These days, more and more people are owning and managing dispensary-type businesses. Therefore, when it comes to payroll, cannabis business owners are just like any other managers of cash-heavy small business operations. Here's some cannabis payroll advice—and advice for any cash-heavy operation.
The Payroll Problem with Cash Businesses
Thanks to the cannabis regulatory industry, many cannabis related dispensaries are cash businesses. For those businesses that may have a business checking account, it's most likely set up in another state, which means payroll has to be carefully managed without direct deposit or easy withdrawal access aside from ATM minimums.
Therefore, cannabis dispensaries, as cash-heavy businesses, have certain payroll problems:
Security Risks
The mere act of holding cash for payroll creates security issues. When employees know there's a payroll stash of thousands of dollars readily available to pay all employees, the likelihood that one tries to rob the cannabis company (or has friends try to rob it) increases.
Furthermore, if a manager needs to bring cash to purchase a money order (which is often what cannabis companies request to pay employees) or bring in a stipulation to show someone//their intentions, this could put the manager in physical harm, as well.
Compliance Complications
When a cannabis company pays its employees in cash, compliance with rules and regulations is easier—and harder. The IRS scrutinizes these companies more than those that have electronic transactions. Therefore, if companies don't have payroll systems to provide correct, reliable paper trails, they'll need to make redundancies to support each payment, as the IRS will come down harder on them without a digital trail.
These are typical payroll mistakes for cash-intensive industries— especially the burgeoning cannabis industry—that fall for the most basic of traps and face devastating consequences:
Inadequate Payroll Records
The biggest mistake is failing to maintain proper payroll records. Any cash transaction with any employee must be documented— and signed for— by the employee getting paid with pay stubs for gross pay, deductions, and net pay. Many cannabis companies don't have as stable a foundation as required to pass an audit.
Miscalculated Payroll Tax Deductions
Cash businesses also under- and over-correct their payroll tax obligations. Without automatic systems in place to determine how much should be withheld, it's easy for cash businesses to fall into human error and make mistakes. However, cannabis dispensaries are even more firmly watched by the IRS, and when they make mistakes, which they do because they're human, they get penalized and charged interest for failing to comply with the tax authorities.
Irregular Pay Schedule
Payment frequency becomes irregular as well. Due to cash flow uncertainty, dispensaries that need to forgo payroll to balance cash inflows and outflows in the absence of a customary banking relationship suffer. This is a wage and hour violation that leads to employee dissatisfaction. This creates compliance issues as well and reduces employee time on the job.
How do Cash-Heavy Businesses Pay Their Employees?
Given the unique challenges that cash-heavy businesses experience, often times the question comes up "How do dispensaries pay their employees?". Well, here are some best practices when it comes to payroll for a cash-heavy business:
Cannabis Payroll Best Practices
Best practices include:
- Create Cash Control Procedures for Payroll
- Look for Alternative Financial Services
- Work with Cash-Friendly CPAs
- Stay Aware of Changing Banking Possibilities
- Employee Education
Create Cash Control Procedures for Payroll
Implement strict cash controls for payroll. For instance, determine counting locations that are under video surveillance and make sure that anything cashed is done with dual custody; envelopes made up ahead of time should be put into tamper-evident bags. If large sums of cash are brought to the donation center for payroll, hire a separate service to bring the cash instead of staff doing it.
Look for Alternative Financial Services
Because cannabis banking is not a national creation or demand, plenty of services still exist to access funding. Research cannabis-friendly credit unions, high-risk businesses, payment processors, and payroll cards to reduce cash flow without needing full-blown banking solutions. Even some payroll services have figured out how to service the industry with cannabis-related solutions that abide by banking restrictions.
Work with Cash-Friendly CPAs
Employ CPAs who understand working with cash-heavy industries or even the cannabis industry itself. They're aware of IRS Code section 280E, which disallows cash businesses from receiving standard business deductions since the IRS does not view companies dealing with controlled substances as "businesses" in the first place. Instead, they can create systems to help distinguish between payroll deductions versus non-taxable overhead costs.
Aware of Changing Banking Possibilities
Be aware of banking possibilities that change over time. Many state and federal companies strive to create legislation over time to allow for more banking possibilities related to cannabis. Therefore, having a business ready for a potential payroll change in the future to something more established will be convenient if financial relationships exist now. A bank that accommodates the needs of a cannabis company will make adjustments when the time comes.
Employee Education
Many people who have not been in the cannabis industry will bring experiences from other industries. As such, your current employees may not understand why cash payroll is necessary. Providing comprehensive educational opportunities during onboarding to explain why payroll methods are used legitimizes your operation as well as creates trust so that those on your team don't question. For instance, when payments are made (and if they're not handed directly on payday), taxes are withheld and reported, and these important things in a professional setting blow the minds of those used to more casual environments and inspire them to respect the experience more.
The Future of the Cannabis Industry
Payroll processes will become more uniform as the sector expands and matures. Forward-thinking dispensary owners should establish their payroll options as the ease of moving from cash to digital options down the line is possible, however, it must come from a cash business mentality with accurate record keeping from the start.
Cannabis entrepreneurs with cash businesses and a penchant for solid cash controls, ancillary banking resources, a reconciliatory relationship with the IRS who avoid losses or record keeping short cuts, educated at the very least about compliance will have a leg up on the competition against those who are blissfully ignorant, no frills, uninformed or complacent. Payroll matters since it is just like any other component of a business, which deserves time and money investment; without appropriate payroll practices, fees, and structures, dispensaries may never get off the ground.
If you are having trouble managing payroll for your cannabis business, contact us today.
