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. Although employers can not currently pay employees’ base salaries, hourly pay, and overtime pay in the U.S., they may offer bonuses 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
Since there is fluctuation in the value of cryptocurrency, the fair market value of virtual currency paid as wages, measured in U.S. dollars on the date of receipt, 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.
The IRS issued Notice 2014-21, 2014-16 I.R.B. 938, explaining that virtual currency is treated as property for Federal income tax purposes and providing examples of how longstanding tax principles applicable to transactions involving property apply to virtual currency. The IRS does consider virtual currency paid by an employer as remuneration for services to be wages for employment tax purposes.
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 in compliance. Paying bonuses and other incentive payments in cryptocurrency may be allowed, however.