8 Things To Know When Doing Payroll as a Cannabis Dispensary

Dispensary owners have a web of compliance and legal challenges to navigate, even when it comes to paying their employees.

Since the legal status of cannabis ranges so widely between states, while still illegal at the federal level, financial matters like taxation, banking, and running payroll for cannabis businesses can be complicated.

For these reasons, effective payroll management in cannabis dispensaries is critical to helping these businesses stay compliant with both federal and state labor laws and keep employees happy with on-time and accurate paychecks.

Below, we’ll discuss some of the essential tips dispensary owners should know to streamline their payroll processes.

Payroll in the Cannabis Industry: Why It’s Different

Cannabis dispensaries don’t just manage employees-they do so in a federally restricted, cash-heavy, and constantly shifting regulatory environment. Unlike traditional retail or service businesses, dispensaries must navigate a fragmented legal landscape, including:

• Inconsistent state-by-state legalization
• Federal tax code restrictions (like IRS Section 280E)
• Limited access to banking and financial services
• Labor law compliance for a new and fast-evolving industry

These challenges make even basic payroll operations-like issuing checks, withholding taxes, and maintaining compliance-more complex than they are in other industries. And with thousands of dispensary jobs now supporting the cannabis economy, understanding how to run compliant payroll is more critical than ever.

Cash Payments and Independent Contractors

Many dispensary owners face a harsh reality: traditional banking isn’t always an option. That leads to two risky workarounds-paying employees in cash or misclassifying them as independent contractors.

Both practices introduce potential legal landmines. Cash payments make it harder to track hours and withhold taxes accurately, increasing audit risk. Misclassifying employees to avoid payroll taxes can lead to penalties from the IRS and Department of Labor. If you're handling payroll manually or relying on makeshift systems, these risks multiply fast.

Avoiding gray areas isn’t just about legal protection-it’s about creating a professional, scalable business that can attract talent and withstand scrutiny.

The Role of Payroll Software in Cannabis Operations

To stay compliant and reduce administrative burden, dispensaries are increasingly turning to specialized payroll software built for the cannabis industry. These platforms help:

• Automate calculations for wages, taxes, and deductions
• Track time accurately, even in shift-based roles
• Handle tip reporting and cash payments transparently
• Generate audit-ready records
• Support classification of both W-2 employees and 1099 contractors

Choosing the right payroll software can mean the difference between running a reactive, high-risk HR operation-or a smooth, compliant, and scalable business.

1. Understand Payroll Processing

Even in a complex industry like cannabis, the payroll foundation stays the same-and getting the basics right is non-negotiable. Make sure you:

• Calculate total worker wages
• Withhold deductions
• Calculate and file payroll taxes
• Remit payment to dispensary workers

Above all, complete and accurate dispensary payroll processing ensures the business is compliant with the relevant labor laws and that they are paying workers appropriately for their time worked.

2. Emphasize Compliance

To run compliant payroll as a dispensary, you’ll need to understand IRS Section 280E. This section of the tax code prohibits businesses that sell federally controlled substances from deducting many typical business expenses-including payroll. However, some dispensaries can claim deductions for employees whose roles are unrelated to cannabis sales, such as administrative staff. Work with a cannabis-competent tax advisor to structure your payroll in a way that clearly separates deductible from non-deductible labor.

Next, take worker classification seriously. Employees (W-2) must have taxes withheld and be covered by workers’ comp and unemployment insurance. Independent contractors (1099) are self-directed and responsible for their own taxes. Misclassifying employees as contractors-even unintentionally-can lead to steep fines, back taxes, and state labor audits. Review job duties, schedule control, and how work is supervised to determine the correct classification.

Finally, remember that labor laws and tax obligations can vary by state or city. Some states impose cannabis-specific payroll taxes or require additional documentation. Others may have stricter rules around employee breaks or minimum shift hours. Use a payroll solution built for cannabis businesses-or work with a legal expert-to ensure your dispensary is aligned with both federal restrictions and your local regulatory environment.

