The 280E regulation forces cannabis operators to pay their employees in cash – here’s how to do so safely.
- Whether members of your workforce is classified as “employee” or “contractor” impacts how you pay them and what taxes you take out.
- Make sure every employee signs a receipt verifying they received the cash owed to them.
- In certain instances you may be able to take a payroll deduction for your subcontractors.
Get in touch with our experts to learn how more about payroll taxes.
Due to federal regulations restricting cannabis operators’ access to traditional banking, many cannabis companies are forced to pay their operational costs in cash.
Payroll is one of those regular expenses that can be difficult and risky to pay in cash – if you don’t know what you’re doing.
Here’s what you need to know about paying your employees in cash.
How do you pay your team?
There are a few different ways to pay your people, depending on how you classify your employees.
Are they employees or subcontractors? This distinction is important.
Uber recently faced a lawsuit for trying to blur the line between employees and subcontractors in an effort to prevent their drivers from forming a union. By classifying the majority of their workforce as “independent contractors”, the rideshare giant is able to prevent drivers from bargaining collectively. The lawsuit has led to a pro-worker bill currently making its way through the California state legislature that, if passed, could “[redefine] the relationship between worker and boss by forcing corporations to pay up.”
What does this mean for your cannabis business?
There may be some costly repercussions for trying to shortchange your team by misclassifying them as subcontractors – and not giving them benefits – rather than traditional employees.
That said, it’s also true that not every worker is an employee. There is a long list of elements to check to determine if your team member is an employee or a subcontractor.
Here are some core elements to consider.
How to classify your workforce
In this guide, let’s use the example of a cannabis dispensary.
If a person is employed at the same dispensary, with set hours, to work on the sales floor using the dispensary’s equipment to perform their job description, that person is likely an employee.
If a person has no set hours or schedule, uses their own equipment, and typically performs specific projects with due dates or deliverables, that person is likely an independent contractor.
The determination of an employee revolves around three key criteria:
- Behavior: the way the work is performed.
- Financial: what financial resources are required to get the job done?
- Relationship: whether a worker receives “perks such as health insurance and an ongoing commitment to provide a specified number of hours.”
Most cannabis businesses will have a mix of both employees and subcontractors on their team. Let’s explore how to take care of each group and the payroll considerations for each.
How to pay employees on payroll
When we talk about payroll, we mean bonafide payroll: a set pay structure every period (every week, two weeks, or monthly) with associated taxes taken out!
We can’t stress this enough: your payroll must be organized. Employees are expensive. You must pay their salaries and wages, as well as:
- The employer portion of FICA and Medicare
- Employer-paid unemployment insurance
- Employer-paid Employment Training Tax (ETT)
- Federal Unemployment tax
- Worker’s compensation insurance
- Payroll processing fees
In addition to these taxes and fees, you must file extra reports four times a year – meaning your accounting expenses will rise as a result of having to process those associated reports.
Things get even more complicated if you’re planning to pay your payroll in cash.
First and foremost, make sure your employees sign a receipt verifying they got the cash owed to them. You will need these signed receipts for proof if you are ever audited. If you pay with a check, then those checks are your evidence or receipts.
You must also make sure that you are allocating the proper taxes every pay period. Trying to come up with the tax money later is a big burden; not to mention you may be fined by the California tax authorities.
The employer is always held responsible for withholding and remitting these taxes to the state; if an employer does not follow directions or protocols, then the employee would be an injured party with a case against you.
The best system? Taxes should be held in escrow, then sent to IRS based on whatever your deposit schedules are.
Payroll taxes are prepared and remitted every quarter, four times a year. There are two ways to pay taxes:
- EFTPS: this is the digital portal for paying your IRS payroll taxes. Rarely can you pay your employee payroll tax in cash; this portal is your go-to for paying your payroll taxes quarterly.
- EDD: the Employment Development Division is California’s state department for paying the state withholding taxes. Here, you have to pay everything you withheld from employees, as well as the SDI state disability insurance. You can send this in via snail mail.
If all of this feels too complicated, instead of managing employees yourself, there are payroll/employee leasing companies who can help.
A leasing company helps you “lease” employees from a non-cannabis company that does not have the 280e issues cannabis operators face. Because they are not restricted by the 280e, you pay the leasing company to pay your people and take care of all the filings. There’s usually a fee on top of the employee rates, but it’s a convenient way to manage your cash flow. Two leasing companies to look into, if you’re interested, are ADP and Payroll USA.
How to pay subcontractors
The process for paying your subcontractors looks slightly different.
Before you pay any subcontractor, make sure you have their completed and signed W-9 forms. This IRS form is necessary when working with an independent contractor – if you don’t have this information, you can be penalized.
At the end of the year, you must complete a 1099 form for each subcontractor based on the total amount you paid. The 1099 form gets sent both to your worker and the IRS to keep everyone compliant. Each subcontractor must list every 1099 on their Schedule C form; these do not get filed with IRS and are for the subcontractor’s personal records only.
As a business, you should issue 1099s to: LLCs, individuals, partnerships. Don’t issue 1099’s to corporations or suppliers. For example, a landscaper who works at your business for $500/month will need a 1099; any subcontractor who you paid more than $600 over the year will get a 1099 from you.
Many cannabis companies make the mistake of thinking they don’t have to issue 1099s, since operators don’t get deduction. However, the question of issuing this form is more dependent on the nature of the work that was rendered.
Do subcontractors come with payroll expenses? The answer is a little complicated.
Based on the facts and circumstances you may still be able to take payroll expenses.
If the subcontractor is directing sourcing products, weighing product, packing products, or adding value to the COGs in other ways, then yes. But a budtender, for example, would not qualify for an expense deduction.
It’s important to have an employee handbook to keep track of these different variables:
– Use your handbook to split out your contractors’ time; allocate 25% of their time to x, 35% to y, etc. This gives you the methodology and evidence for delineating some payroll expenses.
– If you want to create an even more granular allocation of time, and have your employees clock in/clock out specific activities.
– It does seem like we’re asking a lot: clocking in/out doesn’t need to be burdensome. Issue a badge solution and divide your tasks into separate rooms (e.g., selling in one room, COGS-related tasks in another).
However you want to manage the day’s workflow and employee-related expenses, you need to follow the same tax rules as every other company. Otherwise, you could be opening yourself to lawsuits, penalties, and other fines.
If you would like help with creating employee handbooks or creating a 280e tax strategy then reach out to our team experts.