Working Remotely for a Canadian Company from the US: Tax and CPP

Working remotely for a Canadian company from the US: which country taxes your pay?

The US does, once you are resident in the US and not in Canada. Under Article XV(1) of the Canada–US tax treaty, pay is taxable only in the country where you live, unless the work is done in the other country. A US resident working from a US home pays US tax on that pay, and Canada generally has no claim to it, even though the employer, payroll and bank are Canadian.

Four things make a case not simple:

• Days you work in Canada. Canada can tax pay for those days, and the usual short-stay exemption does not help when the employer is Canadian.
• The year you move. Pay before and after the move date is taxed differently, and you may be resident in both countries for part of the year. See the dual-status return in the year you move.
• Family or home still in Canada. Canada may still treat you as resident and tax all your pay, until the treaty's tie-breaker rules settle it. See Canadian tax residency.
• No US payroll. Nothing is withheld for the US, so you pay federal and state tax yourself, and US Social Security may go unpaid.

Gather your move date, a calendar of where you worked each day, your payslips and T4, and any letter from your employer about your new status.

Should my Canadian employer stop deducting Canadian income tax?

Generally yes, once you are no longer resident in Canada. Income Tax Regulations section 104(2) says no tax is withheld for an employee who is neither employed nor resident in Canada, except on pay for duties performed in Canada and certain pay of former residents. The payroll side, including what to tell payroll and how to stop deductions, is in working for a Canadian employer from abroad.

Days I fly back to work in Canada: does Canada tax that pay?

Yes, Canada can tax pay for work you do while in Canada. The treaty gives two ways out, and only one usually fits a Canadian employer (Article XV(2)):

This is the common trap: a few weeks at the Toronto office is well under 183 days, but the short-stay rule does not apply because your employer is Canadian. Only the small-amount test can exempt that pay. If the pay for Canada workdays is over the limit, Canada taxes all of it, you file a Canadian non-resident return, and you may claim the Canadian tax as a credit on your US return; see claiming Canadian tax on your first US return.

Payroll may still withhold on Canada workdays even when the treaty exempts the pay, unless the CRA approves a waiver first; see working for a Canadian employer from abroad.

Social security follows the same split: the agreement covers work by the country where it is done, so pay for Canada workdays may attract CPP and EI rather than US Social Security. Ask payroll to treat those days separately.

Do I still pay CPP and EI if I live in the US, or US Social Security?

Usually US Social Security, not CPP. Under the Canada–US social security agreement, employment is covered only by the system of the country where the work is done (CRA: IC84-6). Work done from your US home is US work.

The exception is a temporary transfer. If your employer sends you to work in the US for a set time, you normally stay in CPP and are exempt from US Social Security and Medicare tax, for up to 60 months; the two countries can agree to extend that. Proof is a certificate of coverage, requested on Form CPT56 and given to the employer; the IRS says an employee claiming the US exemption must secure one. A permanent move, where you chose to live in the US and keep the job, does not fit this exception.

Canada's own tests point the same way (CRA: employment outside Canada):

The CRA adds that an employer cannot use Form CPT8 to keep you in CPP where Canada has a social security agreement with the country of work, as it does with the US. If you were in the Quebec Pension Plan, QPP coverage is handled separately; see working in the US for an employer abroad.

Who pays US Social Security and Medicare if the employer has no US payroll?

The employer. The IRS says people employed in the US by a foreign employer are generally subject to Social Security and Medicare withholding by the foreign employer, unless a social security agreement exempts them. Social Security applies to pay up to US$184,500; Medicare applies to all of it.

If your employer has no US payroll account and does not withhold, that gap is not settled by your own return alone: the duty sits with the employer, and how the missed tax gets paid depends on your facts and the employer's response. Raise it with the employer early; the setup is covered in hiring an employee across the border. How unwithheld wages are reported on your return, and when Form 8919 applies, is in working in the US for an employer abroad.

How do I pay US federal tax with no US withholding?

Through quarterly estimated payments on Form 1040-ES. Publication 505 says you generally must pay estimated tax if you expect to owe at least US$1,000 after withholding and credits. Canadian tax taken off your pay is not US withholding and does not count.

To avoid the underpayment penalty, pay in through the year the smaller of:

In the year you arrive you usually have no full-year US return for the year before, so the prior-year target is not available; plan on the current-year one. The first payment is due April 15 if you have income that quarter; if your US income starts later, the first payment is due by the date for that later period (Publication 505; Form 1040-ES). How to size and make payments is in quarterly estimated tax payments.

