Payroll Taxes for a California Cannabis Company

Payroll Taxes for a California Cannabis Company

All cannabis businesses that operate in the state of California which have employees, including everything from cultivation to dispensaries,  must withhold, report, and pay payroll taxes to the Employment Development Department (EDD). 

Payroll taxes apply to employees such as budtenders, office managers, accountants, growers, salespeople, and delivery drivers. In fact, all personnel who meet the definition of ‘employee’ by the EDD are subject to the payroll tax laws of California.

The EDD defines an employee as: 

  • Anyone who is an officer of your company
  • Any worker who qualifies as an employee under the common law rules
  • Any worker that performs services covered by the law

This definition is inclusive of any time worked by an employee. For example, if someone only worked for you on a temporary basis, this fact alone doesn’t exclude them from the definition of employee. The number of hours worked has nothing to do with their ‘employee’ status. If your workers meet the EDD definition of employee, then the payroll tax laws apply to them. 

A cannabis business employee who meets the EDD definition

Payroll taxes apply to all cannabis business employees who meet the EDD definition.

Wages for Payroll Tax Purposes    

Any compensation paid to an employee for time spent working for your business gets included in your payroll tax calculation. Compensation includes cash, checks, or the cash value of noncash payments, such as cannabis products. 

The most common examples of compensation include:

  • Salaries or hourly pay
  • Bonuses and commissions
  • Vacation pay
  • Overtime worked 

All wages paid out to your employees are subject to payroll taxes. 

Once your cannabis business employs at least one employee, and you pay out more than $100 in a calendar quarter, you must register as an employer within 15 days.

 

Required Filings 

For any new employee you hire, you must file a “Report of New Employee (DE 34)” form within 20 days of their first day of work. The EDD gives employers the option of filing this form online through e-Services for Business or sending in a manual copy by mail or fax.

The same 20-day timeframe applies when you hire a new independent contractor. Just like form DE 34, you can submit the “Report of Independent Contractor(s) (DE 542)” online, through mail or fax. 

Every quarter, your cannabis business is required to file a “Quarterly Contribution Return and Report of Wages (DE 9)” and a “Quarterly Contribution Return and Report of Wages (Continuation) (DE 9C).”

The DE 9 summarizes wages and taxes paid. If this form calculates an overpayment of taxes, the EDD will issue you a refund. Conversely, if the calculation shows an underpayment of taxes, you must pay the difference when you file the “Payroll Tax Deposit (DE 88/DE 88ALL)” form. 

Form DE 9C captures all wages paid during the quarter for each individual employee. The EDD prefers that these two forms, DE 9 and DE 9C, get filed online. However, if you apply for a waiver (DE 1245W), and your request is granted, you can file a paper copy. 

The last payroll tax form to file is called “Payroll Tax Deposit (DE 88/DE 88ALL).” This form captures all payroll taxes by category, including: 

  • Unemployment Insurance (UI)
  • Employment Training Tax (ETT)
  • State Disability Insurance (SDI)
  • California Personal Income Tax (PIT)

These forms report each type of payroll tax that must be paid to the EDD. Filing and payment of these taxes can be done electronically or through the mail. 

 

Filing Due Dates

The table below shows the due dates for forms: 

  • Quarterly Contribution Return and Report of Wages 
  • Quarterly Contribution Return and Report of Wages (Continuation)
  • Payroll Tax Deposit – Unemployment Insurance (UI)
  • Payroll Tax Deposit – Employment Training Tax (ETT) 
  • Payroll Tax Deposit – State Disability Insurance (SDI) 
  • Payroll Tax Deposit – California Personal Income Tax (PIT)

 

Table: Payroll Tax Due Dates

Quarterly Period Due Date Late if not filed by:
January 1st – March 31st April 1st April 30th
April 1st – June 30th July 1st July 31st
July 1st – September 30th October 1st October 31st
October 1st – December 31st January 1st January 31st

 

The due dates for filing and paying these two payroll taxes vary depending on your federal deposit schedule or requirement. For the most part, they tend to be due more often. Here is the schedule that shows the deposit requirements based on your individual business scenario.  

For many startup cannabis businesses, the payroll information presented in this article is fairly new. It can take a lot of time to wrap your head around, and understandably so. Questions may arise, like, what records should I keep for my employees, or what if I don’t have a business checking account to pay my taxes from? 

