Operations

Five Payroll Mistakes Cannabis Businesses Keep Making

1. Treating employees as contractors

Trimmers, budtenders, and delivery drivers are routinely paid on 1099s in this industry, and most of them are employees under every test that matters. Misclassification exposes the business to back payroll taxes, penalties, and state enforcement — and cannabis businesses, already under elevated scrutiny, are poor candidates for the it-was-industry-practice defense.

2. Never splitting labor between COGS and expense

Direct production labor at a cultivation or processing operation can generally be capitalized into inventory and recovered through COGS. Administrative and retail labor cannot. An employee who does both needs a documented time split — and if payroll records never captured it, the allocation has to be reconstructed later, which is a weaker position in every way. This single omission quietly costs producers real money every year.

3. Building on a provider that will drop you

Mainstream payroll platforms periodically purge cannabis clients, often mid-quarter with minimal notice, stranding tax deposits and filings. Choose providers that serve the industry knowingly, and keep your own copies of every filing and deposit confirmation regardless of who processes them.

4. Ignoring multi-state complexity

An operator with licenses in two states has payroll registration, withholding, and unemployment obligations in both. Remote managers and traveling staff complicate it further. Registration gaps surface as penalty notices, usually at the worst time.

5. Cash payroll without documentation

Paying staff in cash is legal. Paying staff in cash without withholding, deposits, and payslips is not — and it contaminates every other number in the business. If cash payroll is operationally necessary, it needs more documentation discipline than a normal payroll, not less.

This article is general information, not tax advice. Cannabis tax outcomes depend on facts, documentation, and jurisdiction — talk to a qualified professional about your specific situation.