DAO Employment vs. Contributor Classification: IRS & Labor Law Guide

Decentralized autonomous organizations (DAOs) face a critical classification challenge: when does a contributor become an employee under tax and labor law? The stakes are substantial—misclassifying even one employee as an independent contractor can trigger IRS information-return penalties of hundreds of dollars per unfiled form, plus back payroll taxes, interest, and potential state labor law violations.

This guide provides a comprehensive framework for DAOs to navigate contributor classification, covering IRS tests, token compensation taxation, foreign contributor reporting, and practical compliance strategies.

Why Classification Matters: The Real Costs

Before diving into classification tests, DAOs need to understand the financial implications of getting this wrong.

Tax Obligations for Employees vs. Contractors

Independent Contractors (1099):

• No payroll tax withholding required
• No unemployment insurance
• No workers’ compensation insurance
• Issue Form 1099-NEC if payments cross the reporting threshold ($600 for 2025 payments; $2,000 for payments made in 2026, adjusted for inflation for calendar years after 2026, under the One Big Beautiful Bill Act, Pub. L. No. 119-21, § 70433, which amended IRC § 6041(a) for payments made after December 31, 2025)¹
• Contractor pays self-employment tax (15.3%)²

Employees (W-2):

• Employer pays 7.65% FICA (Social Security and Medicare)³
• Employee owes 7.65% FICA on wages (plus the 0.9% Additional Medicare Tax above the statutory threshold), which the DAO collects by deducting it from wages as and when paid⁴
• Pay federal unemployment tax (FUTA): 0.6% on the first $7,000 of wages after the state credit, higher in a credit-reduction state⁵
• Pay state unemployment insurance (rates vary by state)
• Withhold federal and state income taxes
• Potentially provide benefits if 50+ full-time employees
• Workers’ compensation insurance required in most states

For a DAO paying $100,000 annually to a contributor:

• As contractor: Zero payroll tax obligation
• As employee: $7,650 in employer FICA taxes, plus FUTA (~$42), state unemployment (varies), and administrative compliance costs

Multiply this across multiple contributors, and misclassification becomes a six-figure liability.

Misclassification Penalties: A Costly Mistake

Federal misclassification exposure runs along two axes: the reduced employment-tax assessment under IRC § 3509, and the separate information-return penalties under IRC §§ 6721/6722.⁶ Section 3509(a) sets the reduced rates; § 3509(b) raises them where the employer “fails to meet the applicable requirements of section 6041(a), 6041A, or 6051” with respect to the employee, “unless such failure is due to reasonable cause and not willful neglect”; and § 3509(c) withdraws the section entirely where the liability “is due to the employer’s intentional disregard of the requirement to deduct and withhold such tax.”

Reduced Rates—Reporting Requirements Met (IRC § 3509(a), “In general”):⁷

• 1.5% of wages for the income-tax-withholding component
• 20% of the employee’s share of FICA
• 100% of the employer’s share of FICA
• Interest accruing from the original due date
• Failure-to-file and failure-to-pay additions under § 6651: 5% per month and 0.5% per month respectively, each capped at 25%

Increased Rates—Employer “disregards reporting requirements” (IRC § 3509(b)):⁸

• Rates double: 3% of wages for the income-tax-withholding component
• 40% of the employee’s share of FICA
• 100% of the employer’s share of FICA
• Interest and the failure-to-pay penalty continue to apply

No Reduced Rates—“intentional disregard of the requirement to deduct and withhold” (IRC § 3509(c)):⁹

• The § 3509 reduced rates are unavailable—the employer owes the full, unreduced amount it failed to withhold and pay
• 100% of both the employer and employee shares of FICA
• Penalties on the full liability
• Criminal exposure attaches (see below)

Information-Return Penalties (IRC §§ 6721/6722):

• $330 per W-2 not filed for returns required to be filed in 2025, and $340 for returns required to be filed in 2026, rising for intentional disregard to the greater of $660 (2025) or $680 (2026) per form or 10 percent of the aggregate amount of the items required to be reported correctly¹⁰
• These amounts are inflation-adjusted annually (Rev. Proc. 2023-34 for returns filed in 2025; Rev. Proc. 2024-40 for returns filed in 2026)¹¹

Criminal Exposure for Willful Violations:

• IRC § 7203 (willful failure to file, pay, or supply information): misdemeanor, up to $25,000 ($100,000 corporate) and/or one year¹²
• IRC § 7202 (willful failure to collect and pay over withheld employment taxes): felony, up to $10,000 and/or five years¹³

State-Level Penalties:

• Back payment of state unemployment insurance
• State income tax withholding deficiencies
• Labor law violations (meal breaks, overtime, etc.)
• Workers’ compensation insurance gaps

Example: A DAO with 5 misclassified contributors earning $80,000 each faces:

• $30,600 in employer FICA alone (7.65% × $400,000)
• $3,400+ in W-2 information-return penalties at the first-tier rate for returns required to be filed, and statements required to be furnished, in 2026 (5 × $340 under § 6721 for the unfiled returns, plus 5 × $340 under § 6722 for the unfurnished payee statements)—far more if the failures are treated as intentional disregard
• Back state unemployment taxes
• Interest and late payment penalties
• Potential DOL investigation

The IRS Voluntary Classification Settlement Program (VCSP) offers relief—employers pay just 10% of the employment tax liability for the most recent year (computed under the reduced § 3509(a) rates), skip interest and penalties, and avoid audits of prior years for the reclassified workers. But eligibility closes once an audit is pending: a taxpayer under IRS employment tax audit, or under Department of Labor or state audit concerning worker classification, cannot apply.¹⁴

The IRS Common Law Test: Federal Classification Standard

The IRS applies common law principles¹⁵ to determine worker classification, examining three categories of evidence: behavioral control, financial control, and the relationship between parties. No single factor is determinative—the IRS evaluates the entire relationship.

Behavioral Control

Does the DAO control or have the right to control what work is accomplished and how?

Indicators of Employee Status:

• DAO provides detailed instructions on how to complete tasks
• DAO mandates specific work hours or schedules
• DAO requires attendance at regular meetings or check-ins
• DAO provides training on protocols, tools, or methodologies
• DAO evaluates how work is performed, not just results
• DAO has approval rights over work methods

Indicators of Contractor Status:

• Contributor determines own methods and processes
• DAO focuses solely on deliverables and outcomes
• Contributor sets own schedule and location
• No DAO-provided training required
• Contributor brings own expertise and methodology

DAO Example: A governance contributor who must attend weekly DAO calls, follow specific proposal formatting requirements, and receive training on governance tools likely exhibits behavioral control indicators of employment. By contrast, a contributor hired to write a specific smart contract deliverable, using their own development methods and timeline, appears more contractor-like.

Financial Control

Does the DAO control the business aspects of the contributor’s work?

Indicators of Employee Status:

• DAO provides all necessary tools, software, and equipment
• DAO reimburses business expenses
• Contributor is paid hourly or salary (guaranteed payment)
• No opportunity for profit or loss beyond salary
• Contributor cannot offer services to other DAOs simultaneously
• Investment in the work comes from the DAO, not contributor

Indicators of Contractor Status:

• Contributor uses own equipment and tools
• Contributor bears own business expenses
• Payment is project-based or milestone-driven
• Contributor can profit by working efficiently or take loss if project takes longer
• Contributor actively markets services to multiple clients
• Contributor has unreimbursed business investments (software licenses, equipment)

DAO Example: A community manager receiving a monthly token allocation, using DAO-provided social media accounts and tools, with reimbursed advertising expenses, exhibits financial control indicators of employment. A smart contract auditor who uses their own tools, charges per audit, and serves multiple protocol clients appears more contractor-like.

