Hiring an Employee Across the US–Canada Border

Which country's payroll rules apply when the employee works across the border?

Start with where the employee actually performs the work. A foreign employer can owe payroll withholding and reporting in that country; its place of incorporation, bank account and pay currency do not decide the answer. US wages for US work can be subject to US withholding and employment taxes, while a non-resident employer with an employee working in Canada generally has Canadian withholding, remittance and reporting duties (IRS: foreign employer wages; CRA: T4001).

Separate three questions before choosing payroll: where each workday takes place, which country covers pension or social security contributions, and which state or province sets local deductions. The US–Canada social security agreement generally assigns pension coverage to the country of work, with a temporary assignment exception. It does not decide income tax withholding, Canadian employment insurance (EI), or state and provincial obligations.

For short visits, treaty Article XV can leave wages taxable only in the worker's residence country if work-country pay does not exceed $10,000 in that country's currency, or if presence is no more than 183 days in any 12-month period beginning or ending in the fiscal year and the pay is neither paid by a resident employer nor borne by a local permanent establishment. Article IV's tie-breaker can change treaty residence. A treaty exemption alone does not stop payroll withholding; use the applicable relief process below.

Can a Canadian business hire a US employee without a US company?

Yes, a Canadian business can generally remain the direct employer and register for US payroll. US payroll registration does not itself require forming a US corporation; whether the worker creates other US business tax or registration duties is a separate, fact-dependent question (IRS: foreign employer wages; IRS: employer identification number).

The Canadian employer must treat wages for US work as US payroll wages when the applicable rules require it. The IRS says US work for a foreign employer is generally subject to Social Security and Medicare withholding, and to federal unemployment tax unless an exception applies (IRS: Social Security and Medicare; IRS: unemployment tax). A worker hired locally in the US usually does not qualify as someone temporarily sent from Canada under the social security agreement.

For the business tax and entity choice, see Canadian business expanding into the US.

What US accounts are needed before the first paycheck?

Get a federal employer identification number (EIN), then check the work state's withholding, unemployment, wage reporting and new-hire requirements before paying the employee. A Canadian business with its principal place of business outside the US can apply for an EIN through the IRS international process using Form SS-4 or by phone (IRS: EIN).

For the domestic setup sequence, see Setting up US payroll. If the worker also works in another state, see Employees in another state.

Can a US business hire a Canada-based employee directly?

Yes. The US business can generally employ the worker directly and register with the CRA as a non-resident employer. The CRA says non-resident employers with employees providing services in Canada have the same Canadian withholding, remitting and reporting obligations as resident employers (CRA: T4001).

A US pay account alone does not discharge those Canadian obligations. Nor does the CRA's non-resident employer certification normally help for an employee who lives and works in Canada: the exemption described by the CRA is for qualifying non-resident employees who work in Canada for a limited time and meet treaty conditions (CRA: T4001). Whether the worker creates Canadian business tax or an entity choice belongs in US business expanding into Canada.

Canadian payroll does not automatically end US payroll duties. Ordinary work performed in Canada is outside US federal unemployment tax, even for a US citizen working for an American employer: the statute excludes work in a contiguous country with a US unemployment agreement, and Canada has one (US Code: FUTA employment definition; US Department of Labor: agreement). For a US citizen or resident, check US income-tax withholding separately; an exception can apply when Canadian law requires income-tax withholding (IRS: income-tax withholding). Check Social Security and Medicare under the coverage agreement.

How does a US employer open a Canadian payroll account?

Use the CRA's non-resident business registration to request a business number (BN) and a payroll deductions (RP) account. A business incorporated or located outside Canada can request both in the same online application; the CRA also lists a mail or fax Form RC1 route when online registration is unavailable (CRA: non-resident registration).

Before registration, collect the business's legal name and address, ownership and contact details, the worker's start date and work location, and the expected first pay date. Then obtain the employee's social insurance number and completed federal and, where applicable, provincial TD1 forms, determine the province of employment, and calculate deductions before the first payment (CRA: T4001). Registering for payroll does not itself resolve GST/HST or corporation tax registration; those depend on separate facts.

What Canadian tax, CPP and EI must be deducted, and which province applies?

