The Hidden Costs of Paying Budtenders Under the Table

We were trying to keep it simple—but it almost cost us everything.

That’s something we hear more often than you’d expect. Business owners in early stages of growth often think that paying staff in cash or through informal channels is the most straightforward path. No paperwork, no payroll taxes, no systems to learn. But what feels easy at the beginning usually turns costly—financially, legally, and emotionally.

This blog is for anyone who’s ever paid a budtender in cash, sent a Zelle just to get through the week, or delayed setting up payroll until "later."

What You’ll Learn

• Why under-the-table pay seems attractive early on

• The tax, compliance, and operational risks it brings

• What happens if you're audited or flagged

• How this impacts banking, insurance, and licensing

• What clean payroll protects you from (and how to fix past mistakes)

Why Operators Choose Informal Pay Early On

Let’s be honest—payroll feels like a lot when you’re just starting out. You might have one or two part-time team members. You’re juggling banking issues. And sometimes, you’re just trying to get through the week without triggering red flags. Paying people under the table can feel like the fastest, cleanest option.

It’s a decision made from stress, not neglect. But the problem is, these short-term workarounds create long-term problems. Even if everyone’s on board and no one complains, you’re leaving your business exposed in ways that aren’t always obvious until it’s too late.

The Risks You Can’t See Right Away

Paying staff off-books isn’t just a tax issue. It’s a documentation issue. When you pay someone without proper records, you lose the ability to prove employment terms, track wages, or defend yourself if something goes wrong. One misstep—an injury, a dispute, a labor complaint—and you have no audit trail.

It also triggers risk with banks, insurance carriers, and licensing bodies. If they can’t verify how your team is paid, they may deny coverage, freeze your account, or flag you during routine reviews. Cannabis is already under the microscope. Don’t give them a reason to zoom in.

Banking Gets Complicated Fast

Here’s where it hits unexpectedly. If your banking institution sees large cash withdrawals that don’t match reported payroll, or if your tax filings don’t align with headcount, they can—and often do—flag your account for investigation.

Even cannabis-friendly banks rely on transparency to protect themselves. When your payroll records don’t match your deposits or expenses, that lack of clarity becomes a compliance risk for them. And that can quickly become your problem.

Insurance and Workers’ Comp Exposure

If someone gets hurt on the job and they’re not on your official payroll, things get messy fast. Your workers’ comp policy likely won’t cover unreported employees. You may be on the hook for medical bills, penalties, or lawsuits—all without a safety net.

This is one of the most painful scenarios we’ve seen operators face. Good intentions don’t override legal obligations. And no one wants to be explaining payroll decisions to a judge after the fact.

What State Regulators Are Looking For

Every licensing renewal or audit includes a workforce compliance review. That means regulators are checking I-9s, pay stubs, tax filings, and job classifications. If someone is working for you and you can’t prove they’ve been paid properly, you’re at risk of license penalties—or even suspension.

We've worked with operators who were shocked at how deeply some states investigate payroll, especially in vertically integrated businesses. It’s not just about having a good team—it’s about having the paper trail to back it up.

Real-World Example: One Operator’s Close Call

A small retail operator in the Northeast had been paying three budtenders in cash. It worked—until one of them filed for unemployment after being let go. The state contacted the business for wage verification. When they couldn’t provide it, it triggered an audit. That audit led to back taxes, penalties, and nearly cost them their license.

They came to Paragon in crisis. We helped them build a compliant payroll system, issue corrected records, and reestablish trust with regulators. They made it through—but barely. They’ve since told us they wish they’d had someone to show them what to do before things got messy.

The Real Cost of "Simple"

Below is a simple comparison showing how informal payment methods stack up against a clean, compliant payroll system:

What looks like saving money often ends up costing more. Between missed tax deductions, penalties, and time lost scrambling to fix things, paying under the table becomes more expensive than doing it right from the start.

You’re not just buying a payroll system. You’re buying peace of mind, audit protection, and the ability to grow without second-guessing your back office. That’s worth more than the few dollars saved skipping a formal process.

What Clean Payroll Gives You Instead

Don’t wait until:

• An employee asks for a pay stub

• A worker gets hurt on shift

• A bank flags your withdrawals

• The state sends an audit notice

These are the moments when informal payroll breaks down—and when clean systems prove their worth.

Clean payroll isn’t just about compliance. It’s about leverage. It lets you:

• Hire confidently

• Sleep better

• Show legitimacy to partners

• Unlock access to better banking

• Qualify for licensing and renewals without scrambling

And most importantly, it protects the thing you’re working hardest to build: your future.

FAQs

What if I’ve already paid people in cash?
You’re not alone. We help operators retroactively clean up payroll all the time. You can still get compliant without making a public mess.

Is this a big deal for just 1–2 employees?
Yes. It only takes one injury, dispute, or complaint to trigger a deeper review. Don’t wait until something forces your hand.

Will switching to formal payroll be expensive?
Not as expensive as fines, license problems, or lost access to banking. Most operators see ROI just from the peace of mind and time saved.

First-Time Operator Checklist: What You Need to Start

1. Get an EIN and register your business with your state

   • Visit the IRS website to apply for your EIN online (usually same-day).

   • Register your business entity with your Secretary of State or local agency.

   • Make sure your business classification matches your cannabis operations.

2. Set up a compliant payroll provider (that supports cannabis)

   • Choose a provider that won’t flag or drop your account for being a cannabis business.

   • Confirm they can file state/federal taxes and handle I-9s, onboarding, and reporting.

   • Get help setting up your first payroll run to avoid delays.

3. Confirm W-2 vs. 1099 classification for each team member

   • Review IRS guidelines to determine proper classification.

   • Use behavioral and financial tests (Who controls the work? Who provides tools?).

   • If unsure, classify as W-2 to stay safe.

4. Secure workers’ comp insurance

   • Find a carrier that covers cannabis operations in your state.

   • Ensure coverage matches your actual employee headcount and roles.

   • Keep your policy updated as you grow.

5. Create onboarding packets (I-9, tax forms, offer letters)

   • Collect I-9 forms with ID verification within 3 business days of hire.

   • Include W-4 and state tax withholding forms.

   • Document each hire with an offer letter or employment agreement.

6. Track and file state and federal payroll taxes

   • Know your state’s filing schedule (monthly, quarterly, etc.).

   • Keep up with deadlines for 941s, 940s, and state equivalents.

   • Set calendar reminders or automate through your payroll provider.

7. Store all documentation securely

   • Use a cloud system with admin access and audit logging.

   • Keep records for at least 4 years (or longer in some states).

   • Don’t rely on physical folders—digital backups are safer and searchable.

8. Get an EIN and register your business with your state

9. Set up a compliant payroll provider (that supports cannabis)

10. Confirm W-2 vs. 1099 classification for each team member

11. Secure workers’ comp insurance

12. Create onboarding packets (I-9, tax forms, offer letters)

13. Track and file state and federal payroll taxes

14. Store all documentation securely

What’s Changing in 2026

Labor audits are increasing in newly regulated states. More operators are being asked to provide retroactive proof of payment and employment classification. Regulators are starting to share data across departments, making under-the-table gaps easier to find.

Getting clean now makes future growth easier, safer, and faster.

If You’re Feeling Nervous, You’re Not Alone

Even if you’re not ready to switch systems, we can help you sanity-check what you’ve got and spot risks before they grow. This is about protecting your future—not pressuring your present.

Almost every founder we talk to has done something informal in the early days. What matters is what you do next.

If this raised concerns—or you’re ready to clean it up before it becomes a problem—let’s talk.