Cross-Border Payroll: What an Employer Owes When the Employee Is on the Other Side of the Border

Payroll is territorial. The country where the work is performed generally has the first claim on withholding and social security contributions, and an employer with an employee working in the other country has to register there, withhold there, and remit there, unless a treaty exemption or the totalization agreement says otherwise. The employer's obligations do not depend on the employee's tax residency; they depend on where the employee sits when working. Remote work has turned this from an occasional expatriate problem into a routine one.

Full guide: Hiring a Remote Employee Across the Border: the Employer's Guide to Payroll, Permanent Establishment, and the EOR Shortcut

Key takeaways

• Canadian employer, employee working in the US: the employer must register with the IRS (EIN), withhold federal income tax and the state's income tax, pay and withhold FICA (Social Security and Medicare) unless a totalization certificate of coverage keeps the employee on CPP, pay federal and state unemployment tax, and comply with state workers' compensation and labour law. A US employer of record or a US subsidiary is the usual solution.
• US employer, employee working in Canada: the employer must open a CRA payroll account, withhold Canadian federal and provincial income tax, CPP, and EI (unless a certificate of coverage keeps the employee on FICA), remit monthly, issue a T4, and comply with provincial employment standards. A Canadian professional employer organization or subsidiary is the usual solution.
• Treaty exemptions (Article XV) can exempt the employee's wages from the work country's income tax on short stays, but the employer's withholding obligation is separate and requires a waiver (Canada) or Form 8233 (US) to lift.
• Totalization: the US-Canada agreement assigns a worker to one country's social security system; a certificate of coverage from the home country exempts the employer from the other country's contributions for transfers of up to five years.
• Permanent establishment: an employee's fixed workplace in the other country can create a PE for the employer, adding corporate tax filings to the payroll ones.

Canadian employer with a US-based employee

An employee working from a home office in Florida for a Toronto company is performing services in the US. The employer must obtain an EIN, register for Florida reemployment tax, withhold federal income tax on the wages (Form W-4, Form 941 quarterly deposits), pay the employer's share of FICA (7.65%) and withhold the employee's share unless a Canadian certificate of coverage applies, pay FUTA, and carry Florida workers' compensation. States with income tax add state withholding registration. A Canadian employer that does this directly is also exposed to a US permanent establishment through the employee's fixed workplace, and to state nexus for corporate tax.

The practical alternatives: engage a US employer of record, which becomes the legal employer for payroll purposes; or form a US subsidiary that employs the worker and bills the parent for the services at arm's length.

US employer with a Canada-based employee

An employee working from Vancouver for a Seattle company is performing services in Canada. The employer must open a CRA payroll program account (a business number), withhold federal and BC income tax using the employee's TD1 forms, withhold and match CPP contributions and withhold and pay 1.4 times the employee's EI premiums (unless a US certificate of coverage applies), remit on the CRA's schedule, issue a T4 by the end of February, and comply with BC's Employment Standards Act. Quebec adds a Revenu Québec payroll account, QPP, QPIP, and provincial withholding. The employer is also exposed to a Canadian PE through the employee's fixed workplace.

Non-resident employers can apply for certification under the CRA's non-resident employer program, which relieves withholding for employees exempt under the treaty who are in Canada fewer than 45 workdays in the year, but that covers business travelers, not resident remote workers.

Short-term assignments

For an employee who remains based in one country and works in the other for days or weeks, Article XV can exempt the wages from the work country's income tax if the employee is present 183 days or fewer in any twelve-month period and the pay is borne by a non-resident employer with no PE in the work country. The employer still has a withholding obligation until it is lifted: a Regulation 102 waiver or non-resident employer certification in Canada, a Form 8233 filed by the employee and submitted by the employer in the US. Social security follows the totalization agreement: a temporary transfer of up to five years stays on the home system with a certificate of coverage.

Shadow payroll and equalization

Employees transferred for a period but kept on the home payroll typically need a shadow payroll in the host country: a parallel calculation that reports and remits host-country withholding on the same wages without paying them twice. Tax equalization policies, under which the employer keeps the employee whole for the move, produce gross-up payments that are themselves taxable wages in both countries.

Worked example

A Toronto fintech hires a senior engineer who lives in Austin and will work remotely.

• Direct employment. EIN; Texas reemployment tax registration; federal withholding and FICA (no Texas income tax); FUTA; Texas workers' compensation. US PE exposure through the engineer's home office; Texas franchise tax nexus.
• Employer of record. A US EOR employs the engineer, runs the payroll, and bills the Toronto company. No US payroll registrations for the Canadian company; PE exposure reduced but not eliminated if the engineer concludes contracts.
• US subsidiary. A Texas subsidiary employs the engineer; the parent pays a cost-plus service fee documented at arm's length; Form 5472 for the related-party transactions.
• Recommendation. EOR for one or two US employees; subsidiary once there are several or the US business has its own revenue.

Official sources

"Employers and self-employed workers must request a certificate of coverage to establish an exemption from U.S. Social Security contributions." — Social Security Administration, Totalization Agreement with Canada, https://www.ssa.gov/international/Agreement_Pamphlets/canada.html

"Non-resident employers, who apply for non-resident employer certification, will not have to withhold and remit tax on the payments they make to non-resident employees who are working in Canada for a limited time and are exempt from tax in Canada under a tax treaty." — Canada Revenue Agency, Non-resident employer certification, https://www.canada.ca/en/revenue-agency/services/tax/international-non-residents/information-been-moved/rendering-services-canada/non-resident-employer-certification.html

Practitioner note

Remote work has made every small company a cross-border employer, and most find out when the employee's home-country tax authority sends a letter. The cheapest path for a Canadian company with a US remote employee is an employer of record from the first day; the most expensive is direct employment discovered on audit two years in.

See also: Planning a full move? Start with the Canada-to-US tax checklist and browse every corridor by city, province, and state.

Next step

Fairlight prepares the cross-border payroll registration, the totalization certificate of coverage, and the employer-of-record or subsidiary structuring for cross-border employers. See cross-border pricing or book a call.