Relationship of the Parties

How do the parties perceive their relationship?

Indicators of Employee Status:

• Written agreement describes an employment relationship
• DAO provides employee-type benefits (health insurance, retirement)
• Relationship is ongoing and indefinite
• Work performed is a key aspect of DAO’s regular operations
• Contributor works exclusively for the DAO
• Discharge or resignation practices similar to employment

Indicators of Contractor Status:

• Written independent contractor agreement
• No benefits provided beyond payment for services
• Relationship is project-based with defined end date
• Work is supplemental to DAO’s core operations
• Contributor maintains multiple client relationships
• Contract can be terminated upon project completion

DAO Example: A core team member with a multi-year token vesting schedule, participating in all strategic decisions, with work integral to the DAO’s protocol development, likely falls into employee status. A contributor engaged for a specific 3-month tokenomics redesign project, working with several other protocols, appears more contractor-like.

Applying the Test: Weight All Factors

The IRS emphasizes that no single factor is controlling. A DAO must evaluate the totality of the relationship. A contributor might exhibit some employee factors (regular payment schedule) and some contractor factors (uses own equipment). The classification depends on which factors predominate.

Key IRS Principle: “Under common-law rules, anyone who performs services for you is generally your employee if you have the right to control what will be done and how it will be done.”¹⁵

State-Level Classification: The Stricter ABC Test

While federal tax law uses the common law test, many states—most notably California—apply the more restrictive ABC test for state employment law purposes. California’s codification reaches the Labor Code, the Unemployment Insurance Code, and the Industrial Welfare Commission wage orders.¹⁶

The California ABC Test (Dynamex Standard)

Under California’s ABC test, adopted in Dynamex Operations West, Inc. v. Superior Court, 4 Cal. 5th 903 (2018), codified by AB 5 (Stats. 2019, ch. 296) at former Labor Code § 2750.3 and recodified by AB 2257 (Stats. 2020, ch. 38) at Cal. Lab. Code §§ 2775—2787, a worker is presumed to be an employee unless the hiring entity proves all three conditions:¹⁷

Prong A: Freedom from Control The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract and in fact.¹⁸

Prong B: Outside Usual Course of Business The worker performs work that is outside the usual course of the hiring entity’s business.¹⁹

Prong C: Independently Established Trade The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.²⁰

One important caveat: Article 1.5 contains numerous occupational and business-relationship exemptions. For the occupations listed in section 2783, “Section 2775 and the holding in Dynamex do not apply … and instead, the determination of employee or independent contractor status for individuals in those occupations shall be governed by Borello”—the older multifactor test of S.G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal. 3d 341 (1989)—rather than the ABC test; the business-to-business and professional-services exemptions (sections 2776 and 2778) reach the same result only where the contracting business or hiring entity, respectively, demonstrates that every statutory criterion is satisfied.²¹ DAOs should check whether a given role falls within one of those exemptions before assuming the ABC test governs.

Why Prong B Is Killer for DAOs

Prong B creates the greatest challenge for DAOs. If a contributor performs work that is part of the DAO’s core operations, they fail this test regardless of how independently they work.

Examples:

• Core developer for DeFi protocol: Writing smart contracts is the protocol’s usual course of business → Likely employee under ABC test
• Marketing specialist for NFT project: Marketing is integral to the project’s operations → Likely employee under ABC test
• External smart contract auditor: Auditing is not part of the protocol’s usual business (the protocol doesn’t provide audits as a service) → Potentially contractor under ABC test
• Specialized tokenomics consultant: One-off advisory work outside the DAO’s regular operations → Potentially contractor under ABC test

Critical Takeaway: Many DAO contributors who would qualify as independent contractors under the IRS test will be classified as employees under California’s ABC test if they perform work integral to the DAO’s operations.

Other State Standards

California isn’t alone in using stricter tests:

• Other ABC-test states: Several states apply ABC tests for state wage and hour and unemployment-insurance purposes, and many more use ABC variants for unemployment insurance
• Convenience of the employer states: Several states apply convenience of the employer rules—taxing residents even when they work remotely from another state
• Reciprocity states: A number of states have reciprocity agreements affecting multi-state tax withholding

Multi-State Compliance: DAOs with contributors in multiple states must comply with each state’s classification test and withholding requirements. This can create conflicting obligations—a contributor may be an independent contractor federally but an employee in California.

Token Compensation: Tax Treatment Under IRC § 83

Token grants add complexity to DAO contributor taxation. The IRS treats convertible virtual currency—currency that “has an equivalent value in real currency, or that acts as a substitute for real currency”—as property for federal tax purposes,²² so grants of a tradeable governance token fall within Internal Revenue Code Section 83, which governs property transferred “in connection with the performance of services.”²³

When Are Tokens Taxable?

General Rule: Tokens are included in gross income as compensation in the first taxable year in which the contributor’s rights are transferable or are no longer subject to a substantial risk of forfeiture, whichever applies—in a typical vesting grant, when the forfeiture condition lapses.²⁴

Vesting Defined: Tokens vest when the contributor has an unrestricted right to them. Common vesting triggers:

• Time-based vesting (tokens unlock after 6 months, 1 year, etc.)
• Performance-based vesting (milestones achieved)
• Combination vesting (time + performance)

Tax Amount: Fair market value of tokens on the vesting date, minus any amount the contributor paid for them. Fair market value is determined “without regard to any restriction other than a restriction which by its terms will never lapse,” so a lock-up that eventually expires does not discount the taxable amount.²⁵

Restricted Token Units (RTUs) vs. Liquid Token Grants

Liquid Tokens (No Restrictions):

• Taxable immediately upon receipt
• Ordinary income = FMV on receipt date
• DAO has withholding obligation if contributor is employee
• Contributor receives W-2 (employee) or 1099-NEC (contractor)

Restricted Tokens (Vesting Schedule):

• Not taxable until vesting occurs
• Ordinary income = FMV on vesting date
• DAO has withholding obligation on each vesting event if contributor is employee
• Contributor can make 83(b) election (see below)

Example: DAO grants contributor 10,000 tokens worth $5 each on grant date, vesting over 2 years (50% each year).

Without 83(b) election:

• Year 1 vesting: 5,000 tokens vest. If tokens now worth $8 each → $40,000 ordinary income
• Year 2 vesting: 5,000 tokens vest. If tokens now worth $12 each → $60,000 ordinary income
• Total ordinary income: $100,000

With 83(b) election (see below):

• Income recognized on grant: 10,000 tokens × $5 = $50,000 ordinary income
• No additional income on vesting dates
• Total ordinary income: $50,000

The IRC § 83(b) Election: A Critical Tax Strategy

The 83(b) election allows contributors to elect to recognize income in the year the tokens are transferred (based on the fair market value at transfer, less any amount paid) rather than waiting for vesting.²⁶

Benefits:

• Lock in taxation at current (potentially lower) valuation
• No further ordinary income at vesting, and the holding period starts at transfer; where the contributor holds the tokens as a capital asset, later appreciation is capital gain rather than ordinary income²⁷
• Avoid income tax surprises if token price spikes before vesting

Risks:

• Pay tax upfront on unvested tokens
• If tokens decline in value or contributor leaves before vesting, taxes paid are not refundable and no deduction is allowed for the forfeiture
• If contributor never receives the tokens, no tax benefit

Critical Deadline: Must file the 83(b) election with the IRS within 30 days of the transfer; if the thirtieth day falls on a Saturday, Sunday, or legal holiday, a filing postmarked by the next business day is timely. Missing the deadline forfeits the election. (Form 15620 (Rev. Apr. 2025) standardizes the § 83(b) election.)²⁸

Tax Withholding Complication: A § 83(b) election fixes the contributor’s income in the year of transfer, and an employer “making payment of wages shall deduct and withhold upon such wages.” Because “wages” includes remuneration “paid in any medium other than cash,” an employee contributor’s token grant is wages, and the DAO’s withholding attaches at transfer rather than at each vesting date, measured by the excess of the tokens’ fair market value at transfer over any amount the contributor paid—even though the tokens haven’t vested. This creates cash flow challenges, especially if the DAO pays in tokens but must withhold cash for taxes.²⁹

Practical Solutions for Token Withholding

Challenge: Employee receives 10,000 tokens worth $50,000 with 83(b) election filed. DAO owes ~$15,000 in withholding (FICA + estimated income tax), but has no cash to remit.