The financial consultants at Northstar have the knowledge and expertise to help answer these questions, and others you might have. If you would like to connect with us, send an email to info@nstarfinance.com or give us a call at 424.274.3188.  

 

Standard Operating Procedures to Implement in Your Cannabis Business

Standard Operating Procedures to Implement in Your Cannabis Business

Before starting a business, many founders draft a detailed and comprehensive business plan. A business plan is helpful when raising capital, and for giving the business its best possible start. An operations plan is equally as important. 

Part of the operations plan involves drafting step-by-step instructions about how to perform and execute business tasks. This list or set of instructions, is collectively known as the business’s Standard Operating Procedures, or SOP for short.

For a cannabis business, SOPs are extremely vital to have in place due to the strict regulatory environment that surrounds the cannabis industry. Your SOPs acts as a ‘how-to’ guide that proves to be immensely valuable in day-to-day operations, as well as in the long-term.

Here is a brief summary of what SOPs can help your business with: 

  • The approval of your cannabis business license
  • Ensuring that your business runs efficiently
  • Cutting down on bookkeeping mistakes
  • Staying compliant with state and local laws and requirements
  • Reducing the chance of theft or fraud

 

What’s Included in a Cannabis Business SOPs

Before discussing the categories to include in your SOP’s, it’s important to understand that the cannabis industry is not the only industry subject to strict standards. Industries such as banking and healthcare also operate in a tightly regulated space. They too must keep detailed SOPs for their own compliance and regulatory requirements.  

Here are the specific areas that many cannabis businesses include in their SOPs:

Security Risks of a Cannabis Business

Outlining how your business plans to mitigate security risks is critical, which is why it’s being discussed first. A cannabis business handles a lot of cash on a regular basis which presents a big security concern. Secondly, cannabis products are very valuable. These two factors expose the business to risks like fraud, theft, and loss.

Detailing out your security procedures in your SOPs, will help keep your cash, products, employees, and company safe. Some details to outline in this section of your SOP include:

  • The facility buildout 
  • Alarms and surveillance
  • Computer system security
  • Limited access areas
  • Armed guards and security fencing

Security for a cannabis business

It’s important that a cannabis business install security measures.

 

    

Quality Assurance & Testing 

Any product intended for medical use is subject to strict quality assurance and testing standards. Cannabis is no different. The requirements in California, for instance, state that all cannabis products must get tested at licensed cannabis testing facilities.      

The SOP for Quality Assurance (QA) and Testing will look different depending on the vertical your cannabis company is in. Here are some examples of what might be included:

  • Cultivation and manufacturing procedures
  • Sanitation measures that will prevent contamination of products
  • Environmental controls for storing and preserving inventory
  • Inspection of the labeling and packaging

Your SOP should detail the steps you’ll take to ensure each of the processes in this section gets accomplished.   

 

Track & Trace Cannabis Inventory Control

State and local regulatory bodies want cannabis companies to keep a tight handle on their inventory at all times. To achieve this, a cannabis business must include specific instructions in their SOPs for this process. 

This is why a solid internal inventory management system is important. It can help track how your inventory is received, handled, stored, and delivered. 

Cash Handling

Another important process to thoroughly document is that of cash management. How you handle your cash is a good predictor of your company’s financial future and success. Some questions to address in this section of your SOPs include:

  • Where will you keep your cash and how will you store it? 
  • Will you open a bank account, or keep the cash in a safe?
  • Which bank will you use, and who will have access to make deposits, payments, or transfers to and from the account?
  • What kind of safe will you buy, who will have access to the safe, and where will the safe be kept?
  • How will you transport cash to the bank, and how will you ensure it’s safe during transit?

These questions and others will help you write up instructions on how to handle your business’s cash.  

 

Record Storage 

Another area of interest for state and local authorities is record keeping. They expect cannabis businesses to be transparent. If the authorities request to see documentation, they’ll want original, untampered copies – and they’ll want them promptly.

So, when it comes to writing out your SOPs for this crucial process, consider including instructions that answer questions such as:

  • How will you keep your records–will everything be electronic, manual, or a combination of both?
  • Where will you store your manual records and documents?
  • Who will have access to them? Will you lock them up in a restricted area?
  • How long will you keep the files?

Writing up your SOPs can take a lot of time and effort. If you need help developing your SOPs, get in touch with the cannabis accountants and consultants at Northstar Financial Consulting Group. Contact us at (424) 274-3188 or info@nstarfinance.com.

