Updated: May 6
Alright, so you started a business in the cannabis industry and now you have payroll questions. Navigating payroll challenges in the cannabis industry can be confusing and leave you with more questions than answers.
It doesn’t matter what aspect of the cannabis industry you are venturing in, growing, processing, or dispensing, chances are you have employees and need a reliable payroll resource.
Redbud Advisors is a full-service cannabis accounting firm offering 5 tips to navigate the payroll challenges in the cannabis industry.
Tip 1: Lockdown a Banking Relationship
This seems easy enough, right? Well did you know banks are required to insure all of their depository accounts by the FDIC? It’s true, they are. This is what makes securing a banking relationship tricky.
The cannabis industry is still federally illegal meaning many of the banks that work with cannabis businesses require much more reporting to the federal government.
Many of the banks that do work with cannabis money are still federally insured, however, due to the nature of the cannabis industry still being federally illegal, it requires much more reporting by banks to the federal government. This has caused an increase in labor and exposure for banks.
The “easy route” might be to have your cannabis business operate as a cash business. But in actuality, it is far too high of a risk, we do not recommend this.
Chances are you will not be able to walk into a larger, well-known, financial institution and open a business account for your cannabis operation. But there are some credit unions and banks who are willing to take you on as a client.
What should you expect when looking for a banking relationship for your cannabis business?
Due Diligence Period
Physical Site Examinations
Analysis of Risk
Here is a list of common items you will need to have when opening a bank account for your cannabis business:
Business Documentation, including but not limited to operating agreements and financial statements
Identification Documents (psst…you will need this for anyone listed on the account)
Vendor and Supplier List
Copies of licenses
Some banks even require an on-site visit
Keep in mind each financial institution is different and may want additional information or have different policies and procedures for cash handling such as legacy cash.
Redbud Advisors stay up to date with all the banks and credit unions working with THC and CBD businesses throughout the country.
Tip 2: Employ a Strong HR Team
HR manages your human capital and assists with compliance in many aspects of any business. Specifically in the areas of payroll, recruiting, performance management, and reporting.
In the cannabis industry, it is important to find the right HR individuals/team who understand this highly regulated industry and can help navigate the intricacies of it.
Your ideal HR team should be knowledgeable in cannabis industry standards and willing to keep up with the ever-changing compliance of this industry.
Hiring a payroll expert who is up-to-date with tax compliance, labor laws, and other industry specifics should be at the top of your list.
Tip 3: Live by the 280E
The 280E is a section of the Internal Revenue Code forbidding businesses from deducting ordinary business expenses. An exception to this rule is the Cost of Goods Sold (COGS).
Remember when we mentioned earlier about the cannabis industry being highly regulated? Well listen up, this is a great example: Cannabis businesses are taxed at, not just a higher rate, a significantly higher rate than non-cannabis businesses.
Typical business expenses listed below are an eligible deduction for non-cannabis businesses:
Payroll & Benefits
Rent and Utilities
Marketing and Advertising Expenses
Repair and Maintenance
A business that cultivates, processes, or sells the marijuana plant is ineligible to deduct these expenses unless they are doing proper accounting that is consistent with Generally Accepted Accounting Principles (GAAP).
This is one of the many reasons at Redbud Advisors we say “Let us worry about your IRC 280E”. Our help and a good time and labor software are truly the keys to success.
Tip 4: 420 Friendly Payroll Solutions (Hey that’s us, Redbud Advisors!)
Remember above when we mentioned the importance of locking down a solid banking relationship for your cannabis business? Finding a 420 payroll solution is equally as important.
Just like the financial institutions, larger well-known, payroll companies may choose not to incur the risk associated with your business.
When looking for payroll solutions it is a good idea to know if you want a payroll-only solution or an HR and payroll solution combined. Regardless of your needs, here are a few things to keep in mind:
Be Transparent About Your Business Operations
The Size of Your Business
Be Clear About Your Objectives and Goals
Ask What Your Responsibilities Will Be
Ask What Their Responsibilities Will Be
Every business is different and might have specifics not listed above when searching for the ideal payroll solution. It is helpful to create a wishlist of functions and keep it handy. Additionally, It is crucial to make sure the payroll solution you choose can handle the nuances of the cannabis industry.
Tip 5: Get those Employees Classified!
When you find the right 420 payroll solution hopefully you choose one that comes with an onboarding system to keep all your employee information well organized and classified correctly.
Why is the classification of employees so important? Paying employees according to their status, W2 or 1099 contractor, hourly or salary, exempt or non-exempt status, ensures correct tax handling and happy employees.
In addition, mapping your payroll to align with your general ledger will help keep your cannabis business organized and in compliance with laws and regulations.
These 5 tips to navigate the payroll challenges in the cannabis industry are important but in reality, just the surface of the challenges cannabis business owners face.
While you may have locked down a banking relationship, employed a strong HR team, you are living by the 280E, you have found that 420 friendly payroll solution (hello it’s us, Redbud Advisors), and classified your employees properly it does not eliminate all your risks.
As the cannabis industry continues to grow and the outlook is slowly changing it still doesn't make it any easier to navigate the industry's regulations.
We encourage you to get to know our specialized accounting experts at Redbud Advisors for all of your cannabis accounting and tax needs. At Redbud Advisors it is our mission to help make your dreams a reality and your taxes compliant.
To get answers to your questions and expert advice you can contact Redbud Advisors here or give us a call at 866-830-5144.