3. Cash Payments and Tips Handling

Many dispensaries still operate with limited access to traditional banking, which makes cash payments a common workaround. But while paying employees or distributing tips in cash may seem straightforward, it opens up a range of compliance and logistical challenges. Cash makes it harder to track hours accurately, withhold the correct taxes, or maintain audit-ready records-all of which are essential for staying in line with labor laws and tax requirements.

To mitigate risk, dispensary owners must treat cash transactions with the same rigor as digital payroll. That means using time-tracking systems to log hours, documenting each payment clearly, and issuing pay stubs even for cash payouts. Tips should also be tracked carefully, especially for front-of-house roles like budtenders. Whether pooled or distributed individually, tip income must be reported, taxed, and included in your payroll records.

The cost of getting it wrong is high. Payroll errors already cost U.S. businesses 5% of their gross annual revenue in fines and fees. In an industry where profit margins can be slim and scrutiny is intense, cannabis businesses can’t afford to be part of that statistic. By building systems for accurate recordkeeping-even for cash-dispensaries not only reduce legal exposure but also lay the groundwork for more professional, scalable operations.

4. Managing Independent Contractors

Cannabis dispensaries may classify and pay workers as independent contractors rather than employees, which makes these workers responsible for paying their own taxes.

However, the misclassification of workers can result in further penalties, fines, or legal issues for the dispensary. So, it’s important to understand what criteria must be met for a worker to be rightfully classified as an independent contractor and not an employee, including:

• Independent contractors have greater autonomy over their work while employees are more under the direct control of the employer
• Workers in roles that require highly specialized skills are more likely to be considered independent contractors
• Employees are typically paid hourly wages, while independent contractors are often paid a flat rate for their work

5. Automate Payroll Processes

Dispensary owners may consider using payroll software to help automate payroll processes and meet compliance requirements.

Using a dedicated cannabis payroll software can provide many benefits, including the ability to pay employees through direct deposit, streamline employee time tracking, keep accurate payroll records, automate tax calculations, receive tax filing support, and more.

All in all, an automated dispensary payroll system can eliminate some of the headaches and administrative burdens that come from running payroll for cannabis businesses.

6. Ensure Data Security

When using automated cannabis payroll software, dispensaries need to safeguard sensitive employee information to meet relevant data privacy laws.

This means looking for a payroll solution that employs robust security measures like encryption and strong access controls to prevent unauthorized access to employee data, as well as clear audit trails and record-keeping to stay compliant with industry standards.

7. Stay Updated on Regulatory Changes

Given the unique regulatory landscape surrounding cannabis in the United States, laws are constantly evolving. Dispensary owners need to stay informed about any changes in payroll regulations and compliance requirements to avoid legal penalties or fines.

These are some helpful resources to keep you up-to-date on the latest regulatory changes in the industry:

• Cannabis Law Report
• Cannabis Business Times
• MJBizDaily
• IRS

8. Choose the Right Payroll Provider

Despite the many options for payroll software available today, these providers are not all fit to serve the cannabis industry. So, dispensary owners need to do the proper research to find a reputable provider that will help streamline their compliance and payroll responsibilities.

Some factors to look for for when selecting a dispensary payroll provider include:

• Industry-specific expertise
• Compliance capabilities
• Tax filing support
• Scalability
• Customer support options

Wrapping up Our Discussion on Cannabis Payroll

While it can be challenging, effectively managing payroll in cannabis dispensaries is not impossible. When you have a better understanding of the compliance standards you must meet, the importance of correctly classifying workers, how to handle cash payments, and the benefits of automating this process, you can feel confident that you are adhering to all relevant laws and paying workers on time.

Especially when you’re using payroll software with automated compliance capabilities and industry-specific expertise, like Paypro, you can streamline your payroll processes while having the peace of mind that nothing will slip through the cracks.

If you want to learn more about our dispensary payroll solution, click here to speak with one of our experts.

About the Author

Kayla is the Marketing Manager at Paypro Corporation overseeing all inbound and outbound marketing and sales efforts. She has 7+ years of experience working within the B2B and SaaS based solutions space and thrives on creating messaging and campaigns that introduce products and services to those who need them most.