Student presentation examining payroll challenges for cannabis-related businesses in an all-cash industry

Marijuana is increasingly legalized at the state level, yet its strict Schedule I classification at the federal level means banks and ancillary businesses will not work with cannabis companies on the premise of not accepting “illegal income.” As such, the multi-billion-dollar cannabis industry is a predominantly cash-based industry. My paper will analyze the consequences of this cash-based industry on payroll for cannabis-related businesses, looking at the tax and employment risks of not having a paper trail and required manual accounting.

For tax issues, incorrect reporting can result in IRS audits and financial penalties. Payroll is already complicated to calculate, as it includes anything going towards employee costs, including salary, pensions, health insurance, retirement plans, and more. Not only can a cannabis business not deduct these payroll costs from their taxable income, they often sometimes face a 10% penalty for paying these taxes in cash, hurting their pockets even more.

For employment issues, FLSA compliance requires paper trails for payments and hours worked, which becomes harder to manage when payroll systems will not work with cannabis companies. A lack of a paper trail and a lack of sufficient employee management systems available increase employment litigation risks of overtime wage payments and inadequate compliance with FLSA meal break and other requirements.

Possible future solutions include legislative reclassification to Schedule III and the SAFER Act, both of which would increase access to banks for cannabis-related issues and minimize, though not eliminate, a lot of payroll concerns.