For work in Canada, a US employer generally deducts Canadian income tax and EI if the employment is insurable. CPP requires a separate check: without a Canadian place of business, the employer's authorized signer can request optional CPP coverage for eligible employees who usually live and work outside Quebec using Form CPT13. The employer selects a coverage start date; CRA says the approved arrangement cannot be canceled. If Canadian coverage is not effected, the social security agreement assigns US coverage. If the employer has a Canadian place of business, or the worker was sent temporarily from the US, check the applicable pension coverage rules. The employer pays its required CPP and EI shares (CRA: Form CPT13; SSA: agreement, Article V).

Check EI separately if US unemployment insurance also applies: Canadian EI excludes employment for which premiums must be paid under a US state's unemployment insurance law. Use the CRA payroll calculator or tables for the applicable pay period and province; the worker's home address does not by itself set the province of employment (CRA: T4001; CRA: province of employment).

If Quebec payroll applies, register for Revenu Québec source deductions online or with Form LM-1-V, withhold Quebec income tax, QPP and QPIP as required, and file RL-1 slips and the RL-1 summary by the last day of February following the calendar year to which the slips apply. A CRA RP account alone does not cover those filings (Revenu Québec: registration; RL-1 filing; CRA: Quebec deductions). The general Canadian payment routine is in Running payroll.

What changes for Social Security, Medicare or CPP after a move or temporary assignment?

The US–Canada social security agreement generally puts an employee under the pension system of the country where the work is done. A qualifying employee normally employed and covered in one country who is sent by an employer with a place of business there to work for the same employer (or a qualifying affiliate) in the other country can remain in the home system if the assignment is expected to last no more than 60 months; the issuing country supplies a certificate of coverage as evidence for exemption from the other system (SSA: agreement, Article V and administrative arrangement).

An assignment expected to exceed the ordinary limit, or sent by an employer without a place of business in the sending country, needs prior mutual consent from both countries' competent authorities to keep sending-country coverage (SSA: agreement, Article V).

For US work, first apply the social security agreement: it normally assigns pension coverage to the US. Canadian CPP can continue instead of US Social Security and Medicare when an agreement exception applies, such as a qualifying temporary assignment documented by a Canadian certificate of coverage. Check Canadian EI and income-tax withholding separately under their own rules (SSA: agreement; CRA: employment outside Canada).

Which deposits, returns and year-end slips follow?

Once the employer is registered, paying the worker creates recurring deposit and reporting duties. A payroll account is only the start; reconcile deposits to the quarterly or annual returns and to the employee's year-end statement (IRS: Publication 15; CRA: T4001).

Late US deposits can draw 2% to 15%, depending on delay and notice. CRA generally applies 3% to 10% on late remittances above C$500, rising to 20% for a repeated knowing or grossly negligent failure (IRS: deposit penalties; CRA: late remittances).

Special US rules can apply if the employee is a nonresident alien claiming a treaty exemption. The employee signs Form 8233 for each tax year; the employer signs its acceptance, sends a copy to the IRS within 5 days and waits at least 10 days after mailing before stopping withholding. Report exempt wages on Forms 1042 and 1042-S rather than in Form W-2 box 1 (IRS: Form 8233 instructions; IRS: Publication 515). Confirm the worker's tax residence and claimed exemption first.

When must payroll change if an existing employee moves?

Reassess before the first paycheck covering work in the new country. If an Ontario employee moves to Texas and works there, Canadian payroll alone may not meet US payroll duties. Check US federal and Texas employer duties, then separately test whether Canadian CPP, EI or income-tax withholding continues. Record work dates and the worker's residence, Canadian reporting location and pay source, and any coverage certificate; a move can affect only part of a pay period (IRS: foreign employer wages; CRA: employment outside Canada).

Ask whether the move is temporary, whether the same employer sent the worker, and whether a coverage certificate exists. Also confirm whether the worker will visit the former country for work. Canadian employer certification for short visits concerns qualifying non-resident employees, and does not exempt a Canada-resident worker's regular Canadian pay (CRA: T4001). Canadian work visits by an employee can trigger employment withholding under CRA's employer guide; the separate services guide addresses fees paid to a non-resident business (CRA: Regulation 105 guidance).

