Tax implications for Canadians sending employees to the US.
Allan Madan, CPA, CA
US-Canada tax experts reveal the most common pitfalls that Canadian companies face when sending employees to the US.
What is an ITIN?
Are you a Canadian corporation that’s sending one or more of your employees to work in the US? If yes, then be sure to avoid the following three most common mistakes made by small to medium size Canadian companies when it comes to US-Canada payroll tax. Also, for prudent steps that any Canadian companies must take when sending their employees to the US, see my article on Five practical steps to take before sending your employees to the US.
1) Not issuing W-2 form for the days worked in the United States
It is easy for Canadian small to medium size companies to think that they only have to issue a T4 to report their employees’ salary for the year. However, if an employee worked partly across the border, then, in addition to the T4, the company must issue a W-2 (equivalent to T4 in the United States) for the portion of the wages earned in the United States. For Example,
Employee: John Doe
Annual salary: $100,000
Time spent working in the United States: 1/3 of the year
Then, the following salary will be reported on each respective forms:
T4: $100,000
W-2: $33,333.33
“Frequently, we only receive a T4slip from employees when they work partly during the year outside Canada. The W2 is missing!” says US Tax Accountant, Allan Madan.
The penalty for late filing W-2 forms to the IRS can accumulate and become significant. Therefore, it is advised that small to medium size companies consult a professional in Canada-US tax on this issue.
2) Not filing the US Personal Income Tax Return
If an employee physically works in the United States for part of the year, the salary earned from the work will be treated as US-source income and subject to US tax. This means that the employee will be required to file a US Personal Income Tax Return for that year even if the employer makes a mistake of not issuing a W-2 (see mistake #1).
The penalty for not filing in the United States is more severe than the penalty in Canada. In the US, it is 5% of your tax balance for each month the tax return is late, up to a total maximum penalty of 25%, plus interest on the penalty.
Therefore, as an employee, be clear that if your employer sends you to work temporarily in the United States, you will face US tax filing requirements.
For first time US Personal income Tax Return filers, you must also apply for the Individual Tax Identification Number (ITIN) with the IRS. With the recent legislative changes, obtaining the ITIN has become more difficult and time-consuming. Therefore, it is highly advisable that you consult a professional in US-Canada tax if you have US tax filing requirements.
3) Withholding social security tax on wages earned in the United States
Nearly all of the employees sent to work in the United States on a temporary basis will return to Canada and continue to live in Canada. Therefore, there is minimal benefit to contributing to the US social security system while working across the border. In response, Canada has established Social Security Agreements with the United States and with over 50 countries around the world to allow employees working in a foreign country on a temporary basis to continue contributing to their Canadian Pension Plan through monthly source deductions.
This form is CPT56 – Certificate of Coverage and should be completed by the employee and employer well before departing Canada. By filing this form, the employer will withhold employee CPP contributions instead of US social security and Medicare tax.
Cross border payroll taxation is a very complex area of US tax. As such, we highly advise that you consult an expert who is well knowledgeable in both the US and Canadian tax.
Disclaimer
The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting and financial professionals. Allan Madan and Madan Chartered Accountant will not be held liable for any problems that arise from the usage of the information provided on this page.
ABOUT THE AUTHOR
ALLAN MADAN
CPA, CA
Allan Madan is a CPA, CA and the founder of Madan Chartered Accountant Professional Corporation. Allan provides valuable tax planning, accounting and income tax preparation services in the Greater Toronto Area.
Hi. In your example, you indicated that if John Doe earns a salary of $100,000 but works in U.S. for 1/3 of the year, then he should receive a T4 slip of $100,000 and W-2 of $33,333.33, and he has to file both Canadian and U.S. tax returns. So then, this means he would have to pay taxes twice (once in Canada and once in U.S.) on the same income?
Thank you.
Rob
Hi Rob,
Thank you for your interest in our article.
Since a Tax Treaty exists between Canada and the U.S., you can claim foreign tax credits on your Canadian tax return in order to prevent double taxation.
Feel free to contact us if you have any further questions.
Best regards,
Allan Madan and Team
I am a Canadian citizen temporarily working in the US. Which tax return do I file, and when is the tax return and payment due?
Hi Taylor,
As a Canadian resident temporarily working in the US, you will have to report your employment income earned in the US on a personal tax return called the 1040NR. This is a tax return that must be filed by April 15th of the following year. It is a tax return filed specifically by those who are residents of Canada, and not by US residents.
Although the tax return is due on April 15, you can request a filing extension.
Regards,
Allan Madan and Team
Based on your example, after getting taxed on the $33,333 in the US, will I get taxed again in Canada on that same $33,333?
