The Essential Guide to International Employer Tax Forms (IRS & CRA)

This comprehensive guide outlines the essential tax forms required by the IRS and CRA for employers. Its goal is to help with successfully navigating the specific filing obligations and compliance standards necessary for managing a cross-border workforce between the United States and Canada.

Navigating global payroll and tax compliance when employing workers in multiple jurisdictions ( or even just hiring a non-resident in one country), is the single biggest challenge for an international employer. While hiring a U.S. citizen or permanent resident is relatively straightforward, the rules change entirely when you hire a Non-Resident Alien (NRA) or a worker residing in a country like Canada.

Failure to file the correct international employer tax forms can result in severe penalties, back taxes, and interest from the IRS, CRA, and other taxing authorities.

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You’ll need to submit some tax forms when you first hire an employee, while others must be issued annually or updated from time to time. Your specific filing obligation depends entirely on your worker’s tax residency status.

Here is a breakdown of the essential forms you need to know, divided into the two primary compliance areas for international businesses:

Section 1: Forms for US-Based Workers (Residents & Citizens)

These forms apply when you hire a US citizen or a resident alien (an individual who meets the IRS’s substantial presence test or holds a Green Card).

1. Form W-4: Allows You to Withhold Taxes

The first form you’ll have any employee fill out is a W-4 (Employee’s Withholding Certificate). This form authorizes you to collect and withhold income tax from the employee’s wages. If an employee doesn’t fill it out, you can’t pay them. It’s in their best interests to complete this form and allow you to file it as soon as possible.

2. Form I-9: Verifies Employment Eligibility

Everyone you hire for your business operations in the US should be legally allowed to work. That’s why they must fill out Form I-9, Verification of Eligibility for Employment. If an employee refuses to fill out and file an I-9, they may not be eligible to work.

Hiring workers who aren’t eligible to work in the US can have repercussions on your business. You may be penalized by the IRS or even subject to visits from immigration officers. It can also disrupt tax withholding and payroll, as employees who are not eligible for employment may also not fill out Form W-4 discussed above.

3. Form W-2: Must Be Filed for Income Tax

As an employer, you’ll also need to fill out and remit Form W-2 (Wage and Tax Statement) each tax year. If you pay any employee more than $600 US in a year, you must complete this form and file it with the IRS. A copy of your filing should also be sent to the employee for their records. Legally, you must send out W-2s before the end of January each year for the previous year.

4. Form 1099: Is for Contractors

There may be times when you hire workers who don’t quite fit the bill as “employees.” These people are contractors, and you’ll need to file Form 1099 (Miscellaneous Income or Nonemployee Compensation).

Contractors engage with you on a business-to-business case, so you don’t need to withhold income tax from them. They don’t need to fill out Form W-4. Instead of a Form W-2, you’ll provide them with Form 1099 at the end of each tax year. Make sure you’re classifying your employees and contractors correctly, as employee misclassification can result in severe penalties for your business.

5. Form SS-5: Must Be Filled Out If an Employee Doesn’t Have a Social Security Number

If you hire a new employee, but they don’t yet have a Social Security number, then they need to apply for one. Form SS-5 is the form they’ll need to fill out. You’ll need to be sure the employee obtains a Social Security number before you can proceed with the rest of the forms.

Section 2: Essential International Forms for Non-Resident Workers

These forms are the true focus of international employer tax compliance, as they dictate withholding and reporting rules for payments made to non-resident entities or individuals.

6. Form W-8BEN: Certification of Foreign Status

This is arguably the most important form for a non-resident individual (e.g., a contractor or employee working outside the U.S. who qualifies as a Non-Resident Alien or NRA).

• Employer’s Obligation: The employer/payer must collect Form W-8BEN from the non-resident individual to confirm their foreign status and to claim any benefits under a Tax Treaty (which can reduce the statutory 30% withholding rate on U.S. source income to 0%).
• Result of Non-Compliance: Without a completed W-8BEN, the employer is legally obligated to withhold tax at the full 30% statutory rate.

7. Form 1042-S: Foreign Person’s U.S. Source Income Subject to Withholding

This form is the annual reporting slip that an employer uses in place of Form W-2 or 1099 for non-resident workers.

• Employer’s Obligation: The employer/payer files this form annually to report income paid to the NRA and any tax that was withheld (if applicable).
• Key Distinction: The 1042-S covers various types of income, including wages that are exempt from withholding under a tax treaty. The employer uses the specific Income Code on the 1042-S to specify the type of income reported.

8. Form 1042: Annual Withholding Tax Return

This is the employer’s master reconciliation form for all non-resident tax activity for the year.

• Employer’s Obligation: The employer files Form 1042 annually with the IRS to summarize the total amount of US source income paid to all non-residents and the total tax withheld and deposited throughout the year (as reported on all 1042-S forms).

9. Form NR4 (CRA): Statement of Amounts Paid or Credited to Non-Residents of Canada

Since Canadian compliance is a key part of the competitor landscape, international employers must be aware of Canada Revenue Agency (CRA) rules.

• Employer’s Obligation: The NR4 is Canada’s equivalent of the US 1042-S. The payer must file this form to report amounts paid to a non-resident of Canada that are subject to Part XIII tax (a Canadian withholding tax, usually 25%).
• Tax Treaties: Similar to the IRS, the employer must collect the NR300 series forms (NR301, NR302, NR303) from the non-resident to support the application of a reduced withholding rate under a tax treaty.

10. Compliance for Services in Canada (Regulation 105)

Employers paying non-resident contractors for work performed in Canada have a special obligation.

• Employer’s Obligation: The payer must withhold 15% of the gross payments made to a non-resident for services rendered in Canada. The employer can apply to the CRA for a waiver (using Form T1261) to reduce or eliminate this withholding tax.
  

Don’t Risk Global Penalties

The rules for W-2 and 1099 are simple compared to the complexity of W-8BEN, 1042-S, and NR4 filings. Incorrectly classifying or withholding tax from a non-resident can subject your company to significant penalties, back taxes, and interest from the IRS or CRA. An international employer needs expert guidance to ensure global compliance. Let Payroll Edge handle the legal aspects for you. Contact us to find out how we can help ensure a seamless and fully compliant process and avoid potential penalties.