Better Have My Money: Cryptocurrency Wage Issues

Better have my money!
Y'all should know me well enough
Better have my money!
Please don't call me on my bluff
Pay me what you owe me
Ballin' bigger than LeBron
Give me your money
Who y'all think y'all frontin' on?
Like brrap, brrap, brrap
-Better Have My Money, Rihanna

Congratulations! Not only did you start a small business, but you have grown big enough to become an employer! Hold up—now you know why they say “more money, more problems!” The nerve of your employees—asking for raises to feed their families! Man—now the government wants you to file quarterly payroll tax returns. Why is the government always breathing down your back? How do major corporations get away with not paying taxes? Well, you’re only human. You start thinking about creative ways to hide payments from the government. After all, avoiding ten thousand dollars in payroll taxes could finance Junior’s new set of braces. You read an article about cryptocurrencies like bitcoin and a lightbulb goes off. You think, “wow—if I convince my employees to accept bitcoins as wages, the government won’t know about the payments, and I won’t have to report employment taxes!”

In 2017, bitcoin was reaching insane values, so your employees jumped on board and agreed to be paid in the cryptocurrency. After two missed quarterly payroll reports to the government, you get an IRS letter. Damn—you’ve been selected for an audit! The IRS letter is about four pages long but can be summarized thusly: “Better Have My Money!” The auditor tells you that wages paid to employees using virtual currency are taxable to the employee, must be reported by an employer on a Form W-2, and are subject to federal income tax withholding and payroll taxes. Dang. Now not only do you have to pay back the taxes you owe, but you’re getting hit with penalties and interest as well.

You may think that this scenario is an extreme situation. In my line of work, these situations are all too common. I have represented over 100 individual and small businesses in front of the IRS and various state tax departments. Most of my clients thought that they could outsmart the government or thought they were too small to get noticed by the government. Sadly, these clients usually blame everyone but themselves for their tax problems. I fear that the appeal of cryptocurrency will get many new individuals and businesses in tax trouble. A lot of people think that the government is unable to locate their cryptocurrency activity.

Don’t test your luck with the IRS and especially your state’s tax department, which is likely to be even more aggressive than the IRS. Keep detailed payroll records going back at least three years. Be sure to include the fair market value of the cryptocurrency at the time you paid your employees. In this situation, you may need to say good bye to your old accountant. If you plan to pay employees with cryptocurrency, it is essential to hire an accountant who is knowledgeable in cryptocurrency tax rules.

If you’re still not convinced, look at the possible IRS penalties described below. This doesn’t even include the penalties that your state would levy on you. Be like Spike Lee and “Do The Right Thing!”

IRS Trust Fund Recovery (TFRP) Penalties

To encourage prompt payment of withheld income and employment taxes, including social security taxes, railroad retirement taxes, or collected excise taxes, Congress passed a law that provides for TFRP. These taxes are called trust fund taxes because you actually hold the employee's money in trust until you make a federal tax deposit in that amount.

The TFRP may apply to you if these unpaid trust fund taxes cannot be immediately collected from the business. The business does not have to have stopped operating in order for the TFRP to be assessed.

The amount of the penalty is equal to the unpaid balance of the trust fund tax. The penalty is computed based on:

The unpaid income taxes withheld, plus
The employee's portion of the withheld FICA taxes.

For collected taxes, the penalty is based on the unpaid amount of collected excise taxes.

Source: https://www.irs.gov/businesses/small-businesses-self-employed/employment-taxes-and-the-trust-fund-recovery-penalty-tfrp

By Jamaal "Crypto-J" Solomon
IG: taxitandforgetit