 

4 Ways To Keep Your Start-up Cannabis Business ‘Lean’

4 Ways To Keep Your Start-up Cannabis Business ‘Lean’

Congratulations — you’re a new cannabis business owner! You’re excited because you secured financing, welcomed your first customers, hired an excellent team, and sales are starting to roll in. You’re feeling good about your success as a start-up thus far.

But, suddenly the rush of excitement begins to fade. The numbers aren’t quite what they should be because sales are plateauing and costs are on the rise. Quite a few start-ups find themselves here. Not to worry, there are proven strategies that can get your business back to where you want it. 

These strategies are both tangible and intangible in nature and can help your business stay ‘lean’. In this context, lean refers to making more calculated decisions and ‘trying-on’ approaches that other successful businesses mastered.

Here are four specific tips to help your business think and stay lean: 

 

  1. Follow the Trail of Evidence

This first tip can help shift your focus away from favorable opinions, to cold-hard evidence. When you look at the evidence, you can clearly see the unbiased opinions of your products. For instance, what are your customers saying about your products? Are you sourcing products from the best in the business? What’s the overall perception (news coverage, social media response, customer reviews) of your products or business? Which cannabis products and accessories are selling and which are collecting dust on the shelves?

Carefully studying these measures can help you analyze what is working, and what is not. Look into the data more, observe the trends, and from this vantage point, you can make better-informed choices about what to improve.

 

  1. Continually Refine Your Business Operations 

Success rarely happens overnight, and it rarely happens on your first try. Meaning, your initial idea to stock your dispensary, or fill staff positions, or find the best inventory management system may well change down the road. 

A business is a work in progress, operations should be evaluated and updated as the need arises. This doesn’t mean you failed because you didn’t get it ‘right’ the first time. It means there is always room for improvement. 

Take Thomas Edison for example. It took thousands of attempts to devise and perfect the light bulb. Or Steve Jobs, who got kicked out of Apple, only to return and transform the company into an international empire. Failure did not define these men. On the contrary, failure was the catalyst that propelled them to a greater level of success. 

Edison did not give up because of business failures

Thomas Edison did not let business failures stop him.

 

  1. Empower All Members of Your Team

In keeping with the ‘lean’ mentality, this particular point urges the founders and executive team to work collectively with all staff members and employees. Everyone serves an important role in the company. Try to empower, collaborate, and give your team ownership of tasks. This encourages them to become invested in the company’s success. Furthermore, it will lead company and individual goals to get carried out with more determination and enthusiasm.

The success of any business takes the collaboration, motivation, and effort of the entire team. When there are no barriers drawn between executives and employees, the mission of your company is more effortlessly carried out.

  1. Get Good at Riding the Waves

When you successfully emerge from the start-up phase, you might think, “good, it’s only up from here.” But, that’s not always the case. In particular, a cannabis business faces more hurdles than a standard business. 

A cannabis business must maintain quality control standards; maintain strict and complex tax compliance; stay audit-ready; follow state, local, and county laws that are constantly being amended. There is no shortage of requirements and responsibilities––these are only from the perspective of compliance.

These requirements can cause ripples or waves that interrupt the flow of business. As a result, changes or adaptations will need to get addressed. Therefore, attention, detail, and care are required to help ride these potential ‘business waves.’ These waves test a company’s will to stay lean and ultimately, to achieve success. 

As stated, some of the most intricate and complicated tasks for a cannabis business are accounting and tax compliance requirements. Having a team of financial cannabis experts can ease this burden and free up your time to focus on business operations.  

If you’d like to speak with our financial experts at Northstar to see how we can help, send an email to info@nstarfinance.com or give us a call at 424.274.3188. 

 

 

7 Financial Signs It’s Time to Sell Your Cannabis Business

7 Financial Signs It’s Time to Sell Your Cannabis Business

Running a cannabis business can be incredibly lucrative. What many first-time founders don’t realize is that few businesses stay with the original owner. Many business owners professionally nurture a shop until the business is ready to sell to bigger fish. Others sell when their small business hits a financial rough patch.

If you have been getting offers for your cannabis business or have been considering the pros and cons of selling, it’s time to take a look at your books. The biggest indication of whether it’s time to sell will often be whether you are financially thriving or struggling in very specific ways.

SIGNS YOU’RE BIG ENOUGH TO SELL

“Big enough to sell” means that your cannabis business is on the rise. Your books are in good order, your customer base is growing and you could make a real profit from selling right at this moment. The business that you have nurtured from the ground up may also stand to see real developments with a new owner ready to invest in helping it grow.

