US-Canada tax experts reveal the most common pitfalls that Canadian companies face when sending employees to the US.

What is an ITIN?

Are you a Canadian corporation that’s sending one or more of your employees to work in the US? If yes, then be sure to avoid the following three most common mistakes made by small to medium size Canadian companies when it comes to US-Canada payroll tax. Also, for prudent steps that any Canadian companies must take when sending their employees to the US, see my article on Five practical steps to take before sending your employees to the US.

1) Not issuing W-2 form for the days worked in the United States

It is easy for Canadian small to medium size companies to think that they only have to issue a T4 to report their employees’ salary for the year. However, if an employee worked partly across the border, then, in addition to the T4, the company must issue a W-2 (equivalent to T4 in the United States) for the portion of the wages earned in the United States. For Example,

Employee: John Doe
Annual salary: $100,000
Time spent working in the United States: 1/3 of the year

Then, the following salary will be reported on each respective forms:
T4: $100,000
W-2: $33,333.33

“Frequently, we only receive a T4slip from employees when they work partly during the year outside Canada. The W2 is missing!” says US Tax Accountant, Allan Madan.

The penalty for late filing W-2 forms to the IRS can accumulate and become significant. Therefore, it is advised that small to medium size companies consult a professional in Canada-US tax on this issue.

2) Not filing the US Personal Income Tax Return

If an employee physically works in the United States for part of the year, the salary earned from the work will be treated as US-source income and subject to US tax. This means that the employee will be required to file a US Personal Income Tax Return for that year even if the employer makes a mistake of not issuing a W-2 (see mistake #1).

The penalty for not filing in the United States is more severe than the penalty in Canada. In the US, it is 5% of your tax balance for each month the tax return is late, up to a total maximum penalty of 25%, plus interest on the penalty.

Therefore, as an employee, be clear that if your employer sends you to work temporarily in the United States, you will face US tax filing requirements.

For first time US Personal income Tax Return filers, you must also apply for the Individual Tax Identification Number (ITIN) with the IRS. With the recent legislative changes, obtaining the ITIN has become more difficult and time-consuming. Therefore, it is highly advisable that you consult a professional in US-Canada tax if you have US tax filing requirements.

3) Withholding social security tax on wages earned in the United States

Nearly all of the employees sent to work in the United States on a temporary basis will return to Canada and continue to live in Canada. Therefore, there is minimal benefit to contributing to the US social security system while working across the border. In response, Canada has established Social Security Agreements with the United States and with over 50 countries around the world to allow employees working in a foreign country on a temporary basis to continue contributing to their Canadian Pension Plan through monthly source deductions.

This form is CPT56 – Certificate of Coverage and should be completed by the employee and employer well before departing Canada. By filing this form, the employer will withhold employee CPP contributions instead of US social security and Medicare tax.

Cross border payroll taxation is a very complex area of US tax. As such, we highly advise that you consult an expert who is well knowledgeable in both the US and Canadian tax.