Solutions:

1. Sell-to-Cover: DAO sells portion of contributor’s tokens to cover withholding

   • Employee receives net tokens after tax withholding
   • Requires liquid market and contributor consent
   • Creates additional tax reporting complexity

2. Contributor Pays Cash: Employee provides cash to cover withholding

   • DAO remits employee’s cash to IRS
   • Preserves full token allocation for employee
   • Requires employee to have cash available

3. Gross-Up: DAO grants additional tokens to cover tax liability

   • Complicated calculation (gross-up itself is taxable)
   • Expensive for DAO
   • Common in traditional equity compensation

4. Contractor Classification: Structure relationship as independent contractor

   • No withholding obligation
   • Contributor responsible for own taxes
   • Only viable if relationship genuinely meets contractor tests

Most DAOs choose option 4 (contractor structure) to avoid withholding complexity, but this creates misclassification risk if the relationship actually meets employment tests.

Foreign Contributor Compliance: W-8BEN and Reporting

DAOs frequently engage contributors outside the United States, creating distinct reporting obligations.

W-8BEN Requirement

Form W-8BEN (individuals) or W-8BEN-E (entities):³⁰ Foreign contributors must complete these forms to:

• Certify foreign status
• Claim tax treaty benefits (if applicable)
• Establish exemption from U.S. withholding

DAO Obligations:

• Provide W-8BEN to foreign contributors before payment
• Retain completed W-8BEN on file (not filed with IRS)
• Use W-8BEN to determine whether withholding or reporting applies

Key Point: W-8BEN does NOT eliminate reporting—it determines which forms apply.

When to Issue Form 1099 to Foreign Contributors

General Rule: No Form 1099 required if:

• Contributor is foreign person (confirmed via W-8BEN), AND
• Services performed entirely outside the United States

Exception—Form 1042-S Required: If the DAO pays a foreign contractor U.S.-sourced income (services performed in the U.S.), file Form 1042-S rather than Form 1099-NEC; the 1099-NEC instructions, listing payments to nonemployee entertainers among the box 1a examples, direct filers to “[u]se Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding, for payments to nonresident aliens.”³¹

U.S. Withholding on Foreign Contractors

30% Withholding Rule: Payments to foreign contractors for U.S.-sourced services are generally subject to 30% withholding unless:³²

• Tax treaty reduces rate (W-8BEN claims treaty benefit)
• Services are not U.S.-sourced (performed entirely outside U.S.)
• Compensation for personal services has been exempted from withholding under regulations prescribed by the Secretary (§ 1441(c)(4))

Note that § 1441(c)(1)‘s effectively-connected-income exception reaches only “any item of income (other than compensation for personal services)” that is effectively connected with a U.S. trade or business, so ECI status alone does not relieve a DAO of withholding on a foreign contractor’s U.S.-performed services.³²

DAO Action: Determine where services are performed. Compensation for personal services is sourced where the services are performed, so remote work from the contributor’s home country generally means no U.S. sourcing and no withholding.³³ But the DAO must document this.

Foreign Contributor Checklist

• Obtain completed W-8BEN or W-8BEN-E before first payment
• Verify services will be performed outside the U.S.
• Document location of services in contractor agreement
• Determine if tax treaty applies (check W-8BEN Part II)
• If U.S. services: withhold 30% (or treaty rate) and file Form 1042-S
• If non-U.S. services: no withholding, no 1099, retain W-8BEN
• Review W-8BEN validity every 3 years

Employee Benefits Requirements: When Does a DAO Need to Provide Benefits?

If a DAO classifies contributors as employees, benefit obligations may be triggered depending on DAO size and structure.

Affordable Care Act (ACA) Requirements

Threshold: 50 or more full-time equivalent employees (FTEs)³⁴

Obligations if threshold met:

• Offer full-time employees (and their dependents) “the opportunity to enroll in minimum essential coverage”³⁵
• Coverage must be affordable. The 9.96% figure for 2026 (9.02% for 2025) is the § 36B required contribution percentage, which is measured against household income; an employer applies it through the § 4980H affordability safe harbors—W-2 wages, rate of pay, or the federal poverty line—rather than against household income it cannot know³⁶
• Coverage must provide “minimum value” (covers ≥ 60% of costs)
• Failure to comply triggers one of two § 4980H penalties (2026 amounts, indexed annually), each of which requires that at least one full-time employee be certified as receiving a premium tax credit or cost-sharing reduction: § 4980H(a), $3,340/year for each full-time employee where the employer fails to offer coverage, counting full-time employees reduced by 30, or § 4980H(b), $5,010/year per subsidized employee where coverage is offered but unaffordable or below minimum value, capped in the aggregate at the § 4980H(a) amount³⁵

Small DAOs (under 50 FTEs):

• No ACA mandate to provide coverage
• If coverage offered voluntarily, must comply with ACA consumer protections (essential health benefits, no annual/lifetime limits)
• May qualify for the Small Business Health Care Tax Credit

DAO Reality Check: Most DAOs are unlikely to reach 50 FTE threshold, but token vesting schedules and governance participation can create arguable employment relationships that aggregate toward the limit.

Other Employee Benefits

Workers’ Compensation Insurance:

• Required in most states for employees
• Coverage for work-related injuries
• Penalties for non-compliance: fines, criminal charges, personal liability for injuries

Unemployment Insurance:

• Employer must pay state unemployment insurance for employees
• Rates vary by state and experience rating
• Federal unemployment (FUTA): 0.6% on the first $7,000 of wages per employee after the state credit, higher in a credit-reduction state⁵

State-Specific Requirements:

• Paid Family and Medical Leave: A growing number of states, plus Washington, D.C., require employer and/or employee contributions to paid family and medical leave programs, and further programs are phasing in through 2027. This list is expanding, so DAOs should confirm current status in each state of operation.
• Temporary Disability Insurance: Several states require employee wage deductions for TDI

Practical Implication: Employee classification triggers cascading obligations beyond payroll taxes. DAOs must budget for insurance, benefits administration, and state-specific programs.

Decision Framework: Employee or Contractor?

Use this framework to classify DAO contributors:

Step 1: Apply IRS Common Law Test

Evaluate behavioral control, financial control, and relationship factors:

• Does DAO control how work is performed (not just results)?
• Does DAO provide tools, equipment, training?
• Is payment guaranteed (salary/hourly) vs. project-based?
• Is relationship ongoing vs. fixed-term project?
• Is contributor’s work integral to DAO operations?
• Does contributor work exclusively for DAO?

Result: If majority of factors point to employee, classify as employee for federal tax purposes.

