Business owners have the luxury of employing different types of employees within their businesses. It is important to be sure all types of employees are being classified correctly. As a cannabis business owner you know the deal, this is a highly regulated industry and IRS audits are a reality. It is important to know the difference between cannabis employees vs cannabis contractors so you are not being audited over something 100% in your control.
The Redbud Advisors team educates our clients on the difference between cannabis employees vs cannabis contractors regularly to bypass any confusion. Doing this sets our clients up for success and makes our job as cannabis accountants a little easier.
What is an Employee?
An employee is an individual who is hired by an organization to work for them on a regular basis in exchange for agreed-upon compensation. Employees are usually expected to work regular hours and days based on the employment contract.
An employee typically has a more defined and structured working relationship with their employer. Employees are subject to the organization's rules and regulations.
An employee will receive wages based on their company’s pay schedule and applicable taxes will be withheld e.g. federal income tax, Social Security tax, and Medicare tax.
Employees may be eligible for health insurance, paid time off, and other benefits.
Why would a business want to hire an employee in place of a contractor? The list of reasons is different for every business but common reasons are;
Meeting long-term business needs
Essential ongoing positions for your business
More control over the work being done
What is a Contractor?
A contractor is an individual or organization who is hired by someone to provide a specific service or product in exchange for agreed-upon compensation. When the project is complete the contractor will move on.
Contractors typically have more flexible and independent working relationships with their clients. In most cases, a contractor sets their own hours and working days based on project deliverables and deadlines.
Employers are not required to provide health insurance, paid time off, and other benefits to contractors. A contractor is responsible for paying their own taxes, so a company employing a contractor will not withhold taxes e.g. federal income tax, Social Security tax, and Medicare tax.
The organization's rules and regulations do not apply to contractors.
Why would a business want to hire a contractor in place of an employee? The list of reasons is different for every business but common reasons are;
Access to specialized skill sets that reduce long-term commitments
Cutting costs on employee benefits and taxes
Why is it so important to classify employees and contractors correctly?
It is important to handle each one differently because employees are typically entitled to certain benefits and protections that contractors are not.
If a company misclassifies employees and contractors there are consequences that can become costly and even ruin the reputation of the business. The IRS can get involved and no one in the cannabis industry wants that.
A business owner can be responsible for back taxes, fines, or penalties if they are found to incorrectly classify employees and contractors. This can even lead to a legal dispute. Accidents happen and mistakes are a good opportunity to learn from but the severity of consequences is dependent upon if the misclassification was intentional or not.
The top 5 questions an employer should ask themselves when evaluating if someone is an employee or a contractor are:
How is the work done? Where is the work done? When is the work done?
If the employer is not providing tools or requiring the person to work in a specific manner then this person is probably a contractor.
Is this person required to complete any training for the company?
Contractors do not have to complete company training because they are not employees.
Is the person doing full-time work? Continual work? Or does the work have a specific endpoint?
If this person has an endpoint to the project and the work is not continuous then they are probably a contractor.
How is this person paid?
If this person is paid once and no taxes are being withheld then this is probably a contractor.
Is travel paid for?
Contractors are responsible for their own costs. If you aren't paying for travel this person is probably a contractor.
As a cannabis business owner, it is important to ask yourself the top 5 questions listed above to help classify people providing work for your business. It is even better if you do this before hiring someone when accessing company needs. A business owner wants to avoid IRS audits as much as possible.
There is a benefit to hiring both employees and contractors, it just depends on your needs as a business and the type of work you need to be completed. Being transparent with the person you hire about their role in your business is essential in setting the business and this newcomer up for success. Doing this will also ensure you are correctly classifying this employee from the beginning and setting any expectations to avoid confusion.
Our Redbud Advisors team is always available to assist cannabis business owners in determining if someone is an employee or a contractor. We can even help you make corrections if an employee was misclassified previously. We are a great resource if you need help deciding if you should hire a contractor or an employee for a specific role too.