What Happens If a Cannabis Dispensary Doesn’t Pay Payroll Taxes?

What This Page Covers

• What payroll taxes are
• The biggest payroll mistakes dispensaries make
• What the Trust Fund Recovery Penalty means
• How payroll errors trigger audits

What Are Payroll Taxes?

When you run payroll for your dispensary, you withhold:

• Federal income tax
• Social Security
• Medicare

You also owe employer payroll taxes on top of what was withheld.

The money you withhold from employees does not belong to your business. It belongs to the federal government. You are holding it “in trust” until it is deposited.

That is why the IRS treats unpaid payroll taxes differently from unpaid income taxes.

The Most Common Payroll Tax Mistakes

1. Not Remitting Withheld Taxes

This is the most dangerous mistake.

Real-world example:

You withhold $18,000 in payroll taxes over a quarter.
Sales slow down.
Rent is due.
You use the $18,000 to cover operating expenses and plan to “catch up next month.”

From the IRS’s perspective, that is misuse of trust fund taxes.

Penalties begin immediately. Interest accrues daily. Collection action can move quickly.

This is one of the fastest ways cannabis dispensaries trigger enforcement.

2. Filing Late Payroll Returns

Even if you eventually pay, missing required filings can trigger penalties.

Common issues include:

• Late Form 941 (quarterly payroll tax return)
• Incorrect wage reporting
• Mismatched totals between payroll provider reports and IRS filings

Repeated late filings signal weak internal controls, and weak controls increase audit risk.

3. Misclassifying Employees as Contractors

In cannabis retail, budtenders, store managers, compliance staff, and inventory employees are almost always employees.

If someone:

• Works scheduled shifts
• Uses your systems
• Follows your policies
• Reports to your management

They are likely an employee.

If misclassified, the IRS can assess:

• Back payroll taxes
• Employer contributions
• Penalties
• Interest

Misclassification often surfaces during payroll or financial audits.

Trust Fund Recovery Penalty (TFRP)

If payroll taxes are not paid, the IRS can assess the Trust Fund Recovery Penalty under Internal Revenue Code §6672.

This allows the IRS to pursue:

• Owners
• Officers
• Managers
• Anyone responsible for financial decisions

If you had authority over which bills got paid — and payroll taxes were not paid — you can be held personally liable.

That means:

Personal bank accounts can be levied.
Personal assets can be targeted.

The corporate shield does not protect against trust fund liability.

Why Payroll Taxes Trigger Audits

The IRS treats unpaid payroll taxes as high priority because the money was already withheld from employees.

Common red flags include:

• Repeated late payroll deposits
• Large unpaid payroll balances
• Inconsistent payroll filings
• Mismatches between payroll reports and bank deposits

For cannabis dispensaries already under scrutiny due to §280E, payroll errors can widen audit scope.

How to Reduce Payroll Risk

Use a reputable payroll provider.
Review payroll tax reports monthly.
Confirm deposits were actually transmitted.
Never use withheld taxes for operating expenses.
File and pay on time, every time.

Payroll discipline is not optional in cannabis retail.

Go Here Next

• What Happens During a Cannabis IRS Audit?
• Can the IRS Access Your Cannabis Bank Records?
• What Happens if a Dispensary Doesn't Pay Payroll Taxes?
• Can You Mix Personal and Business Funds in a Dispensary?
• How To Structure a Cannabis Business To Protect Your Personal Assets

Source Material

• Internal Revenue Code §6672
• IRS Form 941 Instructions
• IRS Payroll Tax Guidance