Step 2: Apply State-Specific Test (if applicable)

If the contributor is in California or another state that applies an ABC test, apply the ABC test:

• Prong A: Is contributor free from DAO control in how work is performed?
• Prong B: Is work outside DAO’s usual course of business?
• Prong C: Is contributor engaged in independently established trade?

Result: DAO must satisfy ALL THREE prongs for contractor classification under state law.

Critical: A contributor may be contractor federally but employee under state law. When in conflict, comply with the stricter standard to avoid state penalties.

Step 3: Document the Analysis

IRS and state agencies expect documented classification decisions:

• List all factors considered
• Explain weight given to each factor
• Describe why overall relationship supports classification
• Attach written agreement (contractor or employment)
• Review classification annually or when relationship changes

Best Practice: Use Form SS-8 (Determination of Worker Status) to request IRS determination if classification is unclear.³⁷ This provides certainty but may trigger closer scrutiny.

Step 4: Structure Accordingly

If Contractor:

• Written independent contractor agreement
• Contributor invoices for services
• Contributor uses own equipment/tools
• No DAO control over methods
• Project-based or milestone payments
• Issue Form 1099-NEC (if U.S.) or obtain W-8BEN (if foreign)
• No withholding, no benefits

If Employee:

• Written employment agreement or offer letter
• Set regular compensation (salary or hourly)
• Withhold payroll taxes (FICA, federal, state)
• Provide W-2 annually
• Pay employer share of FICA, FUTA, state unemployment
• Evaluate benefits obligations (if 50+ FTEs)
• Workers’ compensation insurance
• Comply with state wage/hour laws (meal breaks, overtime, etc.)

DAO Compensation Models: Real-World Examples

Different DAO structures create different classification outcomes:

Model 1: Core Team with Token Vesting (Likely Employees)

Structure:

• 5 core contributors
• Monthly stablecoin salary + 4-year token vesting
• Daily coordination via Discord
• Use DAO-provided tools and accounts
• Work is developing and maintaining protocol (DAO’s core business)

Classification Analysis:

• Behavioral control: Daily coordination, DAO directs what work is done
• Financial control: Regular salary, DAO provides tools
• Relationship: Ongoing, integral to DAO operations
• ABC Test (Prong B): Work IS usual course of DAO business → Employee

Result: Likely employees under both IRS and state tests

Compliance Requirements:

• Payroll tax withholding on stablecoin salary
• Determine vesting taxation (immediate or 83(b) election)
• Withholding on token vesting events
• W-2 reporting
• Consider benefits if approaching 50 FTEs

Model 2: Project-Based Contributors (Likely Contractors)

Structure:

• DAO hires smart contract auditor for protocol v2 review
• Fixed-price audit: 100,000 USDC + 5,000 governance tokens
• Auditor uses own tools and methodology
• 6-week engagement, defined deliverable
• Auditor serves multiple protocols

Classification Analysis:

• Behavioral control: DAO specifies desired outcome, not methods
• Financial control: Auditor uses own tools, fixed project fee
• Relationship: Fixed-term, specific deliverable
• ABC Test (Prong B): Auditing not DAO’s usual business (DAO doesn’t provide audits as a service) → Contractor

Result: Likely independent contractor

Compliance Requirements:

• Form 1099-NEC (if U.S. auditor paid at or above the reporting threshold—$600 for 2025 payments; $2,000 for payments made in 2026, adjusted for inflation for calendar years after 2026, under the One Big Beautiful Bill Act, Pub. L. No. 119-21, § 70433, which amended IRC § 6041(a) for payments made after December 31, 2025)¹
• W-8BEN (if foreign auditor, services performed outside U.S.)
• No payroll tax withholding
• Governance tokens: auditor reports as ordinary income on receipt

Model 3: Hybrid Contributor (Classification Risk)

Structure:

• Community manager
• Part-time (20 hrs/week), ongoing relationship
• Paid monthly in governance tokens
• Uses own computer but DAO provides social media accounts
• Sets own hours but must attend weekly team call
• Also manages community for two other DAOs

Classification Analysis:

• Mixed factors: Some employee indicators (ongoing, team calls, DAO accounts), some contractor (part-time, serves other DAOs, sets hours)
• ABC Test (Prong B): Community management IS usual course of DAO business → Employee under ABC
• Key risk: Regular ongoing relationship + integral work = employee

Result: Borderline case with employee classification risk, especially in California

Recommended Approach:

• If truly contractor: emphasize project-based milestones, no attendance requirements, contributor provides all tools
• If employee: formalize employment, process payroll, withhold taxes
• Document decision rationale thoroughly

Model 4: DAO LLC with Formal Structure (Clear Employment)

Structure:

• DAO forms Wyoming DAO LLC
• Hires 10 W-2 employees
• Formal employment agreements
• Payroll processed through DAO’s US bank account
• Health insurance offered to full-time employees

Classification Analysis:

• Formal employment structure
• Traditional employer-employee relationship
• No classification ambiguity

Compliance Requirements:

• Full payroll tax withholding and remittance
• W-2 reporting
• Federal and state unemployment insurance
• Workers’ compensation insurance
• ACA compliance not yet triggered (under 50 FTEs)
• State-specific benefits (PFML, TDI if applicable)

Compliance Checklist: W-2 vs. 1099 Requirements

For Each Contributor, Determine:

Classification Decision:

• Applied IRS common law test
• Applied state-specific test (if CA or another ABC-test state)
• Documented factors and decision rationale
• Resolved any federal/state classification conflicts

If Independent Contractor (1099):

U.S. Contractors:

• Obtain Form W-9 before first payment³⁸
• Maintain independent contractor agreement
• Track total payments against the current 1099-NEC threshold ($600 for 2025 payments; $2,000 for payments made in 2026, adjusted for inflation for calendar years after 2026, under the One Big Beautiful Bill Act, Pub. L. No. 119-21, § 70433, which amended IRC § 6041(a) for payments made after December 31, 2025)¹
• Issue Form 1099-NEC by January 31³⁹
• File Copy A with the IRS by January 31; section 6071(c) requires Form 1099-NEC “on or before January 31, using either paper or electronic filing procedures”³⁹
• Avoid control indicators (set hours, provide training, control methods)

Foreign Contractors:

• Obtain Form W-8BEN (individuals) or W-8BEN-E (entities)
• Verify services performed outside U.S. (document in agreement)
• Determine if tax treaty applies
• If U.S. services: withhold 30% (or treaty rate)³² and file Form 1042-S³¹
• If non-U.S. services: no withholding, no Form 1099, retain W-8BEN
• Revalidate W-8BEN every 3 years

Token Payments:

• Determine FMV on payment date
• Report token value on Form 1099-NEC (for U.S. contractors)
• Issue 1099-NEC if total payments cross the current threshold, even if paid entirely in tokens

If Employee (W-2):

Payroll Setup:

• Obtain Form W-4 (federal withholding) and state equivalent⁴⁰
• Calculate gross wages (cash + FMV of tokens on vesting/payment)
• Withhold employee FICA (7.65%, plus the 0.9% Additional Medicare Tax above the statutory threshold)
• Withhold federal income tax per W-4
• Withhold state income tax
• Withhold state-specific deductions (TDI, PFML if applicable)
• Pay employer FICA (7.65%)
• Remit withheld taxes per IRS deposit schedule

Quarterly/Annual Reporting:

• File Form 941 (quarterly federal tax return)⁴¹
• Pay and file FUTA (Form 940 annually)⁴²
• File state unemployment returns (quarterly)
• Issue Form W-2 by January 31⁴³
• File Copy A with the SSA by January 31, “whether you file using paper forms or electronically” (the next business day where January 31 falls on a weekend or holiday)⁴³
• File state W-2s per state deadlines