Hi Joanne,
No, you will not be taxed twice on income earned in the US, because Canada and the US have a tax treaty to prevent double taxation.
As a Canadian resident, you must report and pay tax on your world-wide income. When the US-source income is reported on your Canadian tax return, you will receive a foreign tax credit for the US taxes paid. The foreign tax credit, which represents the portion of tax you already paid in the US, will reduce your Canadian tax liability.
Regards,
Allan Madan and Team
Where can I get a list of all the countries that have entered into a Social Security agreement with Canada?
Hi Youlis,
You can find the list here: http://www.servicecanada.gc.ca/eng/isp/ibfa/summarytoc.shtml
Regards,
Allan Madan and Team
What is the process for applying for an ITIN?
Hi Carol,
In order to properly apply for your ITIN you must prepare Form W-7 and present proof of residence in Canada. For detail information on the process, please refer to my article on Tax ID Numbers in the US for Canadians.
Earlier you mentioned there is a filing extension available. How long is the extension for, and how do I get it?
Hi Nicholas,
The personal tax return is originally due on April 15. However, by filing the form 4868, you can extend the deadline by 6 months, allowing you to file by October 15.
You must:
1. Properly estimate and enter your tax liability on the form 4868
2. Submit the form 4868 by April 15
Note: this extension only applies for filing of the return. The payment of tax is still due on April 15, and if not done so, interest will apply. Penalties may also be charged.
Regards,
Allan Madan and Team
Hi,
To which address am I supposed to mail my 1040 NR and the payment?
Hi Bobby,
Individuals are required to mail their Form 1040 NR and their payment to:
Internal Revenue Service
P.O. Box 1303
Charlotte, NC 28201-1303
U.S.A.
Regards,
Allan Madan and Team
Hi,
What other tax slips, other than a W-2, can I expect to receive if I live in the U.S.?
Hi Lori,
An individual earning income from a U.S. source can also receive slips such as 1099-INT, 1099-DIV and 1099-B. These forms are issued to taxpayers and the IRS to report investment income such as interest and dividends as well as proceeds from stock transactions.
Regards,
Allan Madan and Team
For state income tax deductions at source, do I remit the deductions to the state’s department of revenue?
Hi Yohan,
In the U.S. you have to remit state payroll tax to the appropriate state’s department of revenue separately from federal income tax deductions, which are remitted to the IRS.
Regards,
Allan Madan and Team
Hi Allan,
How do you know which country gets to tax the employment income first and in which country the foreign tax credit is applied?
Hi Takumi,
The ability of a country to tax the income first depends on the country in which the income is sourced/earned. Employment income, by definition, is sourced/earned in the country in which one worked. Since the employees physically worked in the US, the employment income they earned will be sourced in the US, and so the US tax body (the IRS) will get to tax the employment income first.
I failed to file my US tax return by the extend deadline of June 15th as I am a Canadian resident with limited knowledge of US tax law. I’m now facing late filing penalties from the IRS. Is there a way for me to request the IRS to waive these penalties?
Hi Tiara,
If you have a clean compliance history, you can request a First-time Penalty Abatement waiver with the IRS. This waiver applies to failure-to-file and failure-to-pay penalties. If you had no previous US tax filing obligations or you’ve been in perfect compliance in prior years, the one-time first-time penalty abatement can be used to waive your late-filing penalties.
Best Regards,
Allan Madan and Team
My Canadian employer did not issue me a W2 as they should have, but I know they did file one with the IRS. Can I phone the IRS and get the slip information?
Hi Nick,
If you know your employer filed it with the IRS, you should get them to provide one to you as well. On the other hand, yes, you may phone the IRS and get them to fax over your slips they received. This may take a few days.
Best Regards,
Allan Madan and Team
My Canadian employer did not issue me a W2 as they should have, but I know they did file one with the IRS. Can I phone the IRS and get the slip information?
If you know your employer filed it with the IRS, you should get them to provide one to you as well. On the other hand, yes, you may phone the IRS and get them to fax over your slips they received. This may take a few days.
I’ve been told I only have to pay US taxes if I become a tax resident of the US, which means more than six months in the US. I work in the US for a Canadian company.
Hi Paul,
Although you may not be considered US resident for tax purpose if you don’t meet the substantial presence test (explained below), you will still be liable for US tax on any employment income that you earn while physically working in the US.
In Canada, you will also have to report that income but you will be granted foreign tax credit by the CRA to eliminate double taxation.
Physical presence test is calculated as below:
1/6 of numbers of days present in the US in 2nd previous year
1/3 of number of days present in the US in prior year
Full number of days present in the US during the current year
If the aggregate of the number above exceed 183, you may be considered US resident for tax purpose.
