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1. What Exactly is Cryptocurrency?
Cryptocurrency refers to any form of digital currency. Banks don’t verify transactions with cryptocurrency. Instead, it is a peer-to-peer system that lets anybody from anywhere make and receive money.
When you transfer cryptocurrency, the transaction is recorded in a blockchain, which is a public ledger.
Although Bitcoin was the first cryptocurrency, it is by no means the only one. There are around 19,000 cryptocurrencies as of May 2022, with more joining the market regularly. Other well-known cryptocurrencies outside Bitcoin include Ethereum, Litecoin, and Ripple.
2. Can You pay Employees with Bitcoin?
Employers are required by the Federal Fair Labor Standards Act (FLSA) to pay regular and overtime wages in either cash or negotiable instruments. Historically, the term was considered solely fiat currency—money backed by a government. As a result, paying non-exempt employees minimum and overtime wages in cryptocurrency and paying exempt employees a minimum weekly salary in bitcoin tends to violate the FLSA.
It is vital to understand that the FLSA only applies to wage, salary, and overtime payments. As a result, you have to pay at least ordinary earnings in US dollars and remuneration over that barrier in cryptocurrency.
The DOL, or the United States Department of Labor has permitted employers to pay employees in foreign currency as long as the amounts paid to fulfill FLSA standards when translated to US currency using the rate of exchange in effect at the time of payment. However, it is still being determined if the DOL or the courts regard cryptocurrencies as foreign currency in the event of a disagreement.
3. State Labor Laws and Cryptocurrency Payments
State employment rules, on the other hand, tend to exacerbate the problem. For example, New York employers pay employees only via cash, cheque, direct deposit, or payroll debit card. Other states expressly demand that wages be paid in US dollars.
Employers in California are prohibited from paying salaries that are not payable in cash, on-demand, and without discount. Because the price of Bitcoin and other cryptocurrencies fluctuates dramatically, crypto-compensation tends to violate state law.
Assume your employee is scheduled to get their salary in Ethereum. Still, the price of Ethereum falls between the time you submit payroll for processing and the time the employee receives payment. A situation like this tends to violate labor regulations and lead to wage-and-hour claims. However, the IRS has no issue paying an employee in cryptocurrency.
4. How to Pay Employees with Crypto?
- Obtain written permission from workers
While it is not necessary, it is advisable to obtain written consent from workers indicating that they intend to receive a portion of their compensation in bitcoin and understand the risks involved. Draft the authorization document in collaboration with your HR department, legal department, or attorney.
- Use a third-party vendor
Consider working with a third-party provider rather than purchasing cryptocurrencies and keeping them until it's time to pay staff. These service providers convert US dollars into cryptocurrencies at the current exchange rate and deposit the funds into the employee's digital wallet.
- Pay minimum and overtime earnings in US dollars
Pay regular salary and overtime in US dollars to avoid problems with the US Department of Labor and use cryptocurrencies to pay bonuses and other incentive payments.
- Pay attention to taxes
Paying employees with cryptocurrencies does not exempt you or them from paying payroll taxes. The IRS still expects you to withhold income taxes and FICA from worker payments. Employees face income taxes on the cryptocurrency's fair market value when they get it, as well as capital gains if they sell it after its importance has grown.
5. The Benefits and Drawbacks of Paying Employees in Cryptocurrency
There are several possible benefits and drawbacks to paying staff in bitcoin.
5.1. PROS
- Speed
Cryptocurrency transactions are almost instantaneous. Employees no longer have to wait days for a bank to deposit cash into their bank accounts.
- Incentives for hiring employees
Those who are young, tech-savvy, and already understand and utilize cryptocurrencies are lured to organizations that pay in cryptocurrency, which provides your company an advantage in recruitment and hiring. As per a survey, 60% of millennials have already acquired cryptocurrency.
- Potential profits
Volatility is one of cryptocurrency's distinguishing characteristics. For example, on December 7, 2017, the price of one Bitcoin increased from $16,000 to $20,000 in a single day. As a result, employees stand to win significantly if the value of their cryptocurrency climbs rapidly after payday.
