Running payroll for a cannabis dispensary isn’t like managing payments in other industries. When your business operates legally under state law but remains federally illegal, even basic functions like paying your staff become complicated. Many dispensary owners find themselves asking: “How can I pay my employees legally while protecting my business?”
This guide breaks down the practical payment methods dispensaries use today, the compliance requirements you need to follow, and a step-by-step approach to setting up a secure payroll system that works in the cannabis industry.
Table of Contents:Â
- What Makes Paying Cannabis Employees Different?
- What Are the Main Ways Dispensaries Pay Their Employees
- Payroll Compliance Essentials for Dispensaries
- How to Set Up a Secure Payroll System in Five Steps
- Best Practices to Keep Payroll Smooth & Compliant
- The Bottom Line
Key Takeaways
- Dispensaries typically pay employees through cash, direct deposit via cannabis-friendly banks, payroll cards, or occasionally digital payment methods
- §280E tax code limits which payroll expenses are deductible, making proper job classification and expense allocation critical
- Maintaining detailed records of all cash payments is essential for both tax compliance and security
- Cannabis-specific payroll software can automate compliance with both federal requirements and state-specific cannabis regulations
What Makes Paying Cannabis Employees Different?
Cannabis businesses face unique challenges when processing payroll:
Limited banking access: Many financial institutions refuse cannabis accounts due to federal regulations, forcing some dispensaries to operate primarily in cash.
Cash-heavy operations: With limited card payment options, dispensaries often handle large amounts of cash from sales, which then flows into payroll.
280E tax restrictions: The 280E tax code prevents cannabis businesses from deducting ordinary business expenses, except for the Cost of Goods Sold (COGS), which affects how payroll expenses are treated.
Dual regulatory frameworks: Dispensaries must comply with both state cannabis regulations and federal employment laws, creating complex compliance requirements.
Higher audit risk: Cannabis businesses face increased scrutiny from tax authorities, making proper payroll documentation essential.
What Are the Main Ways Dispensaries Pay Their Employees
Cash on Hand
Despite the industry’s growth, cash payments remain common for many dispensaries.
Pros:
- No banking relationship required
- Immediate payment to employees
- No processing fees
Cons:
- Security risks for both business and employees
- Requires meticulous record-keeping
- Time-consuming to count, verify and distribute
- Difficult to prove compliance without proper documentation
Compliance checkpoints: If paying in cash, you must still provide pay stubs showing all deductions, maintain signed receipts from employees confirming payment amounts, and keep detailed records for tax purposes. Many states require specific documentation for cash payroll.
Direct Deposit Through a Cannabis-Friendly Bank
As the industry matures, more financial institutions are working with cannabis businesses.
Pros:
- Professional, secure payment method
- Automatic record-keeping
- Convenient for employees
- Easier tax compliance
Cons:
- Finding a cannabis-friendly bank can be challenging
- May require higher fees than traditional business accounts
- Account stability concerns if bank policies change
Compliance checkpoints: Ensure your banking partner understands cannabis regulations and has proper FinCEN reporting procedures. Maintain transparent accounting between sales deposits and payroll withdrawals.
Payroll or Prepaid Pay Cards
Reloadable payment cards offer a middle ground between cash and traditional banking.
Pros:
- No employee bank account required
- Reduced cash handling
- Digital record of payments
- Accessible for employees without traditional banking
Cons:
- Card fees may be passed to employees
- Some cards have withdrawal or usage limitations
- May still require a banking relationship to fund the card program
Compliance checkpoints: Verify the card provider complies with state labor laws regarding employee access to funds. Some states restrict fees that can be charged to employees for accessing their pay.
Digital Wallets & Crypto
Some dispensaries explore alternative payment methods like digital payment apps or cryptocurrency.
Pros:
- Reduced cash handling
- Appeal to tech-savvy employees
- Potential workaround for banking limitations
Cons:
- Regulatory uncertainty
- Volatility (for cryptocurrency)
- Limited mainstream adoption
- Potential tax complications
Compliance checkpoints: These methods exist in regulatory gray areas for cannabis businesses. Consult with legal counsel before implementing, as they may trigger additional reporting requirements or violate state cannabis regulations.
Payroll Compliance Essentials for Dispensaries
Federal vs State Withholding & Reporting
Despite federal prohibition, cannabis businesses must comply with federal tax requirements:
- File Form 941 quarterly to report employee wages and withholdings
- Withhold federal income tax, Social Security, and Medicare taxes
- Pay federal unemployment tax (FUTA)
- Issue W-2 forms annually
- Report new hires to your state agency
Additionally, you must comply with state-specific requirements:
- State income tax withholding (where applicable)
- State unemployment insurance
- Workers’ compensation insurance
- State-specific cannabis industry taxes or fees
§280E and Deductible Payroll Expenses
Section 280E prevents cannabis businesses from deducting ordinary business expenses, but certain payroll costs may be deductible as Cost of Goods Sold (COGS):
Potentially deductible payroll expenses:
- Wages for employees directly handling product (budtenders, inventory staff)
- Production staff wages (for vertically integrated operations)
- Packaging personnel
Non-deductible payroll expenses:
- Management salaries
- Marketing staff
- HR personnel
- Security (in most cases)
- Administrative staff
Proper job classification and time tracking are essential for maximizing legitimate deductions. Some employees may have split roles, requiring allocation between COGS and non-deductible time.