For a treaty-exempt US-resident employee visiting Canada, a qualifying US employer can seek CRA certification on Form RC473, received at least 30 days before Canadian work. The employee must work in Canada for less than 45 days in the calendar year or be present for less than 90 days in any 12-month period including payment; certification lasts up to two calendar years. Otherwise, the employee (or authorized employer) can seek a Regulation 102 waiver on Form R102-R at least 30 days before work or first payment. Neither relief covers ordinary pay to a Canada-resident worker (CRA: certification; CRA: waiver).

If a third party employs or pays the worker, who owes payroll tax?

The contract and the actual employer relationship determine the filing arrangement; paying an intermediary does not by itself transfer an employer's tax liability. The IRS says an employer using a payroll service provider generally remains responsible for deposits and returns, while certain formally designated agents or certified arrangements have different liability rules (IRS: Publication 15). The CRA likewise says an employer remains responsible for a T4 return's accuracy, balance and deadline when a service bureau files it (CRA: RC4120). In Quebec, a payroll service that authorizes or causes wages to be paid can itself share liability for source deductions under Tax Administration Act section 24.0.3.

If an employer of record claims to be the legal employer, get the employment agreement, the named employer on pay statements, the tax account numbers used, and proof of deposits and year-end slips. Check the arrangement in both countries and the work state or province before treating the intermediary's payroll as your own compliance. A payroll service contract and a contract that changes the legal employer have different effects (IRS: third-party payer arrangements).

Payroll debt can reach people. A US sole proprietor owes the business's employment taxes directly; a general partner can owe debts incurred while a partner, as New York and Ontario law illustrate, while limited liability partnerships differ (IRS: sole proprietors). Under Internal Revenue Code section 6672, an officer, director, partner or other person who controls withheld taxes and willfully fails to pay them can owe a penalty equal to the full unpaid withheld income tax and employee Social Security and Medicare tax; IRS collection generally runs 10 years after assessment, subject to statutory exceptions (IRS: penalty; 26 USC 6502). Canadian corporate directors at the time of failure can owe unpaid withholding, CPP and EI, plus interest and penalties, under Income Tax Act section 227.1, CPP section 21.1 and Employment Insurance Act section 83. The Canadian recovery action must begin within two years after the person last ceased to be a director; statutory collection prerequisites and a due-diligence defense apply.

Quebec has its own director rule under Tax Administration Act sections 23–24.0.2. Directors can owe unremitted Quebec tax, QPP, QPIP and employer contributions; for income tax never withheld from a Canada-resident employee, they generally owe related interest and penalties but not that unwithheld tax itself. Revenu Québec must assess a director within two years after the director last ceased, with statutory collection prerequisites and reasonable-care or lack-of-awareness defenses.

Example

Illustrative only; all amounts are US dollars. A Toronto company hires a person who lives and works only in New York for a US$60,000 annual salary, paid as US$5,000 each month. The Toronto company can remain the direct employer. Before the first paycheck, it gets an IRS EIN, checks New York withholding and unemployment registration, collects Form W-4, and sets up US deposits. It separately reports the new hire to New York within 20 days of the hiring date (New York: hiring employees). It records each New York workday, reports the US wages through the applicable US payroll returns and Form W-2, and checks whether any Canadian CPP or EI rule applies to its particular employee. The example does not calculate tax or assume that hiring alone settles the company's US business tax position.

Different for you?

• Your US worker also works in Canada: Canadian employment withholding may apply to those workdays. Check CRA's employer guide for the work pattern.
• Your US employee works in more than one state: see Employees in another state.
• Quebec payroll applies: register with Revenu Québec and file RL-1 slips as well as the CRA T4.
• Your Canadian business may have a US taxable presence: see Canadian business expanding into the US.
• Your US business may have a Canadian taxable presence: see US business expanding into Canada.
• The worker needs to report cross-border wages personally: see Working in the US for an employer abroad or Working across the border.
• The worker may be a contractor rather than an employee: see Contractors who may be employees or Canadian payroll audits and worker-status rulings.
• US deposits or returns were already missed: see Behind on payroll taxes.
• You are deciding between direct employment and a third-party employer: gather the contracts, work locations and dates, prior pay records, registrations, and any coverage certificate before seeking bookkeeping and payroll help.