity and security, are seen as volatile by some investors, the professionals said during the American Payroll Association’s 2022 Virtual Convention. The value of a currency can fluctuate widely and frequently.
“Honestly, all investments are subject to a degree of volatility or change over time,” said Daniel Thompson, Jr., CPP, director of payroll at Bath and Body Works. “As with any investment or security, knowing how it increases or decreases in value is a crucial data point in understanding if it’s a risk you’re willing to take.”
Pay in cryptocurrency
There are multiple methods of paying employees with cryptocurrency, said James Medlock, CPP, payroll compliance instructor at Medlock & Associates. For each payment method, the employer must ensure that the employee has authorized payment of some or all of their wages in cryptocurrency.
One method is for the employer to buy cryptocurrency and wire the amount to the employee, Medlock said.
He noted that each cryptocurrency has its own virtual wallet and that an employer would need to have a wallet for each cryptocurrency option made available to employees. Software wallets can be made available on a mobile phone or computer, but are more vulnerable to hacking and hardware wallets tend to be more secure, he said.
The first step is to calculate the employee’s net wage through the normal payroll process, Medlock said. On the day the processing is complete, the payment is then sent to the employer’s cryptocurrency wallet and converted from US dollars to the equivalent in the chosen currency.
Then, on payday, the cryptocurrency will be transferred from the employer’s wallet to the employee’s wallet, he said.
There may be issues with the internal management of the process, Medlock said.
Specifically, the employer needs to track the U.S. dollar value of the cryptocurrency at the time of the transaction, and it’s possible for the value to fluctuate between the date the employer made the transaction and the payday, Medlock said.
“The closer we get to actual payday, the less likely we will have volatility,” he said.
Employers can also partner with crypto payroll service providers and avoid getting directly involved in managing wallets and buying cryptocurrency, Thompson said.
“We should think of these payroll providers as gateways or intermediaries to the crypto exchanges,” he said. “They don’t require any special hardware or software changes to your current payroll solution, and generally take less time to set up.”
The employer is responsible for remitting the employee’s net pay in U.S. dollars to the provider, who then purchases the cryptocurrency on the employee’s behalf, Thompson said. Some Services may have a tiered transaction fee structure, while others may charge a flat fee.
Medlock noted that the IRS does not use the term cryptocurrency, instead referring to virtual currency and virtual transactions. The agency treats virtual currencies as property for which the market value is taxable at the time the employer transfers the amount from their own wallet to an employee’s wallet. Transfers between two employer’s wallets are not taxable, he said.
“The value of the property becomes taxable at the time of transfer — when the employee can do whatever they want with that cryptocurrency,” Medlock said. “So we’re going to see that become taxable for federal income tax, Social Security and Medicare taxes.”
The amounts must also be reported on Forms W-2, the payroll and tax return, and Form 941, the employer’s quarterly federal tax return, he said.
Employers could violate the Fair Labor Standards Act if a currency’s volatility causes its value to drop the worker’s wages below the minimum wage, Thompson said.
Employers also need to exercise due diligence when choosing a crypto payroll provider, Medlock said. Providers who fall under the requirements of the Bank Secrecy Act should be properly registered as a money services business.