Cryptocurrency Payroll: Tax Guidance for U.S. Employers and Employees
With more companies conducting day-to-day business in cryptocurrencies (see our blog post on the CA bill for cannabis companies), what are the tax implications of paying employees in cryptocurrency?
If you’re planning on paying or receiving compensation in cryptocurrency, you should take into account withholding taxes. Crypto payments are still subject to the same Social Security, Medicare, and Federal income tax withholdings. It is also important to understand the difference between what is considered ordinary income and what may be a capital gain or loss. We’ve outlined key guidelines below and can help you file crypto income taxes and expenses for your specific situation.
If you’re an employer paying salaries in crypto:
It will still show as an expense on your financials and is tax deductible.
There are differences depending on whether you are paying independent contractors or employees: If you have independent contractors, there is no need for withholdings. However, you must provide a 1099-MISC at year-end if you pay them more than 600 USD worth of cryptocurrency. It would be a good idea to make sure they understand the tax consequences and their responsibility to potentially make quarterly estimated payments. Tax liability for the contractors will be discussed later.
If you have employees, you should withhold Federal income tax and FICA taxes in USD, the same as you would if you were paying salaries in USD.
For payroll management, remember your taxable event is when you make the transactions of salary payments. You will be calculating your capital gains or losses based on the transaction price (less the cost basis). The calculation is the same whether your transaction is an expense to pay your employee in Bitcoin or a trade to USD to pay your employee.
If you’re an employee or independent contractor being paid in crypto:
The USD value of the cryptocurrency at the time of receipt will be classified as ordinary income.
There are differences depending on whether you are an employee or independent contractor:
If you are an employee, this should be reflected on your W2. If you are an independent contractor, you will likely receive a 1099-MISC. Even if you do not, the proceeds should be entered on your Schedule C- Profit or Loss from Business. As an independent contractor, you will likely be liable for these separate taxes: Federal income tax, which is taxed according to normal tax brackets; Self-employment tax, which is taxed at 15.3% for the first 132,900 USD (for 2018 tax year); and Medicare, which is an additional 2.9% (for 2018 tax year). Note that as an independent contractor, you can deduct expenses from your income. You’ll pay Federal income and self-employment tax on your net profit.
For capital gain or loss calculation, remember your taxable event is when you make a transaction with your income. The value of cryptocurrency you received may have fluctuated by the time you trade it or sell it. If it goes up in value when you trade or sell it, you have a capital gain; if it goes down, you have a capital loss (less the cost basis in either case). Your cost basis for the crypto traded or sold is your ordinary income original amount at the time you were paid. The calculation is the same whether your transaction is a trade to USD to deposit into your savings account, a trade to buy ether, or a trade to USD to pay your monthly water bill. You’ll enter these amounts on Schedule D- Capital Gains and Losses.
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