Mainstream payroll providers are dropping legal cannabis companies left and right. Often, the decisions result from state or federal banking and tax regulations.
For many payroll companies, working with any cannabis-related business is too risky, time consuming, or complicated. For instance, unlike mainstream businesses that may have one or two tax IDs, it’s not unusual for cannabis companies to have more than twenty-seven due to regulatory constraints. Cannabis companies are required to comply with a lengthy list of specialized tax laws and banking regulations, and some payroll companies simply aren’t willing or equipped to handle that kind of effort.
Leading human capital companies including ADP, Bamboo HR, Paylocity, and Ultimate Software typically won’t engage with legal cannabusinesses. Even worse, they repeatedly have dropped cannabis companies suddenly, giving them as little as fourteen to thirty days to transition to a new payroll or HR provider.
If you operate in the legal cannabis industry, it is imperative to be proactive and anticipate potential transitional pain points. There are things you can do to ensure your payroll and HR operations continue functioning should your provider suddenly dump you—or to prevent your company from being dumped in the first place.
First, find a cannabis-friendly payroll firm that understands the unique challenges the industry faces. Experienced payroll and HR providers know how to navigate the challenging 280E tax law that prohibits cannabis businesses from deducting normal business expenses associated with trafficking a Schedule I illegal substance. As a result, cannabis businesses effectively pay three to four times more in taxes than non-cannabis businesses because cannabis companies can’t deduct key operational costs like employee wages, technology, accounting, and rent.
However, cannabusinesses are allowed to deduct expenses directly related to cannabis cultivation and certain aspects of the retail vertical. Cultivators may deduct the cost of items such as soil, water, lights, electricity, nutrients, direct presale labor, and additional expenses related to growing. For retailers, applicable expenses include invoice prices for products, the cost of electricity in inventory areas only—as opposed to sales space—and transportation as it relates to shipping or procuring products.
A cannabis-friendly payroll company can help track how much time the workforce is spending in different areas of the business so your company can maximize tax benefits allowed under 280E.
Second, don’t wait to be dumped. To minimize operational disruptions, you should preemptively cut ties with any current provider if you suspect they may drop you as a client. Once you find the right cannabis-friendly human capital provider to work with, begin collecting all the information you’ll need to transfer to them. This includes tax history, pay history, employee demographics, basic information about employees, Internal Revenue Service documentation, business licenses, and cannabis licenses.
It’s important to recognize you’ll need to give the new cannabis-friendly payroll provider time to sync with your company’s operations. For smaller companies with fewer than twenty-five employees, providers need an average two to four weeks to get up to speed. Mid-sized businesses with between twenty-five and 100 employees should expect a transition period of one to two months. For large companies with more than 100 employees, the process may take up to three months. Cannabusinesses also should factor in the amount of time and resources required to train their own staff on new systems.
If you find yourself suddenly dropped by your payroll provider before you’ve put alternate plans in place, don’t panic. Do everything you can to move quickly to collect the necessary HR and payroll information to transfer to another provider. Additionally, immediately notify your financial manager about the change in order to avoid payroll delays and tax penalties.
Your best preventative measure to mitigate long-term losses and disruptions is to hire a provider accustomed to working with cannabis businesses or one that is willing to invest the time and manpower required to understand and comply with complicated cannabis reporting mandates. If you already use a provider and you suspect they want to end the relationship, switch to a cannabis-friendly alternative provider as quickly as possible. Consider HR and payroll companies that have comprehensive experience in the cannabis industry, serve noteworthy clients, and are equipped to manage services for a workforce predominantly composed of hourly wage earners.
You could wait to see if your current payroll provider will dump you, but why take the risk? It makes far more financial sense to be proactive and protect your businesses’ best interests from the unpredictable.