I am a business owner who just signed up with a firm out of China to start their North American Operation. My income will be from China, however, they have incorporated a business in the US that I will need to manage from home and sometimes the office in NJ. I was planning on putting the income through my Canadian corporation but am not sure how to handle having to manage the with the possible tax as I will be in the US up to 5 days per month. I would appreciate any advice you may have.
Hi Shawn,
Thanks for contacting me. You have two options:
1. Become an employee of the US company. In this case, you will receive a W2 slip and payroll taxes will be deducted from your paycheques. You will file a US Non Resident Return annually and pay US income taxes.
2. Invoice your US customer through your Canadian corporation. Your company will need an EIN (US Tax ID Number) and will need to complete form W8-BEN-E so that taxes are not deducted from payments made to your company. Based on the limited number of days that you plan on being in the US, your company will not have to pay US income taxes.
I can discuss these options further with you if you would like to.
Hello,
I am a Canadian company sending my emploee to the states for 6 months.. during that time do I pay her her in Canadian or US funds ? Does it make a difference if she is a dual citizen? Also while she is down there do I take her monthly source deductions as usual? (Cpp, ei, and tax ) and continue to remit them to the Canadian government with the rest of the employees deductions ?
Thank you
Hi Miranda,
Thanks for your questions. As a Canadian employer sending a Canadian resident employee to work in the US, you must register for an EIN and deduct American payroll taxes from that employee’s pay-cheques. You must also issue a W2 (US employment income slip) to that employee for the salary earned in the US. Since the employee is a Canadian resident, you must also deduct Canadian payroll taxes from his/her pay-cheques. In order to avoid double taxation, please have your employee complete a TD1-Form to reduce Canadian payroll taxes by the amount of the estimated US foreign tax credit he/she will receive upon filing a Canadian personal tax return. A T4 must be issued to this employee and this T4 should report the total salary paid in the year.
As a US citizen and a tax resident of Canada, the employee must declare his/her worldwide income on both her Canadian and US personal tax returns. It does not matter if you pay the employee in US or Canadian dollars.
Hi,
I am a Canadian company working in Canada for a US based company . All work will be done in Canada itself and no employee will go to US. Is there anything I have to worry about US taxation ?
Regards
Rajeev
Hi Rajeev,
Do not charge GST/HST to your US customer. File an 1120-F (US corporate tax return for a foreign corporation) each year. Attach form 8833 the return to claim an exemption from US corporate income taxes. Your Canadian company will also need a US EIN.
“As a Canadian company working in Canada performing work for a US company, what taxes do I have to be aware of?
The US company has a CA customer and pays me to do the work in Canada.
Thanks in advance,
Lars Storm”
Hi Lars,
Your Canadian company will not be liable for US corporate taxes since it’s only operating in Canada. Your US client may ask for a US Tax ID # for your Canadian Company, known as an EIN. Your US client may also require a completed copy of form W8-BEN-E, so that they do not have to deduct taxes from payments made to your Canadian company. We can help you with this.
“Hi
If you are a Canadian Corp, we would like to know if we need to withhold US tax (30% rate) from workers sent to the US (these are also Canadian Inc). I understand there are tax treaty’s in place.”
Hi Monica,
When sending employees to work in Canada, Canadian payroll taxes must be deducted from their paychecks. This means your US company will have to register for a Canadian payroll number and be in compliance with Canadian payroll laws.
“Hi,
What’s the tax consequences of a US citizen as an employee working in the US but working for a Canadian Company, but gets paid salary in USD?
Thanks!”
Hi May,
If you are working in the US for a Canadian company, you should receive a W2. Use the W2 to prepare your US tax return as you normally do.!
Hi Allan,
I have a question regarding withholding tax. We need to make a payment to Canadian company for the event conducted by them. can you please let me know being a US incorporated company how much we need to deduct as withholding tax (percentage) while making a payment to Canadian company for event nature of activity.
Regards,
Viju
Hi Viju,
You are supposed to deduct 30%, unless your Canadian vendor supplies you with a completed form W8-BEN-E and EIN.
Hi. I am a Canadian Citizen married to an American permanent resident of Canada. The Canadian company I work for wants us to move to Texas permanently but continue to pay me from Canada. What hurdles do I face in this situation?
Hi Zane,
You should fill out form NR73, Determination of Residency Status, and file this with the CRA in order to establish that you are a non-resident of Canada (after moving to Texas). Provide the notice of determination issued by the CRA to your Canadian employer. Furthermore, your Canadian employer should deduct US payroll taxes and issue a W2 (employment income) slip to you. Canadian payroll taxes should not be deducted from your paychecks if you are a non-resident of Canada and are not working in Canada.
In addition, you will have to file a US return each year and pay US income taxes.