Token Compensation Specifics:

• Determine vesting schedule
• Calculate FMV on each vesting date
• Withhold taxes on vesting events (cash or sell-to-cover)
• If employee files 83(b): withhold on grant date FMV
• Report token value in Box 1 (wages) on W-2
• Report withholding in applicable boxes

Benefits and Insurance:

• Obtain workers’ compensation insurance
• If 50+ FTEs: evaluate ACA requirements
• Comply with state-specific benefit mandates
• Track hours for overtime eligibility (if non-exempt)
• Provide required meal/rest breaks per state law

Multi-State Considerations:

• Register with each state where employees work
• Determine state income tax withholding (work state vs. residence state)
• Check reciprocity agreements
• Comply with convenience of the employer rules in the states that apply them
• File non-resident withholding returns where required

Record Retention:

• Keep classification analysis documentation with the employment-tax records it supports
• Retain Forms W-9, W-8BEN, and W-4 for the duration of the relationship and the applicable retention period after it ends
• Keep copies of all 1099s and W-2s
• Maintain payroll records; some states require longer retention than federal law
• Document token FMV calculations and sources

Safe Harbor Strategies: Reducing Classification Risk

DAOs can minimize misclassification exposure through intentional structural choices:

Strategy 1: Genuine Contractor Relationships

Design contributor relationships to satisfy contractor tests:

Structural Elements:

• Fixed-term project agreements (3 months, 6 months, defined milestone)
• Deliverable-based rather than time-based compensation
• Contributor provides all tools, software, equipment
• No DAO-provided training or onboarding beyond project scope
• Contributor serves multiple DAOs/clients (document this)
• No attendance requirements (meetings, calls, standups)
• Focus on outcomes, not methods or processes

Documentation:

• Independent contractor agreement specifying relationship
• Statement of work detailing specific deliverables
• Invoice process (contributor bills DAO, not payroll)
• No employee-style policies (vacation, sick leave, benefits)

Strategy 2: Service Provider Entities

Instead of engaging individual contractors, contract with service provider companies:

Structure:

• Contributor forms LLC or corporation
• DAO contracts with entity, not individual
• Entity invoices DAO for services
• Individual is employee of their own entity

Benefits:

• Clearer contractor relationship (B2B service agreement)
• Entity handles its own employment tax obligations
• Reduced DAO misclassification risk

Limitations:

• Doesn’t eliminate scrutiny if entity is single-person LLC doing employee-like work
• State laws (like California ABC test) can look through entity structure

Strategy 3: Use Wyoming or Other DAO-Friendly Structures

Wyoming DAO LLC:

• Formally register as DAO LLC under Wyoming statute⁴⁴
• Establish clear employment vs. contractor policies
• Use legal entity for banking, payroll processing, tax compliance
• Obtain EIN, set up payroll infrastructure

Benefits:

• Legal recognition and limited liability
• Clear entity for tax and compliance purposes
• Access to traditional payroll and benefits providers

Tennessee and Utah: Also offer DAO entity structures. Tennessee recognizes a “decentralized organization” by statute;⁴⁵ Utah’s Decentralized Autonomous Organization Act, Utah Code § 48-5-101 et seq.—renumbered to § 16-22-101 et seq. effective October 1, 2026—creates a distinct entity type rather than an LLC wrapper: a decentralized autonomous organization formed under the chapter “shall be deemed a legal entity separate and distinct from the decentralized autonomous organization’s members,” with the capacity to sue in its own name and perpetual duration.⁴⁶

Strategy 4: Voluntary Classification Settlement Program

If you’ve already misclassified workers and want to correct it:

IRS VCSP (Voluntary Classification Settlement Program):

• Pay just 10% of the employment tax liability for the most recent year (computed under the reduced § 3509(a) rates)¹⁴
• No interest or penalties
• No audit of prior years for reclassified workers
• Must file Form 8952 to apply; the application should be filed at least 120 days before the date you want to begin treating the workers as employees⁴⁷

Eligibility:

• Consistently treated the workers to be reclassified as independent contractors or other nonemployees
• Filed all required Forms 1099 for those workers for the previous three years
• Not currently under IRS employment tax audit, and not under Department of Labor or state audit concerning worker classification
• If previously audited on worker classification, complied with that audit’s results and not contesting the classification in court

When to Use: Before IRS discovers misclassification, or when DAO proactively identifies classification errors.

Strategy 5: Regular Classification Audits

Annual Review Process:

• Re-evaluate all contributor relationships against IRS and state tests
• Document any changes in relationship (scope, control, integration)
• Reclassify if factors shift toward employment
• Update agreements to reflect current relationship

Trigger Events for Re-evaluation:

• Relationship extends beyond initial term
• Contributor scope expands to core operations
• DAO begins controlling methods, not just results
• Contributor stops serving other clients
• Compensation changes to regular salary model

Conclusion: Classification Is Risk Management

DAO contributor classification isn’t just a tax compliance exercise—it’s a core risk management function. The financial exposure from misclassification can be devastating: back taxes, penalties, interest, state labor law violations, and potential personal liability for unpaid obligations.

Key Takeaways:

1. Apply Tests Rigorously: Use the IRS common law test for federal purposes and state-specific tests (like California’s ABC test) for state compliance. When in conflict, comply with the stricter standard.

2. Account for Real Costs: Employee classification adds 10-15% in payroll taxes alone, plus benefits, insurance, and administrative overhead. Budget accordingly.

3. Token Compensation Adds Complexity: IRC § 83 governs token grants²³—plan for vesting taxation, consider 83(b) elections, and solve for withholding obligations on illiquid tokens.

4. Document Everything: IRS and state auditors expect documented classification decisions. “We thought they were contractors” isn’t a defense—show your analysis and factors.

5. Foreign Contributors Aren’t Exempt: W-8BEN forms, U.S. sourcing analysis, and potential withholding obligations apply. Failing to obtain W-8BEN creates backup withholding liability.

6. State Law Matters: Under California’s ABC test the hiring entity must establish all three conditions, so a contributor whose work falls within the DAO’s usual course is an employee no matter how independently they work.¹⁷ Multi-state DAOs face a patchwork of classification standards and withholding rules.

7. Seek Legal Counsel Early: Classification analysis is fact-intensive and jurisdiction-specific. Engage counsel before setting up contributor relationships, not after receiving an IRS notice.

The decentralized, global, token-based nature of DAO operations doesn’t exempt them from employment and tax law. By understanding classification tests, structuring relationships appropriately, and implementing robust compliance processes, DAOs can compensate contributors while managing legal and financial risk.

Need DAO Compliance Guidance?

Astraea Counsel helps DAOs design compliant contributor classification frameworks, structure token compensation, and implement employment tax compliance. We minimize tax and legal risk while preserving DAO flexibility. Explore our Regulatory Compliance services.

Related Resources

• Crypto Tax Lawyer’s Guide - Tax compliance framework for crypto
• DAO Liability After Lido - Legal entity structures for DAOs
• DeFi Protocol Legal Structure - Entity comparison for protocols
• DAO LLC Formation Guide - Entity formation process
• DAO Token Launch Checklist - Token compensation structures
• Treasury Management for Crypto Companies - Token and stablecoin reserves
• Contact Us - Discuss your contributor classification needs
• Cryptocurrency Lawyer in California—engaging counsel on licensing, token launches, custody, and enforcement

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About the Author

Chanté Eliaszadeh represents crypto, AI, and fintech startups on regulatory compliance, corporate transactions, and strategic matters. She advises DAOs on contributor classification, token compensation structures, and employment tax compliance, helping organizations design compliant frameworks that minimize legal and tax risk.

