Bitcoin, the most popular form of digital or crypto-currency, is gaining traction as an investment vehicle and a way to pay for goods and services. More than 100,000 merchants worldwide now accept Bitcoin, allowing consumers to book a hotel stay, take a taxi, or buy a car.  The buzz around crypto-currency continues to grow as Bitcoin options will likely soon be traded on the futures exchange and regulators consider how to monitor Bitcoin transactions.

So what about paying employees in Bitcoin? Here are some things to consider before diving into the digital currency market.

What is Crypto-currency?

Virtual or digital currency is a digital representation of value that has no paper or coin equivalent. Crypto-currency such as Bitcoin uses encryption to control its creation.  Virtual currency is electronically created and stored and does not have the backing of a commodity, bank, or government authority. Additionally, virtual currency does not have the status of legal tender.  This means that a creditor can refuse virtual currency as payment for a debt.

Convertible virtual currency is a class of virtual currency that can be substituted for real currency. As of this week, 1 Bitcoin could be converted into to approximately $4,594.69 USD.

How Do I Get and Use Bitcoin?

Bitcoin is available online and may be purchased with cash, credit card, or wire transfer. A Bitcoin user would set up an online “wallet” that manages his or her transactions.  Each user has a unique address that is identified by a series of letters and numbers and each transaction in Bitcoin is also identified by a series of letters and numbers that can be viewed on a public ledger blockchain.info and shared with other devices on the Bitcoin network.

Due to the encryption of the transactions, the users have a certain level of anonymity, but the transactions are public. One of the advantages of Bitcoin is that there are no intermediaries, which gives user’s control to send payments from one party directly to another without a financial institution making fees lower.

To prevent paying twice with the same Bitcoin, each user has its own private key and a public key. Once a transfer is initiated, the transfer is submitted to the network encoded by the public key.  The acceptance occurs when the person accepts the amount on his or her private key.  The sender signs the transaction with the private key.  This log of transactions is continually downloaded by users on the network removing the need for a third-party clearinghouse to monitor the transactions.

Theoretically, paying an employee in Bitcoins would go through the same process. However, to comply with payroll deductions and filings, employers most commonly engage a payroll service experienced in Bitcoin that handles payroll deductions and filings.

What are the withholding implications of using Bitcoins as wages?

Just like wages paid in non-virtual currency, Bitcoin compensation would be considered W-2 wages for employees. Bitcoin is also subject to federal income tax withholding, FICA, FUTA, and the self-employment tax based on the fair market value of the Bitcoin on the date it was received. 

Do Bitcoin payments meet an employer’s minimum wage and overtime requirements?

Regulations under the Fair Labor Standards Act (FLSA) require that wage payments be in “cash or a negotiable instrument payable at par,” meaning that Bitcoin payments may not satisfy an employer’s minimum wage and overtime requirements under the FSLA. An employer could pay in a hybrid of U.S. currency and Bitcoin to meet the federal requirements and pay anything above that amount in Bitcoin.  Several state wage and hour laws also require that wages be paid in U.S. currency so it is important to check both federal and state laws before paying employees in crypto-currency.

What about exempt employees?

Most exempt employees have minimum salary requirements under federal law. The minimum salary requirement under the FLSA salary basis test must be paid in U.S. currency or a negotiable instrument.  Like the minimum wage and overtime requirements, once that threshold is met, employers may pay employees the rest of the amount in Bitcoin.

Other concerns?

For nonexempt employees, there is some gray area as to how to value Bitcoins for the regular rate calculation for overtime purposes. The timing of the valuation may have a significant economic impact due to Bitcoin’s somewhat volatile nature.  Bitcoin valuation may also be a problem when calculating the regular and back pay if an employee is misclassified as exempt.  There may also be other issues tied to Bitcoin’s volatility, the administrative cost of converting wages to Bitcoin and security of Bitcoin wallets.  Before diving into the digital currency world, it is recommended that an employer consult with legal counsel to avoid any potential pitfalls.