You Are Generating Steadily Increasing Revenue

Every business goes through the rocky startup phase. If your goal is to sell, one way to be ready is when your company has exceeded covering overhead to increase revenue. Your business is approaching ready to sell when your customer base is growing through both marketing and word-of-mouth popularity while your overhead stays productively low. In a state of healthy growth, your cannabis business will naturally become more appealing to potential buyers.

Sell When Buyers Have Started Making Bids

A surefire way to know that your business is ready to be sold is if potential buyers are making bids. If a potential business partner has already reached out to you with interest in buying your cannabis establishment, you know they see the potential for gain in the deal. Each bid must be weighed on its own merits and the merits of the buyer. Once you find a buyer who seems like a good fit for your business, the only remaining question is whether your back-end paperwork and internal finances are in shape for the hand-off. Of course, when you are personally ready to sell.

You Have Another Investment Ready to Go

Another important factor is where you are going financially from this sale. Many serial business owners are looking for a chance to sell because they’ve had other “irons in the fire” that are maturing as the current business grows to sale-readiness. You may have another startup ready to go with the kick-off of your cannabis business sale. When you have other projects waiting, now may be the ideal time to sell.

SIGNS IT’S TIME TO SELL

Another best time to sell is if the cannabis business finances are struggling, but the shop is fine. It’s not uncommon for startup business owners to create a fantastic business model, but not quite have the finances. You may have run into overhead issues, been hit by incidental costs, or the constant regulations may have tripped up your otherwise perfect financial plan. When this happens, often the smartest choice is to sell and allow the buyer’s revenue to provide support and growth.

You can then take the profits from the sale and reinvest in a new plan. Here are the financial signs of a cannabis business that is struggling and ready to be sold.

Sell When Your Brand Is Ready to Expand, but Your Revenue Is Not

Your brand may be a big hit in the neighborhood and you may have more business than you can easily accommodate. However, expanding takes quite a bit of investment. Opening a new store or remodeling are serious investmentd, and your revenue might not be prepared. If you started this cannabis business from scratch, then a new buyer may be able to take your accomplishments through the next phase of growth and development. And you can take the sale profits to try something new.

Competition Is Fierce and Eating Your Profits

cannabis business employee looking at graphic representation of finances to decide if she should sell or not

Shot of a businesswoman using a digital tablet to look over finances.

Competition in the cannabis industry is intense in the select areas where dispensaries are permitted to flourish. You may have started as the only cannabis business in the neighborhood, but now there are three or four others. If you built a dispensary with potential but you can’t keep the books in black, a buyer might be able. In this case, selling could be the best solution for everyone.

You Are Not Financially Prepared for the Next Wave of Regulations

Regulations may be taking their bite out of your revenue reserve. Every time the regulations change, you need to change your packaging, labeling, and security protocols. This is not necessarily part of a stable business plan. This can throw a serious wrench in your otherwise well-planned startup finances. Investing in regulation-required changes can eat into money you needed to complete your business launch. If your books can’t handle the next wave of regulation changes, your best option is to sell.

Your Store Is Doing Well but Slowly Losing Money

Then there is the unique situation that only happens in business: Success without profits. You have great customers who love your brand. You have dominance over the competition, but somehow you’re still losing money. This can happen when costs are higher than income, even if your customers are steady. High rent, regulation costs, and tax changes can all cause this unique situation. A buyer may be able to turn your business around, but won’t be interested until they can buy.

LEARN MORE ABOUT SELLING YOUR CANNABIS BUSINESS

If you are considering selling your cannabis business, the smartest move is to work with a third-party financial consultant first. You may be able to turn a negative revenue situation around and keep your business or a financial consultant can help you finalize your books and create the most beneficial possible exit strategy.  Contact us to learn more.

How to Restructure Your Cannabis Business as More States Legalize

How to Restructure Your Cannabis Business as More States Legalize

The cannabis business is currently caught in an interesting dance of legality and opportunity. On one hand, it is still considered illegal according to federal law. However, on the other hand, a constantly growing number of states are legalizing it locally. Those states that legalized early have already seen a thriving new cannabis industry rise up, both for urban areas and bringing money and tourists to once-depressed small towns.