5.2. CONS
- Compliance
The laws governing bitcoin and its use vary greatly and are constantly changing, making it difficult to confirm adherence with federal and state ordinances.
- Possible losses
Just as rapidly as bitcoin acquires value, it also loses value. For example, after setting new highs in 2017, the price of one Bitcoin fell from $20,000 to around $12,000 on December 27, 2017. Employees incur significant losses if the value of their cryptocurrency falls precipitously after payday.
- There is no legal protection
The bitcoin industry is appealing to fraudsters due to its decentralization and lack of government supervision. It also implies that cryptocurrency owners are not afforded the same consumer safeguards as conventional forms of payment.
For example, if you overpaid an employee unintentionally through direct deposit, your payroll processor generally reverses the transaction and refunds your money. When you pay using cryptocurrency, though, you typically only receive your money back if the person you paid returns it.
- Specific payment conditions
Aside from these drawbacks, there are a few more factors that organizations have to consider. Certain states and nations, for example, have labor regulations that say that employees are to be paid in cash, direct deposit, check, or payroll debit card. Some rules also require payments to be made in a specific currency and people have to buy BTC with a credit card to fulfill such payments.
6. 4 Best Ways to Pay your Employees in Crypto if They Ask You to Do So
Here are the four greatest methods to be paid in cryptocurrency.
- Bitcoin payment in full
Your monthly wage is converted to bitcoin or the cryptocurrency of your choice and put into your crypto wallet each month using this option.
- Payroll proportion
Here, you don’t choose to get your full salary or compensation in bitcoin or another cryptocurrency. Most payroll providers offer alternative payment arrangements that allow you to designate a portion of your income to be paid in bitcoin or cryptocurrency instead.
- Cryptocurrency pension plan
Instead of contributing to a Roth IRA or 401(k), some employees who choose the payroll percentage form of payment get a tiny portion of their income in bitcoin or another cryptocurrency.
The outcome is a new type of retirement fund that doesn’t rely on the stock market and is more resistant to economic downturns and market collapses.
- Extraordinary compensation
Some payroll platforms also enable businesses to send out lump amounts, one-time transactions, and other non-regular payments.
This function is valuable in some situations, such as when you are qualified for workers' compensation or receiving reimbursement for travel and housing.
7. Some More Considerations on Paying Employees with Cryptocurrency
- Legality of paying the staff with Bitcoin
Some nations allow employees to be paid in Bitcoin and other types of cryptocurrency, while others prohibit it. The rules in the United States are still developing. To avoid breaching the FLSA, firms have to pay minimum wages, overtime compensation, and minimum weekly salaries to non-exempt employees through traditional ways. Cryptocurrency is useful enough to pay bonuses and other incentive rewards.
- Consequences of getting paid in cryptocurrency
Receiving cryptocurrencies as payment is a taxable income taxed at your marginal tax rate. The IRS considers cryptocurrency property rather than cash, so if you later spend, sell, or trade it, pay capital gains tax on any such transaction.
8. Reasons Behind a Company Wanting to Pay its Employees in Cryptocurrency
Paying staff with cryptocurrency is a strategy for some firms to attract talent. Competing for clever and skilled individuals is fierce, particularly in technology. Companies position themselves as progressive employers who provide enticing wages and perks by offering a portion of employee salaries or incentives in cryptocurrency. Also, the transaction fees are substantially cheaper than those imposed by a bank or other financial intermediary.
9. Using Crypto to Pay it Forward
Because of its potential benefits, cryptocurrency has undoubtedly influenced many firms' pay and benefits schemes. Though the usage of cryptocurrencies as remuneration is still in its early stages, it takes some time before it becomes a responsible, safe, and well-understood business practice. The method acquires credibility as more businesses consider cryptocurrencies a payment option, and regulatory advice emerges.
However, businesses must carefully examine some drawbacks and issues before getting on the crypto payment bandwagon. As a result, before making the switch, have a thorough conversation with your staff about the preferred payment choices, and contact your tax adviser and attorney.
