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September 8, 2020

The Major Challenges facing Cannabis Payroll Tax Reporting, and What Business Owners Can Do About it

The Major Challenges Facing Cannabis Payroll Tax Reporting

And What Business Owners Can Do About It

This guide gives an overview of the problems affecting cannabis payroll tax reporting. At a federal level, marijuana is illegal. However, several states classify the drug as legal. Undeniably, the varying legal standpoints create complications for cannabis payroll tax compliance. From banking to payroll, this guide will cover all the issues surrounding cannabis payroll tax reporting. Additionally, business owners can find instructions on filing their cannabis payroll taxes. 

How federal law impacts the marijuana trade

Cannabis is a multi-million, and in some cases billion, dollar industry in states where it is legal. As more states legalize the drug, the industry will continue to grow. 

Conversely, under federal law, cannabis is illegal.

Although states where the drug is illegal must strictly abide by federal law, the regulation also impacts legalizing states. In fact, the law has a profound impact on marijuana businesses in those states. 

How?

Without federal backing many marijuana businesses (from cultivation centers to dispensaries) struggle to open checking accounts. Consequently, normal business functions like book-keeping and payroll become hairy. 

Why cannabis businesses struggle to get banked

Of course, there is no law that explicitly bans banks from doing business with cannabis retailers. Still, under federal law, banks must closely monitor marijuana companies for signs of illegal activity. 

Banks must file reports — known as Suspicious Activity Reports (SARs). Presently, SARs protect financial institutions from prosecution if an enterprise is determined to be involved in illegal activity. (For example, selling the drug on the black market.)

Nonetheless, there are major downsides to SARs as well.

Hefty fines can be levied against institutions that fail to accurately report "suspicious" transactions. Similar fines are assessed for misidentifying others.

For most banks, the costs linked to SARs outweigh the financial benefits of banking cannabis companies. Accordingly, institutions backed by the Federal Deposit Insurance Corporation rarely bank marijuana related-businesses.  

Bank approval is marginal in marijuana commerce

About one in 30 banks or credit unions will service a cannabis business nationwide

Overall, for the lucky few that land a checking account, that's actually good news.

But even so, there are pitfalls. First, banking institutions charge sizable account and transaction fees to offset risk. Markedly, such fees are three to four times those charged to other non-cannabis customers. 

Second, even locating a willing bank is an uphill battle.

Furthermore, financial institutions rarely advertise their willingness to bank cannabis. In fact, most do just the opposite and ask their cannabis clientele to sign non-disclosure agreements. 

Thirdly, these organizations are extremely selective about which marijuana businesses they take on. For this reason, many small-scale enterprises find it challenging to get banked. In general, banks opt for large scale operations with the resources to carefully manage the company's paperwork.

Still, it's undeniable that when it comes down to costs and benefits, companies that get banked are better off.

Why? Not having a bank account can be a payroll nightmare. 

The payroll dilemma 

In general, some services require a bank account to be rendered. 

Consequently, companies that struggle to get banked are often gypped out of other services. But not for the reasons you would think.

In fact, providers typically prefer to offer their full portfolio of services to their clients. Nevertheless, in some cases, the lack of a bank account means they cannot. 

Take payroll, for instance. Most payroll providers offer functions like direct deposit and payroll processing. But without banking, service providers cannot complete either task.

Thus, the employer can only rely on their payroll system to calculate wages and taxes. However, once the amounts are determined, the employer must remit the payments in cash.

Undoubtedly, this method is far from fool-proof and leaves a potential margin for error. Further, cash payments make cannabis payroll tax compliance more difficult.

Cannabis payroll tax reporting

The lack of banking services is the main impeding factor for proper cannabis payroll tax reporting and greater cannabis payroll tax compliance.

In fact, when problems crop up with payroll processing, challenges for cannabis payroll tax reporting soon follow.

Payroll taxes are paid on employee wages. Also, payroll taxes are assessed to the employer. Additionally, state and local governments may impose additional payroll taxes.

Recommended Reading

Looking for a full break down on employee vs employer payroll taxes? Then check out our guide on How to Read your Pay Stub. It offers a comprehensive overview of the various taxes typically withheld from wages.

So how has banking — or the lack of banking for cannabis businesses— created the cannabis payroll tax reporting dilemma? By and large, the problem hinges on three factors:

  • Cannabis payroll tax compliance
  • Employee Misclassification
  • Payroll processing for cannabis industries

Cannabis payroll tax compliance

Cannabis payroll tax compliance is somewhat of a perplexity. In particular, the lack of "compliance" is usually the direct result of not having a bank account.

Since they lack checking accounts, marijuana companies must pay taxes in cash. Luckily, by law, the IRS accepts all forms of payment including cash. 

So far so good, right? But things can get dicey from here.  

Basically, cash payments — especially those in the range of thousands, or hundreds of thousands, of dollars— require in-person drop offs.  

Moreover, the IRS must have other resources on hand. They include: staff to count payments and secure locations to accept and store money.

Here's where the problem lies, however:

10 states fully legalized marijuana nationwide. Furthermore, in each of those states, thousands of companies legally deal with cannabis in some form.  

As a result, the IRS would be responsible for accepting millions of dollars in tax payments in cash. Whereas the IRS can process thousands of payments online, it cannot do the same in person. 

In other words, the revenue service is struggling to keep up. The taxing authority simply does not have enough resources to process so many cash payments. Even worse, the roadblock is one that not even the IRS has been able to tackle. 

$1,000 per day limit

In light of the problems facing payroll tax reporting in the marijuana trade, the IRS tried simplifying the process. Presently, the department accepts cash payments through select retailers. However, there is a monetary limit. In short, retailers can only accept payments of up to $1,000 per day. 