For guidance on your DAO’s contributor classification and compensation structure, contact Astraea Counsel APC.

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Disclaimer: This article provides general information only and does not constitute legal or tax advice. Contributor classification is fact-specific and varies by jurisdiction. Consult qualified legal and tax counsel for advice on your specific situation.

Footnotes

1. One Big Beautiful Bill Act, Pub. L. No. 119-21, § 70433(a)—(c), (f), 139 Stat. 72, 243—44 (2025) (amending 26 U.S.C. § 6041(a) by striking “$600” and inserting “$2,000,” adding § 6041(h), conforming § 6041A(a)(2), and providing that the amendments “shall apply with respect to payments made after December 31, 2025”), available at https://www.govinfo.gov/content/pkg/PLAW-119publ21/pdf/PLAW-119publ21.pdf; 26 U.S.C. § 6041(a) (return required for payments “of $2,000 or more in any calendar year”); 26 U.S.C. § 6041(h) (for “any calendar year after 2026,” the subsection (a) dollar amount is increased by the section 1(f)(3) cost-of-living adjustment, rounded to the nearest multiple of $100); 26 U.S.C. § 6041A(a)(2) (service-recipient return required where remuneration for services “equals or exceeds the dollar amount in effect for such calendar year under section 6041(a)”). PDF PDF PDF ↩ ↩² ↩³

2. 26 U.S.C. § 1401(a) (tax “equal to 12.4 percent of the amount of the self-employment income”), (b)(1) (further tax “equal to 2.9 percent of the amount of the self-employment income”), (b)(2)(A) (additional tax “equal to 0.9 percent of the self-employment income for such taxable year which is in excess of” the applicable threshold). PDF ↩

3. 26 U.S.C. § 3111(a) (excise tax on every employer “equal to 6.2 percent of the wages”), (b) (further excise tax “equal to 1.45 percent of the wages”). PDF ↩

4. 26 U.S.C. § 3101(a) (tax on the income of every individual “equal to 6.2 percent of the wages”), (b)(1) (further tax “equal to 1.45 percent of the wages”), (b)(2) (additional 0.9 percent tax on wages above the applicable threshold); 26 U.S.C. § 3102(a) (the § 3101 tax “shall be collected by the employer of the taxpayer, by deducting the amount of the tax from the wages as and when paid”). PDF PDF ↩

5. 26 U.S.C. § 3301 (excise tax “equal to 6 percent of the total wages”); 26 U.S.C. § 3306(b)(1) (wages exclude remuneration paid after remuneration “equal to $7,000 with respect to employment” has been paid to the individual by the employer during the calendar year); 26 U.S.C. § 3302(b) (additional credit computed at the highest state rate “or to a rate of 5.4 percent, whichever rate is lower”); 26 U.S.C. § 3302(c)(2)(A) (credit reduced “by 5 percent of the tax imposed by section 3301” beginning with the second consecutive January 1 on which a Title XII advance balance remains, and by “an additional 5 percent, for each such succeeding taxable year”). PDF PDF PDF ↩ ↩²

6. 26 U.S.C. § 3509(a)—(c); 26 U.S.C. § 6721; 26 U.S.C. § 6722. PDF PDF PDF ↩

7. 26 U.S.C. § 3509(a)(1) (withholding tax “determined as if the amount required to be deducted and withheld were equal to 1.5 percent of the wages”), (a)(2) (employee social security tax “determined as if the taxes imposed under such subchapter were 20 percent of the amount imposed under such subchapter”). Section 3509 reaches only the employer’s liability “for tax under chapter 24 or subchapter A of chapter 21,” 26 U.S.C. § 3509(c); accord id. § 3509(a), so the employer’s own excise tax under 26 U.S.C. § 3111 (subchapter B of chapter 21) is unreduced; 26 U.S.C. § 6601(a) (interest at the underpayment rate “from such last date to the date paid”); 26 U.S.C. § 6651(a)(3) (where the tax was not shown on a return, addition to tax of “0.5 percent of the amount of such tax if the failure is for not more than 1 month, with an additional 0.5 percent for each additional month or fraction thereof during which such failure continues, not exceeding 25 percent in the aggregate,” running from notice and demand); id. § 6651(a)(1) (failure to file, “5 percent of the amount of such tax” per month on the same terms, “not exceeding 25 percent in the aggregate”). PDF PDF PDF PDF ↩

8. 26 U.S.C. § 3509(b)(1) (where the employer “fails to meet the applicable requirements of section 6041(a), 6041A, or 6051 … unless such failure is due to reasonable cause and not willful neglect,” substituting “3 percent” for “1.5 percent” and “40 percent” for “20 percent”). PDF ↩

9. 26 U.S.C. § 3509(c) (“This section shall not apply to the determination of the employer’s liability for tax under chapter 24 or subchapter A of chapter 21 … if such liability is due to the employer’s intentional disregard of the requirement to deduct and withhold such tax.”). PDF ↩

10. 26 U.S.C. §§ 6721(a)(1), (e)(2)(A), 6722(a)(1), (e)(2)(A); Rev. Proc. 2023-34, §§ 3.58—.59, 2023-48 I.R.B. 1287 (for returns required to be filed in 2025, a $330 general-rule penalty under § 6721(a)(1) and, for intentional disregard, the greater of $660 or 10% of the aggregate amount of the items required to be reported correctly), available at https://www.irs.gov/pub/irs-drop/rp-23-34.pdf; Rev. Proc. 2024-40, §§ 2.58—.59, 2024-45 I.R.B. 1100 (“In the case of any failure relating to a return required to be filed in 2026, the penalty amounts under § 6721 are” a $340 “General Rule (§ 6721(a)(1))” and, for intentional disregard, the “Greater of (i) $680, or (ii) 10% of aggregate amount of items required to be reported correctly”); Rev. Proc. 2025-32, 2025-45 I.R.B. 695 (modifying Rev. Proc. 2024-40 §§ 2.15(1) and 2.25 only, leaving §§ 2.58—.59 unchanged). PDF PDF PDF PDF PDF ↩

11. 26 U.S.C. §§ 6721(f), 6722(f) (adjustment for inflation). PDF PDF ↩

12. 26 U.S.C. § 7203 (a person who willfully fails to make a return, keep records, supply information, or pay tax “shall … be guilty of a misdemeanor and, upon conviction thereof, shall be fined not more than $25,000 ($100,000 in the case of a corporation), or imprisoned not more than 1 year, or both”). PDF ↩

13. 26 U.S.C. § 7202 (a person who “willfully fails to collect or truthfully account for and pay over such tax shall … be guilty of a felony and, upon conviction thereof, shall be fined not more than $10,000, or imprisoned not more than 5 years, or both”). PDF ↩

14. Internal Revenue Service, Voluntary Classification Settlement Program, https://www.irs.gov/businesses/small-businesses-self-employed/voluntary-classification-settlement-program (a taxpayer “cannot currently be under employment tax audit by the IRS” or under DOL or state worker-classification audit, must have filed Forms 1099 for the workers “for the previous three years,” and files Form 8952 “at least 120 days prior to the date the taxpayer wants to begin treating its workers as employees”; a participant agrees to “[p]ay 10 percent of the employment tax liability that would have been due on compensation paid to the workers for the most recent tax year, determined under the reduced rates of section 3509(a) of the Internal Revenue Code,” and will “[n]ot be liable for any interest and penalties on the amount” and “[n]ot be subject to an employment tax audit with respect to the worker classification of the workers being reclassified under the VCSP for prior years”); 26 U.S.C. § 3509(a). PDF ↩ ↩²

