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.
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.
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 firstname.lastname@example.org or give us a call at 424.274.3188.