THE MULTI-STATE CANNABIS BUSINESS CHALLENGE

For cannabis entrepreneurs, this has been a bonanza of business with your products in high-demand wherever they are allowed to be sold. However, the complex web of legality also uniquely limits cannabis business from flowing freely from state-to-state. Because even though cannabis may be legal in two bordering states, (California and Oregon, for example), crossing the state border is still a federal action in which federal laws apply. So cross-state cannabis is a no-go. At least, if you’re trying to transport the leaf or products themselves.

This puts cannabis entrepreneurs in a challenging spot. How can you grow your business into the newly legalizing states without breaching federal laws about crossing state lines? You are not as limited as you might believe. Cannabis itself can’t cross state borders, but your business can. Let’s explore a few strategies for restructuring and expanding your cannabis business into new states without breaking federal law.

CULTIVATE SUPPLIERS IN INDIVIDUAL STATES

The major limiting factor is that you cannot share supplies from one location to another across state lines. You can ship packaging, plans, decoration, and shelving, and even vapes and glassware. But you cannot ship cannabis or any cannabis-derived products.

This means you will need to cultivate a network of suppliers in each individual state where you plan to open a new dispensary location. The more local growers and producers you know, the greater your stock can be from shop to shop.

Cannabis Buyer’s Market

Fortunately, the current market is very buyer-friendly when looking for new cannabis supply partners. Growers in established cannabis-legal states are overproducing with no ability to spread out their products across state lines. New dispensaries looking for grower partners will find eager grow operations who would love to help you bring their buds to new towns and neighborhoods just to get the stuff out of their coolers and off the loading docks.

GET MEDICAL TO ACCESS GREATER MARKETS

If your brand does not already have a medical branch, it’s time to build one. When you’re planning to expand your cannabis business into new states, it’s important to remember that medical marijuana is legal in far more states than recreational use. Conservative states that have acknowledged the use of cannabis for hard-to-treat conditions like epilepsy, cancer care, and nerve pain conditions are making marijuana medical-only. Others are stopping through the ‘Medical Zone’ for a few years while the state population adjusts. The best way to successfully expand and reach new multi-state audiences is to also open dedicated medical-only locations.

The Respectable Pharmacy In-Road

These can serve in states that only allow certain medical conditions and medical-card-only customers to buy marijuana commercially. Make your medical branch separate from your recreational branch so that the stricter states can see that you take the medical side of the business as seriously as they do. The more respectable and serious your medical dispensaries are, the more welcome your cannabis-pharmacies will be in conservative areas that are just opening up in the market.

For states on the path to recreational legality who are currently in the ‘medical zone’, your medical establishments will also set you up for a quick and easy expansion to recreational when the laws change again in a few years.

BUILD A DEDICATED STATES REGULATION-ADHERENCE TEAM

Jumping through regulation hoops is the name of the game in the cannabis industry. Every state is like a new level, where the hoops are in entirely different places with new heights to jump through. You may have become a pro at keeping up with the regulations and legal requirements of your home state. But going multi-state means keeping up with the wild and often problematic changes in each individual state you expand to.

Many of the states that are resistant but changing anyway are using regulations to put a hold on cannabis expansion. Don’t let the strict, sometimes bizarre, and ever-changing regulations stop you. Instead, become a pro at regulation adaptation. Make it a brand hallmark that your cannabis establishments are always in perfect compliance and in good standing with the local authorities who are sometimes wary of new cannabis businesses.

Your Regulation-Adherence Team

Business team reviewing how to restructure your business as more states legalize cannabis.   

 

Meeting to discuss multi-state regulation-adherence

The best strategy is to build a dedicated team, or a collection of teams, whose sole purpose is to keep up with the regulations. Your team should include lawyers who can keep you up-to-date on the letter of each state (and county and city)’s laws. Include local liaisons who will talk to city councilmen and county sheriffs to ease community concerns. Include marketing specialists who will coordinate all your local packaging, labeling, and logistics as well as hone your brand.

Check-in with your team monthly to hear about any recent changes or upcoming regulations.

LEARN MORE ABOUT RESTRUCTURING YOUR CANNABIS BUSINESS AS MORE STATES LEGALIZE CANNABIS

Managing a multi-state cannabis business is not impossible. Brands like Curaleaf, Green Thumb, and Trulieve are already doing it. With the right strategy, you can do the same by forging your growing cannabis brand into a national icon of respectable medical cannabis pharmacies and trendy recreational dispensaries. Just be ready for the roller coaster of regulations, roadblocks, and sudden opportunities that await. Contact us today to start financially planning for your big expansion to new states.