Do I owe state income tax on the pay?

If your state has a personal income tax, it generally taxes a resident's wages, and a Canadian employer that has not registered in your state will not withhold it. You then make the state's own estimated payments, which have their own dates and penalty rules. Your state may also tax pay for Canada workdays, and state credits for Canadian tax vary. See remote work and state income tax and which US state to move to from Canada.

What slip do I get, and how does the pay go on my US return?

You will usually get a Canadian T4, with no income tax in it if payroll stopped deductions, and no US Form W-2. Report the pay for your US-resident period (all of it, if you were a US resident all year) on your Form 1040 in US dollars anyway; the T4 is not a W-2 and its tax box is not US withholding. The line to use and how to convert is in working in the US for an employer abroad.

If Canadian tax was withheld on US workdays, ask the employer to correct the slip, or recover the tax on a Canadian return; see working for a Canadian employer from abroad. It is not a US foreign tax credit, because the US, not Canada, has the right to tax that pay.

What changes if my employer makes me a contractor?

If you truly become a contractor, Social Security works differently: you owe US self-employment tax yourself, and the social security agreement assigns self-employed people by where they live, not where the payer is (CRA: IC84-6). Whether you are a contractor depends on how the work is done, not on what the employer calls it. See self-employment tax abroad and totalization.

What should I give my employer, and what should I keep?

Give payroll your new US address, the date you stopped being resident in Canada, whether the move is permanent or a set-term transfer, and, before each trip, the dates you will work in Canada. Keep a dated calendar of where you worked each day, your payslips and T4s, any certificate of coverage, and proof of every estimated payment.

Example

Illustrative only. Pay is in Canadian dollars; the rates and day counts are round numbers.

Moving to Charlotte with the same job

An analyst earns C$110,000 a year. She moves from Toronto to Charlotte on 1 March and keeps working from home. From March, her work is done in the US, so under the social security agreement it falls under US Social Security, not CPP; EI stops because she no longer lives in Canada; and income tax withholding stops because she is no longer resident or employed in Canada. The US and North Carolina tax her pay from that date. Her employer has no US payroll, so she makes federal and state estimated payments for the quarters after the move and asks the employer how US Social Security will be handled. For the move year she files a Canadian return for her January and February pay and a first US return for her pay from March; see the dual-status return.

Fifteen days at the Toronto office

The next year she spends 15 working days in Toronto. At about 230 workdays a year, that pay is roughly C$7,200, under the treaty's C$10,000 limit, so Canada cannot tax it. If payroll withheld Canadian tax on those days, she recovers it on a Canadian return. Had she spent 30 days there, about C$14,300, the whole amount would be taxable in Canada, because her employer is Canadian; she would file a Canadian non-resident return and claim that tax as a credit on her US return.

A two-year transfer to Seattle

A developer at a Calgary company is sent to its Seattle office for two years and will return. Because the transfer is temporary and within the agreement's limit, his employer can get a certificate of coverage on Form CPT56. With it, he stays in CPP and is exempt from US Social Security and Medicare tax on that work. Income tax is a separate question: where he is resident under each country's rules and the treaty decides who taxes his pay.

Different for you?

• You work in Canada for weeks at a time, or your Canada days push the pay over the treaty limit: a Canadian return and a US credit both turn on your workday records; get cross-border tax help.
• Your employer will not set up US payroll or keeps deducting Canadian tax and CPP: the fix runs through both countries; see hiring an employee across the border and get cross-border tax help.
• Your spouse, children or home are still in Canada: your residence decides which country taxes all of your pay; see Canadian tax residency and get cross-border tax help.
• This is the year you moved: you file a Canadian departure-year return and a first US return that may be dual-status; see the dual-status return in the year you move and get cross-border tax help.
• Months or years have passed with no US Social Security withheld or no estimated payments made: what is owed, by whom, and the penalties depend on your facts and your employer's response; get cross-border tax help.
• You have stock awards, a bonus or pay earned around the move: each country taxes its share by workdays; see stock awards and pay after a move and get cross-border tax help.
• You are in the US on TN status: see Canadians on a TN visa.
• You moved to a country other than the US: see working for a Canadian employer from abroad.
• You still live in Canada and work for a US employer: see working across the border.