Tips, Overtime & Break Compliance
Cannabis businesses must follow standard labor laws:
Tips: If your budtenders receive tips, you must:
- Report all tips as income
- Withhold appropriate taxes
- Follow state-specific tip credit rules if applicable
Overtime: Federal law requires overtime pay (1.5x regular rate) for non-exempt employees working over 40 hours weekly. Some states have additional requirements, like daily overtime thresholds.
Breaks: Many states mandate meal and rest breaks for cannabis workers. These requirements vary by state but typically include:
- 30-minute meal breaks for shifts over 5-6 hours
- 10-15 minute paid rest breaks
- Special provisions for employees who cannot leave the premises
How to Set Up a Secure Payroll System in Five Steps
1. Open a Cannabis-Friendly Bank Account
Research financial institutions that openly work with cannabis businesses. Options include:
- Local credit unions in cannabis-legal states
- Banks with specific cannabis banking programs
- Partner Banking (where a financial institution partners with a cannabis-specific service provider)
Examples include Maps Credit Union (Oregon), Partner Colorado Credit Union, and Severn Bank (Maryland).
2. Choose Industry-Specific Payroll Software
Standard payroll systems often lack cannabis-specific features. Look for software that:
- Understands §280E compliance
- Offers cash management features
- Provides proper tax filing for cannabis businesses
- Integrates with seed-to-sale tracking when possible
Cannabis payroll software designed specifically for dispensaries can automate many compliance tasks while addressing industry-specific challenges.
3. Create Written Cash-Handling Protocols
Develop clear procedures for cash payroll:
- Designated counting areas with video surveillance
- Two-person verification for all cash handling
- Secure storage between collection and distribution
- Employee signature requirements for cash payments
- Detailed reconciliation processes
- Incident reporting procedures
Document these protocols and train all managers who handle payroll funds.
4. Automate Tax Filings & Employee Self-Service
Reduce errors by automating:
- Tax calculations and withholdings
- Quarterly and annual tax filings
- Employee access to pay stubs and tax documents
- Time tracking and approval workflows
This creates an audit trail and ensures consistent compliance with changing regulations.
5. Schedule Quarterly Compliance Audits
Regular reviews help catch issues before they become problems:
- Verify proper job classification for §280E purposes
- Confirm all cash payments are properly documented
- Review overtime calculations and break compliance
- Check state-specific cannabis employment requirements
- Update policies based on regulatory changes
Consider working with a cannabis-focused accountant or HR consultant for these reviews.
Best Practices to Keep Payroll Smooth & Compliant
- Reconcile cash daily to prevent discrepancies between sales and payroll funds
- Implement dual control for all cash handling, requiring two employees to verify amounts
- Encrypt all digital payroll records and limit access to authorized personnel
- Train staff regularly on both cannabis regulations and general employment laws
- Separate retail staff from administrative staff for clearer §280E deduction allocation
- Document job duties thoroughly to support your tax position on COGS allocations
- Maintain consistent pay schedules to build employee trust and compliance
- Keep physical copies of all payroll records in addition to digital files
- Stay updated on changing regulations through industry associations and legal advisors
The Bottom Line
Paying dispensary employees legally requires navigating complex federal and state regulations. While cash payments remain common, more dispensaries are moving toward banking relationships and specialized payroll services. Whichever payment method you choose, meticulous record-keeping and proper tax compliance are essential to protect your business from penalties and audits.
The cannabis industry continues to professionalize, and payroll practices are following suit. By implementing proper systems now, you’ll build a foundation for growth while avoiding the compliance pitfalls that have troubled many cannabis businesses.
FAQs
Can dispensary employees be paid in product instead of money?
No. Paying employees in cannabis products violates both labor laws and cannabis regulations. All compensation must be in legal tender, and proper taxes must be withheld and reported.
Are dispensary employees exempt from overtime?
Generally no. Most dispensary positions (budtenders, inventory staff, security) qualify as non-exempt under federal labor laws, meaning they’re entitled to overtime pay. Management positions with proper duties and salary thresholds may qualify for exemption.
How should dispensaries handle employee tips?
Tips must be reported as income, with appropriate taxes withheld. Dispensaries should have a clear tip policy, proper reporting mechanisms, and understand their state’s specific requirements regarding tip credits and distribution.
Can dispensaries use regular payroll services like ADP or Paychex?
While some mainstream payroll providers work with cannabis businesses, many lack industry-specific features for §280E compliance and cash handling. Cannabis-specific payroll services typically offer more tailored solutions for the industry’s unique challenges.
What records should dispensaries keep for cash payroll?
At minimum: detailed pay calculations for each employee, signed receipts confirming payment amounts, copies of pay stubs showing all deductions, time records supporting hours worked, and documentation of tax payments and filings.
