Do Dispensary Employees Pay Taxes on Their Income?
Clarify your tax responsibilities as a dispensary employee. Learn how your employment classification affects income reporting and payment obligations.
Dispensary employees, like individuals in other industries, are subject to various tax obligations. The Internal Revenue Service (IRS) considers all income taxable, regardless of its source’s federal legality. This means employees are not exempt from paying taxes on their earned income, despite the cannabis industry’s unique legal landscape.
Required Taxes for Dispensary Employees
Individuals employed by dispensaries are responsible for paying several types of taxes on their income. This includes federal income tax, state income tax, and in some jurisdictions, local income tax. Federal Insurance Contributions Act (FICA) taxes are also a mandatory deduction from wages. FICA taxes fund Social Security and Medicare, which provide retirement, disability, and healthcare benefits. Employee tax obligations are distinct from the business’s tax challenges, such as those related to Internal Revenue Code Section 280E, which primarily impacts the dispensary’s ability to deduct business expenses.
Employee vs. Independent Contractor Classification
How an individual is classified for tax purposes significantly affects their tax responsibilities. A worker is generally considered an “employee” if the employer controls what work is done and how it is performed, including setting schedules and providing tools. Conversely, an “independent contractor” is typically self-employed, maintains control over their work methods, and is often paid for the results of their work rather than by the hour or salary. This distinction is particularly relevant in the cannabis industry, where misclassification can occur.
The IRS uses three main categories to determine proper classification: behavioral control, financial control, and the type of relationship. Behavioral control examines whether the business has the right to direct or control how the worker does the work. Financial control looks at whether the business controls the business aspects of the worker’s job, such as how the worker is paid, whether expenses are reimbursed, and who provides tools. The type of relationship considers written contracts, employee benefits, and the permanency of the relationship.
How Taxes Are Paid and Reported
The method for paying and reporting taxes depends directly on whether an individual is classified as an employee or an independent contractor. For employees, the employer is responsible for withholding taxes from each paycheck. This includes federal income tax, state and local income taxes, and FICA taxes. Employees complete a Form W-4, Employee’s Withholding Certificate, to provide their employer with information to determine the correct amount of federal income tax to withhold. At the end of each year, employees receive a Form W-2, Wage and Tax Statement, from their employer, which summarizes their annual earnings and the total amount of taxes withheld. This W-2 form is then used to file their annual federal and state income tax returns.
Independent contractors, in contrast, are considered self-employed and are responsible for managing their own tax payments. They receive a Form 1099-NEC, Nonemployee Compensation, from each business that paid them $600 or more during the year. Independent contractors must pay self-employment taxes, which cover their Social Security and Medicare contributions, in addition to their income taxes. For 2025, the self-employment tax rate is 15.3%, consisting of 12.4% for Social Security on earnings up to $176,100 and 2.9% for Medicare on all net earnings. Independent contractors are generally required to make estimated tax payments quarterly to the IRS and relevant state tax authorities to cover their income and self-employment tax liabilities. These quarterly payments are typically due on April 15, June 16, September 15, and January 15 of the following year.