6 minute read 23 Mar 2022
What to know if you want to pay employees with cryptocurrencies

What to know if you want to pay employees with cryptocurrencies

By Rajat Kapur

EY Blockchain Sales Leader

Leader of blockchain sales. Help clients build enterprise-scale blockchain application solutions that address complex business problems.

6 minute read 23 Mar 2022
Related topics Technology TMT Tech sector

Fewer payroll fees and an appeal to some talent are among the benefits to be weighed against tax and regulatory uncertainty. 

In brief

  • Cryptocurrencies are finding their way into some companies’ benefit packages, and stablecoins pegged to the US dollar can be useful for global workers.
  • Companies must tread carefully, and even partially paying workers in a volatile cryptocurrency may create a big mismatch between their income and liabilities.
  • For those that wish to pursue this capability, starting with a cryptocurrency vendor that can be scaled later, as warranted, is recommended. 

Companies hoping to stand out in the war for talent, while saving money in payroll transaction fees through financial intermediaries, have an alternative method to explore: inclusion of cryptocurrencies in their compensation plans.

For certain organizations — such as startups and those in the tech and media sectors that are recruiting digital natives, or those with workforces in the developing world — crypto may present an intriguing value proposition and a chance to position themselves on the cutting edge. However, such a move is not without risks for those companies and their employees who choose to participate in such payments, particularly amid significant regulatory ambiguity and enormous swings in the value of many leading cryptocurrencies.

What are the benefits balanced against the risks — and can those risks be mitigated? Here’s what to consider and how your organization can begin assessing how to move forward, if warranted.

Is there a business case for crypto payroll transfers?
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Is there a business case for crypto payroll transfers?

Surveys show large interest in crypto investments. Fees and settlement times are also more favorable. But there is plenty to consider.

Cryptocurrencies may be a niche interest today, but they are increasingly on the minds of millennials and zoomers. Among stock investors in the US aged 18 to 40, 40% own cryptocurrencies, making it the third most popular investment type (ahead of bonds, options and index funds), according to an April 2021 survey by The Motley Fool. Specifically, for investors within Generation Z — the oldest of whom are about 25 — that percentage climbs to 47% in the same survey, and crypto is the second most popular investment, even more than mutual funds.1

Among American adults overall, a separate survey in May 2021 also found significant appeal for crypto payments: just over 40% would consider it for part of their salary and 31% for their entire salary. It also noted that 20% who have never owned crypto say they are likely to buy some in the next year, representing over 50 million people.2

Meanwhile, since the pandemic, more companies have been widening their horizons and building global workforces that transcend physical offices — and the best-suited or cost-effective talent may live in a country with a troubled local currency. Years of double-digit inflation rapidly erode the fruits of labor for many workers across the world, and in such cases, payments in cryptocurrencies can be an alluring option.

Some cryptocurrencies can be highly volatile, which can be a major drawback and may also be part of their appeal. For example, the value of bitcoin declined from about $63,000 in mid-April 2021 to around $35,000 a month later, yet that is still a sharp increase from $7,000 in the year-ago period.3 However, a variety of cryptocurrencies called stablecoins are pegged to the values of fiat money or commodities, like the US dollar or gold, that typically aren’t subject to sudden swings, offering consistency that can be elusive with direct payments in the developing world.

A crypto solution would also accelerate the delivery of a payment to minutes4 instead of one to two days from an automated clearing house or up to five days through a wire transfer. Not only that, the transaction fees would be dramatically lower than those from a financial intermediary, depending on the amount transferred and the potential foreign-exchange costs. If such payments catch on, banks and other financial institutions may be forced to rethink their charges to remain competitive. Here’s a hypothetical comparison

Understanding the nuances
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Understanding the nuances

Both companies and employees must come to terms with the risks involved and explore a cautious approach if they feel comfortable.

On the other side of the coin, so to speak, are some question marks that companies will need to think through:

  • The U.S. Department of Labor requires employees to be paid “in cash or negotiable instrument paid at par.” But whether cryptocurrencies comply as a negotiable instrument has not been definitively resolved. Some states specifically require wages to be paid in US dollars, although there can be exceptions even to those rules.
  • The IRS designates cryptocurrencies as property, not currencies, which has tax implications and reporting considerations for employees and employers — for instance, the risk of forfeiture and in how tax should be withheld from wages.
  • Acquiring cryptocurrencies and keeping them on the balance sheet can expose your organization to risk from value fluctuations, especially with bitcoin and ether (less so with stablecoins). And there are major technical considerations needed to manage and retain the cryptocurrencies securely — not just protecting them from cyber attacks but also self-inflicted problems, such as the loss of keys required for transactions.

