Bridge West Consulting had an opportunity to speak with Mike Wales, Senior Enterprise HCM Consultant with Paychex. Paychex recently began serving the cannabis industry throughout the country.
What is your background in the cannabis industry and with Paychex?
Mike Wales has been with Paychex for over 29 years. Mike’s primary geographic focus is California; however, he serves clients all over the country. He began servicing the cannabis industry in January of 2021 and quickly noticed that his knowledge about payroll taxes would be valuable to the cannabis industry.
What issues do you see within the cannabis industry for taxes, payroll, etc.?
When Mike first started to serve the cannabis industry, he immediately saw many issues regarding payroll taxes. He said, “The cannabis industry has been extremely underserved and significantly overcharged for many years. Paychex was one of the first national providers to enter the cannabis space. Since Paychex is a publicly traded company, everything we do is completely transparent. We get it right. This has not been the case for the cannabis industry for a very long time.”
For example, there was a recent issue with cannabis companies not having their payroll taxes paid when using other services, affecting everything from operations to payroll. Another service provider did not pay close enough attention to this. The IRS recommends that employers review their account regularly even when using a third party. Mike explained, “There are many ways that a business in the cannabis industry can get penalized for not filing taxes correctly. Even if you outsource someone to handle your finances, the business will get penalized for not making the correct payments timely. Some states have different tax laws when it comes to payroll and taxes.”
Mike also cited a webinar titled, “FAQs for Payroll Information in Conjunction with the Cannabis Industry” presented by Roy Chaney, a veteran Revenue Officer at the Internal Revenue Service. During the seminar, Roy addressed the biggest issues he feels that cannabis companies face:
- Misclassifying employees vs. independent contractors
- Misunderstanding payroll tax deposit rules: Payroll tax deposits are now required to be made electronically to the IRS. There is a 10% penalty if payments are made directly to the IRS vs. electronic funds transfer (EFTPS).
- Trust Fund Recovery Penalty Investigation: the IRS’s top priority, and it is assessed on anyone who:
- Is responsible for collecting or paying withheld income and employment taxes, or for paying collected excise taxes, and willfully fails to collect or pay them.
- A responsible person is a person or group of people who has the duty to perform and the power to direct the collecting, accounting, and paying of trust fund taxes.
Another issue happened in the fall when a cannabis operator’s employees were set to receive their regular paychecks, and no one received their direct deposit. Mike explained, “There are many ways that a cannabis business can get penalized for not paying employees correctly. Even if you outsource someone to handle your finances, the business will get penalized for not making the correct payments timely. For example, California has a law where employers must pay their employees on time, and if they cannot pay them on time, there is a late fee on all paychecks not received by employees.
There are best practices that the IRS outlines on their website when outsourcing someone to handle payroll, taxes, etc. It dictates that whoever signs off on using the outsourced financial advisor is held responsible for any mistakes that are made. The IRS takes this very seriously. Business owners need to avoid these penalties and ensure that their business does not make these mistakes. States feel the same way, but how they address the issues varies by state.
Employee Lifecycle HR – How Paychex Helps
Paychex helps its clients find future employees by analyzing the current job market conditions. Currently, people are very mobile-facing and perform most of their job searches through apps on their phones. Paychex offers to help their clients find employees by posting their open positions on multiple job boards, including free and paid listings. Paychex’s clients can perform their regular onboarding processes for new employees. They can create different screening processes from simple to specialized positions, based on the position that is being screened. The HR professionals at Paychex can help with the onboarding process and make hiring easier.
Once employers have selected the candidates and extended the job offers, the next steps in the onboarding process are to send the new employees a mobile link to submit the required information. Online and e-submissions can speed-up the process by making the documents available to view instantly after submission and is also easier to read vs. handwritten documents. Paychex also utilizes onboarding software, where the system screens potential employees, making the process much easier for recruiters. The system also provides a paperless onboarding process that helps to reduce risk and ensures that no information gets lost along the way. For example, it does not allow people to skip required fields during the application process.
Online and e-onboarding processes make hiring in various states easier because the system knows the different state-to-state laws and requirements and will ensure compliance to federal requirements. The system can also track vaccinations and make it easier for an employer to see the status of all employees, no matter the size of the company. Everyone who needs to view the records of these different aspects can have complete visibility, right at their fingertips.
The system allows employers to capture the time and attendance of all employees through the centralized system. Paychex can monitor this data whether paper or other methods are used to track employee hours. At the end of the pay period, they communicate the numbers with payroll and confirm that everything is calculated correctly — that everyone is paid on time and taxes are properly calculated. At the end of each quarter or year, there also needs to be a set of returns done for every agency that needs them. There are three ways to pay employees: cash, check, or direct deposit. Employers are responsible for paying garnishments, and this needs to be identified whether there are one or multiple.
Once payroll is done, it is essential for employers to update their accounting systems. As long as the accounting system can receive files, they can automate it and eliminate time during this overall process, which is much more efficient. This is a big issue within any industry and every industry needs to be more efficient and cut down on time wherever they can.
After the payroll process is complete, employers need to focus on paying any retirement funds, 401(k) plans, and medical benefits, since there are health care reporting requirements.
What is the biggest challenge in the cannabis industry?
Mike explained, “What I see the most is cannabis operators having an existing systems and processes are not working. There is a huge lack of information across all industries and people don’t know what they don’t know. Paychex helps educate and guide businesses throughout all these processes before an agency contacts them, which can have higher consequences.”
Do you have advice for operators regarding how to choose a payroll business partner?
Mike said, “Understand that the business is still responsible even if the function is outsourced. Review the suggestions the IRS has on their website on choosing a provider”