Many American companies have operations in Canada. In this day and age, many have Canadian employees, even if they don’t necessarily have Canadian operations. Whether you’re thinking about expanding into Canada, debating hiring a Canadian as the perfect fit for a new role, or have had a long-standing operation in Canada, you probably still have questions about paying these cross-border employees.
Paying Canadian employees can be convoluted, but it doesn’t need to be difficult. Here are a few things American companies should keep in mind when it comes to paying their Canadian employees.
1. The Paperwork Might Look Different
For your American employees, you likely issue a W-2. If the person is a contractor, you may need to issue a 1099. There are a number of different forms depending on how the employee is classified, how they’re taxed, what benefits you offer, and so on.
You shouldn’t be surprised to hear there’s paperwork for your Canadian employees. It also shouldn’t be shocking to discover the paperwork might be different. If you’re hiring the person on as an employee, you’ll still need to issue a W-2. In some cases, such as when the person can claim treaty benefits, you may need to issue different forms.
You should always check with the IRS or with a knowledgeable employer of record (EOR) to find out what forms you need and when you need to issue them by. Filing the right paperwork to start simplifies the rest of the process.
2. Think about Exchange Rates
Right now, the US dollar is valued higher than the Canadian dollar. You can buy more Canadian dollars with a single US dollar. This might tempt American companies to pay their Canadian employees in Canadian dollars.
This can lead to complications with the exchange rate as the value of the Canadian dollar goes up and down. Why does it matter? You could end up paying Canadian employees more or less every month. If you pay an employee $3,500 Canadian per month, you’d need to pay them $2,700 in March 2018. In January 2018, this same amount Canadian would have cost you $2,800 US.
Many American companies find it easier to pay their Canadian employees in US funds since they don’t need to worry about differences in currency valuation.
3. Proper Withholding Can Be Complicated
Payroll tax withholding can be a bit challenging to figure out for your American employees. For your Canadian employees, it can be a whole other ball game.
Canada and the US have treaty agreements to avoid double-taxation, meaning your Canadian employees will most often pay taxes in Canada and not in the US. Their income is subject to Canadian payroll tax legislation. This can vary by province, so American companies need to pay attention to the rules where they operate or where their employees live and work.
In some cases, employees may be exempt from paying tax. In other cases, they might be required to pay tax in both Canada and the US.
As you can see, payroll withholding and taxation for Canadian employees working for American companies can become quite complicated. If you’re not sure, consult with the experts. They’ll be able to steer you in the right direction.
4. It Can Be Easier
These are just a few of the problems American companies frequently encounter when they need to pay Canadian employees. There are more.
If you’re feeling overwhelmed or unsure about the best way to go about paying your Canadian employees, consider partnering with a Canadian employer of record. They can help you navigate the tricky waters of cross-border payroll and taxation.