Employees should also think through the implications such as:

  • Cryptocurrency is still extremely volatile because of how nascent the technology is, with major protocols such as Ethereum less than eight years old. 
  • How would a sudden and dramatic swing in the value of a cryptocurrency affect your ability to cover your liabilities? By opting for only a small portion of your salary in a cryptocurrency like bitcoin, or else a greater stake in stablecoins such as USDC, you can still take advantage of quick settlements and low transaction fees without exposing yourself to undue risk. 
  • Volatility may decrease in the future as exchange-traded-fund products are being introduced to expose more institutional investment into these assets.

Although it depends on your specific organization’s needs, a prudent initial approach is to set up a pilot program in a state that allows for payroll crypto payments without any ambiguity in the law — which is most states — and to use a third-party vendor. By working with such vendors, of which there are a number of prominent providers in the market, a company would not need to acquire and protect cryptocurrencies on its balance sheet — instead, the vendors convert US dollars (or other fiat money) into the cryptocurrency at the current rate and enable the payment transfer into the employee’s digital wallet.

How would this work? First, an organization would create an account with and connect its payroll system to such a cryptocurrency vendor, which can be done on the back end just like with a typical payroll solutions provider. (Or the transactions can be performed manually through the vendor’s website.) The employer withholds necessary taxes based on the W-4 form, and the vendor calculates the percentage of post-tax salary for the employee to receive in crypto — for example, 10%, with the rest in US dollars. The vendor then handles the conversion of the US dollars into the cryptocurrency at the employer’s set time and facilitates the secure transfer to the employee, which is completed much more quickly and at a lower fee than a comparable fiat currency payment through a financial intermediary. A company then has the framework in place to scale.

How to move forward using crypto

After organizations have considered their risk management protocols and determined that they would like to pay employees using crypto, but are unsure about how to begin, here is an example of a step-by-step process:

  1. Determine how many current employees would be interested in receiving cryptocurrency payments for a pilot program. Engage your talent teams around gauging that interest among potential recruits.
  2. If the desire is substantial, think about using a third-party cryptocurrency payment vendor as a first step in your pilot program, mitigating some of the risks involved with keeping crypto on your balance sheets. Although the fees involved in transactions should be much lower than those of financial institutions, the costs still vary among crypto vendors. Understand that states regulate non-fiat-money payments differently, and that the regulations may be evolving. Local regulations must be understood and followed so that payroll is accurately taxed and reported.
  3. Create an account with the vendor. Evaluate whether connecting your payroll system to the vendor’s system or initiating transactions manually through the vendor’s website is a more appropriate option for your organization.
  4. Educate your employees and set up the terms and agreements. What cryptocurrency would they like — for instance, popular types such bitcoin or ether, or a stablecoin that is less volatile? What portion of their salary should be paid in crypto? With an account through a vendor, employees can make their selections, save them and modify them. The terms also include the acceptance of the exchange rate at time of payment. Employees also need to be aware of the tax implications of receiving their salary in cryptocurrencies, which are considered property.
  5. With these aspects covered, your company can withhold the necessary taxes and initiate the payments through the crypto payment vendor, with the cryptocurrency paid into the employee’s digital wallet or custodial account. This will also require proper accounting and recording by the company based on the accounting regulations.

Summary

Certain companies feel they can secure a competitive advantage with talent, particularly in the technology and media sectors or in developing nations, by offering employees the option of salary payments in a cryptocurrency. Crypto can be delivered to them more rapidly and with reduced payroll fees, although regulatory and tax implications must be carefully considered. Third-party vendors may offer ways for employers to mitigate some of the risks and set up programs rapidly.

About this article

By Rajat Kapur

EY Blockchain Sales Leader

Leader of blockchain sales. Help clients build enterprise-scale blockchain application solutions that address complex business problems.

Related topics Technology TMT Tech sector