Employers interested in offering wage payments in cryptocurrency should be aware of and comply with applicable withholding, wage and hour, and wage payment requirements at the federal and state levels. Employers can exercise caution by paying base salaries, hourly pay, and overtime pay in U.S. currency via traditional methods of payment, but offering bonus or incentive payments in cryptocurrency. Additionally, employers can use a third-party cryptocurrency payment processing company (e.g., Bitpay) or conversion service rather than paying wages directly in cryptocurrency.
Federal Withholding and Tax Issues
The IRS treats virtual currency as property for federal income tax purposes, rather than as real currency (IRS Notice 2014-21, 2014-16 IRB 938; FAQs on Virtual Currency Transactions). The IRS does consider virtual currency paid by an employer as remuneration for services to be wages for employment tax purposes. The fair market value of virtual currency paid as wages, measured in U.S. dollars on the date of receipt (since there is fluctuation in the value of cryptocurrency), is subject to federal income tax withholding and social security and Medicare (FICA) and Federal Unemployment Tax Act (FUTA) taxes and must be reported on Form W-2, Wage and Tax Statement.
Wage/Hour and Wage Payment Requirements
The Fair Labor Standards Act (FLSA) requires wages to be paid in “cash or negotiable instrument payable at par.” Cryptocurrency is not considered to be either. In other words, base wages—such as salary or minimum wage—and overtime pay must be paid in a currency issued by a government. Most states have similar requirements. Employers that have made payments of base wages and overtime pay in cryptocurrency might not be considered to be in compliance. Paying bonuses and other incentive payments in cryptocurrency may be allowed, however.
To learn more about federal and state laws, regulations, and information to keep your company's payroll operations in compliance, check out Payroll Source Plus!
Mavanee Anderson, Esq., is Editor of PayState Update and Payroll Information Resources for the APA.