But for companies that owe thousands in taxes the solution is not viable and would take years to successfully pay off. 

Meanwhile, companies that likely would pay their taxes if practical means were available end up appearing delinquent.

Employee misclassification

Another key point that goes along with cannabis payroll tax compliance is misclassification. 

Sometimes, to alleviate the burden of payroll taxes, companies misidentify employees. Basically put, they classify workers legally defined as employees as independent contractors instead.  

(Not sure what defines someone as an employee? Check out the distinction here.)

Because workers identified as independent contractors must deduct their own taxes, some companies make this move. But this is a big mistake. In general, employee misclassification results in massive fines. Likewise, unpaid payroll taxes can be assessed to the employer by the IRS as a penalty.  

Payroll processing for cannabis industries

Cash payments also create another complication for those in the marijuana industry.

For accurate cannabis payroll tax reporting, businesses must keep thorough records.

But, record keeping without a bank account is no easy feat. Manual record entry, even with some the latest apps and software, is time consuming and subject to marginal errors. 

Similarly, processing services are limited for clients that do not have bank accounts. As we've noted before, payroll processing is practically impossible without a bank account.

So the onus is on businesses to set aside the right figures for employee wages and payroll taxes. Consequently, this leaves a lot of room for error.

What you can do to improve cannabis payroll tax reporting

Of course, not all the factors that surround cannabis payroll tax reporting are within your control.

Be that as it may, you can still improve the overall accuracy of your tax reporting and payroll processes. In general, you can accomplish this through three methods. 

They are: 

  • Hiring a payroll provider
  • Keeping thorough payroll records
  • Staying up-to-date on state and federal progress on cannabis banking

Hire a payroll provider

Although payroll providers are limited on what services they can offer unbanked clients, there are still advantages to the services.

At the very least, a payroll provider will ensure that your company's payroll amounts are accurate. More importantly, it will take the stress out of trying to calculate how much you should deduct and pay in payroll taxes.

Likewise, the calculations you receive from a provider will likely be error-free. As a result, your business is more likely to maintain its cannabis payroll tax compliance.

Keep thorough records

Of course, even with a bank account, you should keep thorough records. As a rule, tracking the money your business spends is paramount — especially when it comes to payroll taxes.

However, if you are unbanked it's even more imperative that you keep detailed records.

In particular, these records serve two purposes. Firstly, they help you keep track of the payments and deductions you've made to minimize the potential for future errors. Secondly, they act as helpful resources when it comes time for payroll tax reporting. 

Stay up-to-date on cannabis laws

But perhaps one of the best ways to navigate cannabis payroll tax reporting is through information. 

While some states are working out the kinks when it comes to banking and taxes, like California, others have found manageable work-arounds. 

For example, in Colorado, marijuana businesses can make cash payments through in-person appointments at the local IRS office.

In some states, the IRS even provides secure counting rooms for cash payments during tax season.

Know what resources are available in your state. Most importantly, take advantage of them.

Similarly, stay relevant about the federal law. After all, changes at the federal level will shift the entire playing field. 

Particularly, one law that can impact cannabis payroll tax reporting is the Safe Banking Act. The law, if passed, would grant banks greater freedom to take on marijuana-related businesses. The law could make cannabis payroll tax compliance far easier for businesses.

In late May, the bill gained significant traction among members of Congress and representatives in the Senate

How to file and report payroll taxes for cannabis businesses

Still, the issues of taxes extends beyond cannabis payroll tax reporting and cannabis payroll tax compliance. Equally important for cannabis business owners is the filing process for payroll taxes.

Luckily, this guide is also designed to walk you through the steps of how to file and report payroll taxes for cannabis businesses — specifically those located in California.

So if you're ready to file your taxes, or just want to be prepared for next year, keep reading.

  1. 1
    Apply for EIN/ EDD: In general, you'll start off by registering as an employer. First thing to remember is that you should register through the IRS. Concurrently, you should also register with any corresponding state entities. For instance, in California you must apply through the Employment Development Department.
  2. 2
    Report all employees: Make sure you regularly report wages earned by employees. Typically, you do so by filing Form 941. Likewise, the state where you operate may also have additional requirements you must meet. For example, California requires employers to report employee info and wages to the EDD on a quarterly basis. You can find a full breakdown of the filings here.
  3. 3
    Make the necessary arrangements for payments: If your business already has a checking account, congrats! You can make e-payments! On the other hand, what happens if you don't? Then it's imperative that you make arrangements to pay your taxes. In general, that will require and in-person meeting with your local tax authority. The EDD recommends contacting your local office.

Conclusion

To sum up, the lack of proper banking is probably one of the biggest factors impeding proper cannabis payroll tax reporting.

Due to its complexity, this isn't a problem that can be resolved overnight. Nonetheless, business owners can still take actions to minimize the overall effect.

Remember, poor cannabis payroll tax compliance can hinder the success of your company. So take steps to protect yourself. 

In particular, stay informed on upcoming legislation. Being in-the-know can help you make the right decisions when filing payroll taxes.

Remain up-to-date on legislation that might remove the barriers to banking cannabis enterprises. By contrast, also be aware of any pending laws that could add more roadblocks. Moreover, be willing to be vocal on those issues as a business owner. In time, that can have a significant impact on the success of laws like the Safe Banking Act .

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Felix Mwania


I live in the intersection of technology and entrepreneurship. I am a technology enthusiast but my passion is helping small businesses succeed, including mine. When I am not working, you will find me goofing with my wife and kids. When not with family and/or friends, you will find me doing some home improvement projects.

Felix Mwania

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