Canadian HR Reporter - Ontario

CANADIAN HR REPORTER OCTOBER 2018 16 NEWS JOINT VENTURE BY: Understanding U.S. payroll obligations for Canadian employers Many companies face foreign obligations for reporting, withholding tax BY MARNI HALPERN AND JENNIFER SANTOS MANY Canadian companies may be faced with foreign obligations for reporting and withholding tax on wages paid to employees per- forming employment duties out- side of the country. Cross-border travel continues to be a common trend to meet business essential needs. Whether the business needs are for employment ser- vices directly connected to a es- tablishment in the United States or for servicing clients, Canadian employers should be aware of the U.S. payroll reporting and with- holding requirements for employ- ees working in the U.S. Withholding and reporting Canadian employers that have employees working in the United States are required to withhold U.S. income and other payroll taxes from the wages of these employees, if the wages are not exempt from U.S. taxation by the Internal Revenue Code (IRC) or the Convention Between Canada and the United States of America (the treaty). Generally, these taxes include federal and state income taxes, social security (FICA), Medicare hospital insurance tax and any state unemployment or disability obligations. In addition, the employer may be required to pay an equal amount of FICA and Medicare taxes, and the entire obligation for Federal Unemployment Tax (FUTA) and any state unem- ployment or disability obligation dependent on state law for each employee. Employee wages that may be exempt from U.S. taxation must meet the following criteria: I. Under U.S. domestic tax rules, withholding is not required where: • the non-resident employee is temporarily present in the U.S. for a period or periods not ex- ceeding a total of 90 days during the tax year • the total pay does not exceed US$3,000 • the employee is employed by a non-resident corporation that is not engaged in a trade or busi- ness in the U.S. II. Pursuant to the U.S.-Canada income tax treaty, a Canadian resident and non-resident of the U.S. with U.S. source employment income may be exempt from U.S. tax if the following requirements are met: • If the Canadian resident em- ployee earns no more than US$10,000 during a tax year, such income will be exempt from U.S. income tax or • the Canadian company does not establish a permanent establish- ment in the U.S. and • a U.S. entity is not considered the employer of the Canadian employees, and • the Canadian employee is not present in the U.S. for more than 183 days in any 12-month pe- riod. If a Canadian employee's U.S. source compensation is exempt from U.S. income tax, the em- ployer would not be required to withhold U.S. income tax pro- vided that Form 8233, Exemption from Withholding on Compensa- tion for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual has been completed by the employee and provided to the employer. e employer is then required to sign and submit Form 8233 to the Internal Revenue Service (IRS). If Form 8233 is not provided to the employer, the employer will be required to withhold U.S. tax with respect to the U.S. source compensation. However, the withholding tax should be refunded when the em- ployee files a U.S. non-resident in- dividual treaty income tax return for that year. Other taxes ere are other taxes to consider: Social Security and Medi- care: A Canadian employee pro- viding services while physically present in the U.S. is subject to the U.S. requirement to withhold and remit U.S. Social Security and Medicare (meaning FICA). FICA is the combination of Social Secu- rity taxes and Medicare taxes and is computed based on a percent- age of compensation received by an employee. For a Canadian employee who is in the U.S. on a temporary as- signment, relief may be available under the totalization agree- ment between Canada and the U.S. Form CPT-56 Certificate of Coverage Under the Canada Pen- sion Plan Pursuant to Article V of the Agreement on Social Security Between Canada and the United States is available through the Canada Revenue Agency (CRA) to remain contributing to the Canada Pension Plan (CPP). e Canadian employee would remain on CPP and would not be subject to the U.S. Social Security system. Federal Unemployment Tax: e employer may be subject to other payroll taxes, such as fed- eral and state unemployment tax or worker's compensation, which vary by state. Federal Unemployment Tax (FUTA) is an employer tax and is calculated on the first US$7,000 of income at a rate of six per cent. The state may also have an unemployment tax that may be required. Remittance of tax to the U.S. tax authorities Form 941 Employer's Quarterly Federal Tax Return is used to report income taxes, social secu- rity tax, or Medicare tax withheld from employees' paychecks or pay the employer's portion of social security or Medicare tax. Reporting to the U.S. tax authorities e employer is required to re- port the remuneration related to the employment duties per- formed in the U.S. on Form W-2, Wage and Tax Statement, U.S. source compensation that is not exempt from U.S. tax under the treaty or where it is exempt from U.S. tax under the treaty but Form 8233 has not been provided by the employee. Where U.S. source compensa- tion is exempt from U.S. tax un- der the treaty, and Form 8233 has been provided by the employee, U.S. source compensation should be reported on Form 1042-S, Foreign Person's U.S. Source In- come Subject to Withholding. Number in 2015 for Canada. Source: Internal Revenue Service Credit: Mictoon (Shutterstock) 599,565 US $49,276,346 US $34,760,814 US $14,515,532 US $1,593,078 7.6 U.S. source income of Canadians using Form 1042S. Amount exempt from withholding tax. Amount subject to withholding tax. U.S. tax withheld. Percentage of total taxes for Canada withheld in 2012 in U.S. Form 1042S EIN > pg. 44 Pursuant to the income tax treaty, a Canadian resident and non-resident of the U.S. with U.S. source employment income may be extempt from U.S. tax.

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