15. Internal Revenue Service, Publication 15-A, Employer’s Supplemental Tax Guide 4 (2026), https://www.irs.gov/pub/irs-pdf/p15a.pdf (“Under common-law rules, anyone who performs services for you is generally your employee if you have the right to control what will be done and how it will be done.”). PDF ↩ ↩²

16. Cal. Lab. Code § 2775(b)(1) (“For purposes of this code and the Unemployment Insurance Code, and for the purposes of wage orders of the Industrial Welfare Commission, a person providing labor or services for remuneration shall be considered an employee rather than an independent contractor unless the hiring entity demonstrates that all of the following conditions are satisfied”). PDF ↩

17. Dynamex Operations West, Inc. v. Superior Court, 4 Cal. 5th 903, 916—17 (2018) (a worker is an independent contractor to whom a wage order does not apply “only if the hiring entity establishes: (A) that the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact; (B) that the worker performs work that is outside the usual course of the hiring entity’s business; and (C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity”); Cal. Lab. Code § 2775(b)(1); Assemb. B. 5, 2019—2020 Reg. Sess. (Cal. 2019) (Stats. 2019, ch. 296) (adding Lab. Code § 2750.3), available at https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201920200AB5; Assemb. B. 2257, 2019—2020 Reg. Sess. (Cal. 2020) (Stats. 2020, ch. 38) (repealing Lab. Code § 2750.3 and adding Article 1.5, commencing with § 2775), available at https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201920200AB2257. PDF PDF PDF PDF ↩ ↩²

18. Cal. Lab. Code § 2775(b)(1)(A) (“The person is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.”). PDF ↩

19. Cal. Lab. Code § 2775(b)(1)(B) (“The person performs work that is outside the usual course of the hiring entity’s business.”). PDF ↩

20. Cal. Lab. Code § 2775(b)(1)(C) (“The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.”). PDF ↩

21. Cal. Lab. Code § 2783 (“Section 2775 and the holding in Dynamex do not apply to the following occupations as defined in the paragraphs below, and instead, the determination of employee or independent contractor status for individuals in those occupations shall be governed by Borello”); Cal. Lab. Code § 2776 (bona fide business-to-business contracting relationship); Cal. Lab. Code § 2778 (contract for “professional services”); S.G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal. 3d 341, 350—51 (1989) (the “principal test of an employment relationship” is the “right to control the manner and means of accomplishing the result desired” (quoting Tieberg v. Unemployment Ins. App. Bd., 2 Cal. 3d 943, 946 (1970)), weighed with “secondary” indicia). PDF PDF PDF PDF ↩

22. I.R.S. Notice 2014-21, 2014-16 I.R.B. 938, Q&A-1 (“For federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency.”); id. §§ 2—3 (the notice “addresses only the U.S. federal tax consequences of transactions in, or transactions that use, convertible virtual currency,” meaning virtual currency that “has an equivalent value in real currency, or that acts as a substitute for real currency”). PDF ↩

23. 26 U.S.C. § 83(a) (where, “in connection with the performance of services, property is transferred to any person other than the person for whom such services are performed,” the excess of fair market value over “the amount (if any) paid for such property” is included in the service provider’s gross income). PDF ↩ ↩²

24. 26 U.S.C. § 83(a) (inclusion occurs “in the first taxable year in which the rights of the person having the beneficial interest in such property are transferable or are not subject to a substantial risk of forfeiture, whichever is applicable”), (c)(1) (rights “are subject to a substantial risk of forfeiture if such person’s rights to full enjoyment of such property are conditioned upon the future performance of substantial services by any individual”). PDF ↩

25. 26 U.S.C. § 83(a)(1)—(2) (the excess of “the fair market value of such property … at the first time the rights … are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier” over “the amount (if any) paid for such property”); § 83(a)(1) (value “determined without regard to any restriction other than a restriction which by its terms will never lapse”). PDF ↩

26. 26 U.S.C. § 83(b)(1) (a service provider “may elect to include in his gross income, for the taxable year in which such property is transferred,” the excess of fair market value “at the time of transfer” over “the amount (if any) paid for such property,” and “if such property is subsequently forfeited, no deduction shall be allowed in respect of such forfeiture”). PDF ↩

27. 26 U.S.C. § 83(b)(1) (“If such election is made, subsection (a) shall not apply with respect to the transfer of such property”); Treas. Reg. § 1.83-4(a), 26 C.F.R. § 1.83-4(a) (2025) (where the service provider “has made an election under section 83(b), the holding period of such property shall begin just after the date such property is transferred”); 26 U.S.C. § 1221(a) (a “capital asset” is “property held by the taxpayer (whether or not connected with his trade or business),” excluding, among other things, property “held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business”); 26 U.S.C. § 1222(3) (“long-term capital gain” means “gain from the sale or exchange of a capital asset held for more than 1 year”); see also Treas. Reg. § 1.83-2(a), 26 C.F.R. § 1.83-2(a) (2025) (after a § 83(b) election, “any subsequent appreciation in the value of the property is not taxable as compensation to the person who performed the services”). PDF PDF PDF PDF PDF ↩

28. 26 U.S.C. § 83(b)(2) (the election “shall be made not later than 30 days after the date of such transfer” and “may not be revoked except with the consent of the Secretary”); Internal Revenue Service, Form 15620, Section 83(b) Election (Rev. Apr. 2025), https://www.irs.gov/pub/irs-pdf/f15620.pdf (instructions, “When to File”: where the thirtieth day falls on a Saturday, Sunday, or legal holiday, the election “will be considered timely filed if it is postmarked by the next succeeding day which is not a Saturday, Sunday or legal holiday”). PDF PDF ↩

29. 26 U.S.C. § 3402(a)(1) (an employer “making payment of wages shall deduct and withhold upon such wages a tax determined in accordance with tables or computational procedures prescribed by the Secretary”); 26 U.S.C. § 3401(a) (“wages” means “all remuneration … for services performed by an employee for his employer, including the cash value of all remuneration (including benefits) paid in any medium other than cash”); 26 U.S.C. § 83(b)(1); Treas. Reg. § 1.83-2(a), 26 C.F.R. § 1.83-2(a) (2025) (the service provider “may elect to include in gross income under section 83(b) the excess (if any) of the fair market value of the property at the time of transfer … over the amount (if any) paid for such property, as compensation for services”); cf. Treas. Reg. § 1.83-1(a)(1), 26 C.F.R. § 1.83-1(a)(1) (absent an election, the excess “shall be included as compensation in the gross income of such employee or independent contractor” when the property becomes substantially vested). PDF PDF PDF PDF PDF ↩

30. Internal Revenue Service, About Form W-8 BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals), https://www.irs.gov/forms-pubs/about-form-w-8-ben; Internal Revenue Service, About Form W-8 BEN-E, Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting (Entities), https://www.irs.gov/forms-pubs/about-form-w-8-ben-e; Internal Revenue Service, Instructions for Form W-8BEN (Rev. Oct. 2021), https://www.irs.gov/pub/irs-pdf/iw8ben.pdf (“Line 10, claims of tax treaty benefits”). PDF ↩

