Best Practices for Working with Vendors in your Cannabis Business
Vendors and vendor management are a very important part of your cannabis business. Good vendor management will help your cannabis business deliver products and services faster and have the cash flow to do it correctly.
But how do you actually start the vendor process and make sure that you are setting your business up for success?
Your vendor management process starts with you building a framework and accounting controls. In this blog post, we’ll cover the contracts and paperwork that you’ll need to master when it comes to working with vendors.
Use Vendor Contracts
A handshake is not a contract, and can’t be held up in court or if there is a legal dispute. When you’re working in any industry, and especially the cannabis industry, you’ll want to have a vendor contract process and system in place.
Not every vendor is the same, and your negotiations with vendors might be different. If you can, you’ll want to use a standard contract for your vendors that details your terms, the services, and what to do in case the services are not fulfilled.
Issue them the Correct IRS Paperwork
When you are working with vendors and contract labor you will need to request that they complete a W9 and that you have contracts in place that formalize your agreements.
A W-9 is an informational return where you validate an individual/entity’s tax identification number (TIN) and payee’s correct name.
Collecting this information helps you formalize your vendor management process, and will help you stay compliant with the IRS.
When to issue a 10-99?
If you pay independent contractors, you may have to file Form 1099-NEC to report payments for services performed for your trade or business.
A 10-99 shows the information listed on the w9 and the amount paid to this vendor.
This document will be used for the vendor to file their personal taxes and will be used for you to substantiate your payment to them (and be able to deduct this from your tax return).
Who should you issue 1099 to?
If you are working with contract labor, accountants, or subcontractors, you will generally need to issue them a 10-99.
You will need to issue 1099s to individuals that you paid more than $600 throughout the year.
Generally, payments to a corporation (including a limited liability company (LLC) that is treated as a C- or S-Corporation do not require a 10-99 to be issued. Generally, payments for merchandise, freight, storage, and similar items don’t require a 10-99.
You can check out this resource from the IRS that will help you with Reporting: Reporting Payments to Independent Contractors
When do you need to issue 1099s?
10-99s are due at the end of January every calendar year. To be successful in the process, you’ll want to start running your vendor totals at the end of December and start the process in early Janaury.
Make sure your contractors are actually contractors and not employees
The IRS does not joke around about the treatment of employees and has a test to see if your contractors are really employees. The basic rule of thumb for this test is:
- Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
- Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how the worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
- Type of Relationship: Are there written contracts or employee-type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
If the IRS considers that your independent contractor is actually an employee, your business could owe back tax and face severe penalties. The most common penalties:
- Repayment for Wages Due
- Back taxes and penalties
- Payment for Worker’s Compensation Benefits
- Employee Benefits (401k, Health insurance)
Make sure that you work with a qualified financial professional if you are unclear about any of this!
Keep Good Records
Make sure that you save your contracts and have a good accounting system to stay compliant with the IRS in case of an audit.
Having a good system in place to keep track of your contracts and payments to both employees and contractors will help you stay compliant but organized. Good Organization will lead to better cost management in your cannabis business and ultimately better cash flow.