How Crypto Payroll Works
Crypto payroll is an innovative system that integrates the benefits of onchain payments with traditional payroll processes. Understanding the mechanics behind crypto payroll systems helps businesses appreciate its potential advantages and complexities. Here’s an in-depth explanation of how crypto payroll works.
Offchain Payroll Calculations
Federal, State, and Local Taxes:
Compensation Assessment: The process begins with calculating the net compensation for each employee. This includes calculating taxes and benefit deductions.
Tax Withholding: Offchain systems compute federal, state, and local taxes based on the employee's compensation and applicable regulations.
Deductions: Other deductions such as benefits, retirement contributions, and garnishments are also calculated offchain.
Onchain Fund Distribution
The net pay is transferred onchain from the company's treasury to the employee's desired cryptocurrency wallet. Employees need to have a secure crypto wallet set up to receive payments. Popular options include MetaMask and Ledger.
IRS Payments
Employer and Employee Taxes:
Bank Account Transfer: The calculated employer and employee taxes are transferred from the employer’s bank account to the IRS.
Tax Reporting: Employers must ensure accurate and timely tax reporting to comply with federal and state regulations.
Hybrid Cash and Crypto Payroll
Often, workers want to receive payroll via direct deposit AND onchain in crypto. This is a slightly more complex use case that requires splitting net payments
Split Payments: In a hybrid system, part of the net pay is distributed via traditional direct deposit into the employee’s bank account, while the remaining portion is paid in cryptocurrency. The tax amount reported remains unchanged.
Franklin supports this hybrid approach, allowing businesses to customize the payment distribution based on employee preferences while maintaining compliance with regulatory requirements.
Off-Ramping for IRS Payments
Funding IRS Payments with Crypto:
Crypto to Fiat Conversion: In some systems, like Franklin, the employer can use cryptocurrency to fund IRS payments. The crypto is converted to USD, and the corresponding amount is paid to the IRS to meet the tax obligations for each payroll run.
Detailed Workflow of Crypto Payroll
Gross Compensation Calculation:
Payroll software calculates the gross compensation for each employee, factoring in hours worked, salary agreements, and other compensation elements.
Tax and Deduction Calculation:
Offchain systems compute the necessary withholdings for federal, state, and local taxes, as well as other deductions such as health insurance, retirement plans, and any garnishments.
Net Pay Calculation:
After deductions, the net pay amount is determined. This is the amount the employee will receive in their cryptocurrency wallet.
Onchain Distribution:
The employer’s onchain treasury sends the net pay to the employee’s cryptocurrency wallet. The transaction is recorded on the blockchain, ensuring transparency and security.
Tax Payment and Reporting:
The employer’s connected bank account is used to transfer the withheld taxes to the IRS and state tax agencies. This ensures compliance with tax laws and timely payment of all obligations.
Hybrid Payroll Execution:
For hybrid payrolls, the net pay is split between a direct deposit into the employee’s bank account and a cryptocurrency payment to their wallet. This provides flexibility and accommodates employee preferences.
Off-Ramping for IRS Payments:
Employers can opt to use their cryptocurrency holdings to fund IRS payments. The crypto is converted to USD and paid to the IRS, simplifying the process of meeting tax obligations.
Conclusion
Crypto payroll integrates traditional payroll processes with the innovative capabilities of blockchain technology, offering a secure, efficient, and flexible way to pay employees. By understanding the mechanics behind crypto payroll, businesses can better appreciate its potential and effectively implement it within their operations. Whether opting for a full crypto payroll or a hybrid approach, this system ensures compliance, enhances security, and provides employees with modern payment options.