31. Treas. Reg. § 1.6041-4(a)(1), 26 C.F.R. § 1.6041-4(a)(1) (2025) (“Returns of information are not required for payments that a payor can, prior to payment, reliably associate with documentation upon which it may rely to treat as made to a foreign beneficial owner”; such payments “may be reportable, for purposes of chapter 3 of the Internal Revenue Code (Code), under § 1.1461-1(b) and (c)”); Treas. Reg. § 1.1461-1(c)(1)(i), 26 C.F.R. § 1.1461-1(c)(1)(i) (2025) (a withholding agent “must make an information return on Form 1042-S, ‘Foreign Person’s U.S. Source Income Subject to Withholding,’ (or such other form as the IRS may prescribe) to report the amounts subject to reporting”); id. § 1.1461-1(c)(2)(i)(E) (amounts subject to reporting include “[c]ompensation for dependent and independent personal services performed in the United States”); Internal Revenue Service, About Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding, https://www.irs.gov/forms-pubs/about-form-1042-s; Internal Revenue Service, Instructions for Forms 1099-MISC and 1099-NEC (Rev. Dec. 2026), https://www.irs.gov/pub/irs-pdf/i1099mec.pdf (box 1a examples, payments to nonemployee entertainers: “Use Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding, for payments to nonresident aliens.”). PDF PDF PDF ↩ ↩²

32. 26 U.S.C. § 1441(a) (persons having “the control, receipt, custody, disposal, or payment” of specified items of income “of any nonresident alien individual or of any foreign partnership shall … deduct and withhold from such items a tax equal to 30 percent thereof”), (c)(1) (no withholding required for “any item of income (other than compensation for personal services)” that is effectively connected with a U.S. trade or business), (c)(4) (“Under regulations prescribed by the Secretary, compensation for personal services may be exempted from deduction and withholding under subsection (a).”). PDF ↩ ↩² ↩³

33. 26 U.S.C. § 861(a)(3) (income from sources within the United States includes “[c]ompensation for labor or personal services performed in the United States”); 26 U.S.C. § 862(a)(3) (income from sources without the United States includes “compensation for labor or personal services performed without the United States”). PDF PDF ↩

34. 26 U.S.C. § 4980H(c)(2)(A) (an “applicable large employer” is one “who employed an average of at least 50 full-time employees on business days during the preceding calendar year”), (c)(2)(E) (full-time equivalents counted toward that determination), (c)(4)(A) (a “full-time employee” is “employed on average at least 30 hours of service per week”). PDF ↩

35. 26 U.S.C. § 4980H(a) (assessable payment where an applicable large employer “fails to offer to its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage” and at least one full-time employee has been certified as receiving a premium tax credit or cost-sharing reduction), (b)(1) (assessable payment measured by one-twelfth of $3,000 for each full-time employee so certified), (b)(2) (overall limitation capping the (b) payment at the applicable payment amount multiplied by the number of full-time employees), (c)(1) (the “applicable payment amount” is one-twelfth of $2,000), (c)(2)(D)(i) (the number of full-time employees “shall be reduced by 30 solely for purposes of calculating” the subsection (a) payment and the subsection (b)(2) overall limitation), (c)(5) (inflation adjustment); on the affordability and minimum-value tests that drive the certification, see supra note 31; Rev. Proc. 2025-26, § 2 (2025) (“For calendar year 2026, the adjusted $2,000 amount under § 4980H(c)(1) is $3,340 … and the adjusted $3,000 amount under § 4980H(b)(1) is $5,010”), available at https://www.irs.gov/pub/irs-drop/rp-25-26.pdf. PDF PDF ↩ ↩²

36. Rev. Proc. 2025-25, § 3.02 (2025) (“For plan years beginning in calendar year 2026, the Required Contribution Percentage for purposes of § 36B(c)(2)(C)(i)(II) and § 1.36B-2(c)(3)(v)(C) is 9.96%.”), available at https://www.irs.gov/pub/irs-drop/rp-25-25.pdf; Rev. Proc. 2024-35, § 2.02(2) (2024) (“For plan years beginning in calendar year 2025, the Required Contribution Percentage for purposes of § 36B(c)(2)(C)(i)(II) and § 1.36B-2(c)(3)(v)(C) is 9.02%.”), available at https://www.irs.gov/pub/irs-drop/rp-24-35.pdf; Internal Revenue Service, Questions and Answers on Employer Shared Responsibility Provisions Under the Affordable Care Act, https://www.irs.gov/affordable-care-act/employers/questions-and-answers-on-employer-shared-responsibility-provisions-under-the-affordable-care-act (“The 9.5 percent affordability threshold, which applies for purposes of both the premium tax credit provisions and the employer shared responsibility affordability safe harbors, is adjusted in accordance with the threshold that applies with respect to the premium tax credit.”). PDF PDF ↩

37. Internal Revenue Service, About Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, https://www.irs.gov/forms-pubs/about-form-ss-8. ↩

38. Internal Revenue Service, About Form W-9, Request for Taxpayer Identification Number and Certification, https://www.irs.gov/forms-pubs/about-form-w-9. ↩

39. Internal Revenue Service, Instructions for Forms 1099-MISC and 1099-NEC (Rev. Dec. 2026), https://www.irs.gov/pub/irs-pdf/i1099mec.pdf (“Section 6071(c) requires you to file Form 1099-NEC on or before January 31, using either paper or electronic filing procedures. File Form 1099-MISC by February 28, if you file on paper, or March 31, if you file electronically.”). ↩ ↩²

40. Internal Revenue Service, About Form W-4, Employee’s Withholding Certificate, https://www.irs.gov/forms-pubs/about-form-w-4. ↩

41. Internal Revenue Service, About Form 941, Employer’s Quarterly Federal Tax Return, https://www.irs.gov/forms-pubs/about-form-941. ↩

42. Internal Revenue Service, About Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, https://www.irs.gov/forms-pubs/about-form-940. ↩

43. Internal Revenue Service, General Instructions for Forms W-2 and W-3 (2026), https://www.irs.gov/pub/irs-pdf/iw2w3.pdf (“The due date for filing 2026 Forms W-2, W-2AS, W-2CM, W-2GU, W-2VI, W-3, and W-3SS with the SSA is February 1, 2027, whether you file using paper forms or electronically.”). ↩ ↩²

44. Wyo. Stat. Ann. §§ 17-31-101 to -116 (“This chapter shall be known and may be cited as the ‘Wyoming Decentralized Autonomous Organization Supplement.’”); id. § 17-31-104(d) (registered name must denote DAO status, “specifically ‘DAO’, ‘LAO’, or ‘DAO LLC.’”), available at https://www.wyoleg.gov/statutes/compress/title17.pdf (ch. 31, at 772—80). PDF ↩

45. Tenn. Code Ann. §§ 48-250-101 to -115, added by 2022 Tenn. Pub. Acts ch. 852, available at https://publications.tnsosfiles.com/acts/112/pub/pc0852.pdf (enrolled text also at https://www.capitol.tn.gov/Bills/112/Amend/HA0748.pdf). PDF ↩

46. Utah Code § 48-5-101 et seq. (Decentralized Autonomous Organization Act), enacted by ch. 85, 2023 Gen. Sess., available at https://le.utah.gov/xcode/Title48/Chapter5/C48-5_2023050320240101.pdf, renumbered as Utah Code § 16-22-101 et seq. effective October 1, 2026 by ch. 92, 2026 Gen. Sess., available at https://le.utah.gov/xcode/Title16/Chapter22/C16-22_2026050620261001.pdf; Utah Code § 16-22-104 (legal personality); former Utah Code § 48-5-105 (permitted names, requiring the designation “limited liability decentralized autonomous organization” or “limited decentralized autonomous organization” or the abbreviation “L.L.D., LLD, L.D., or LD”) repealed effective October 1, 2026 by ch. 93, 2026 Gen. Sess. PDF PDF ↩

47. Internal Revenue Service, About Form 8952, Application for Voluntary Classification Settlement Program (VCSP), https://www.irs.gov/forms-pubs/about-form-8952. ↩