Paying employees using Bitcoin is not as simple as it might seem. In order to stay in compliance with state and federal payroll laws employers must file timely reports to the proper taxing authorities. Although the payment of Bitcoin is reported on form W-2, just like regular payments of cash, reporting requirements are somewhat different. This article will detail how to properly report the payment of Bitcoin to employees.
IRS Treats Bitcoin as Property
Back in March of 2014 the IRS published guidance on the taxation of Bitcoin in Notice 2014-21. Under this guidance, the IRS treats Bitcoin and other cryptocurrencies as property. Because of this, payroll reporting is not as easy at it might seem.
Property given to employees as compensation should be recorded at the fair market value at the date it was paid. So, if you are paying an employee 10 Bitcoins then the dollar value that is reported on applicable forms is $43,540 as of the date this article is written.
Pegging Pay to Bitcoin or U.S. Dollars
The tricky part about paying employees with Bitcoin is trying to keep track of the fair market value and deciding who will bear the brunt of deviations in market price.
For example, if you decide to pay an employee 20 Bitcoins per year and the price of Bitcoin skyrockets, then their pay in US dollars will also increase. This means that the cost of that employee will be subject to the ups and downs in the market price of Bitcoin.
If you decide to peg their total pay to U.S. dollars then the amount of Bitcoins they’ll receive will vary and will have to be adjusted week by week. This ensures that both the employee and employer will know exactly how much pay the employee will receive. This also keeps payroll taxes and withholding consistent but makes the administrative aspects of payroll a nightmare.
Withholding Payroll Taxes
Withholding and payroll taxes must be paid in U.S. dollars so paying employees with Bitcoin can get complicated. The easiest way to calculate the required withholding is by first calculating the gross payroll.
If you decide to pay your employees a fixed amount of Bitcoin then you’ll simply covert the value of those Bitcoins into U.S. dollars. You will then calculate the gross to net check in U.S. dollars and withhold the appropriate amount of taxes.
For example, 1 Bitcoin is equivalent to $4,354, so if you were to pay an employee 1 Bitcoin, then you will withhold taxes as if you were paying the employee $4,354 in cash. If the net paycheck is $3,000 then you will pay the employee $3,000 worth of Bitcoin and remit the remainder ($1,354) in U.S. dollars to the appropriate taxing authorities.
Reporting Capital Gains/Losses
Reporting expenses related to payroll is complex when factoring in the use of Bitcoin. Since Bitcoin is considered property in the hands of the employer, the basis of each Bitcoin purchase must be tracked.
When you pay employees using Bitcoin you can deduct the fair market value of the Bitcoin at the date it was paid. However, you must also report a capital gain or loss as if you sold Bitcoin to a third-party. This whole situation is made even worse if you have several employees and regularly buy Bitcoin throughout the year.
- Minimum wage laws still apply regardless if wages are paid using Bitcoin or U.S. dollars.
- Employees will be subject to capital gains/losses once they convert their Bitcoin to U.S. dollars or buy goods or services with Bitcoin.
- The administrative burden is overwhelming and may be impossible for business with multiple employees receiving Bitcoin.
Use a Third Party to Avoid Headaches
Using a third-party to pay employees using Bitcoin is a must. This way, employers won’t have to worry about capital gains, U.S. dollar conversions or Bitcoin transfers. This is a relatively new service, but one of the more popular providers is Bitwage. If you couldn’t already tell by this article, paying employees with Bitcoin is complicated and can cause a tax and administrative mess. If you still decide you want to offer Bitcoin as a way to attract talent then the best bet is to go through a third-party provider.