Thank you for the feedback - this employer has stated that due to foreign tax implications that they do not want to bring me on as a direct employee. This seemed odd to me as I’m a US Citizen and I thought they could treat me like any other employee.
Few hundred CAD, how did you come up with that number?
Please don’t spread misinformation like this. It’s an extremely bad idea to not understand the tax liability.
If you did get paid in USD by your employer, then they will not withold any state tax, you will need to keep making quarterly payments towards the provincial tax due based on the province of your residence. You’d also need to file federal taxes in Canada though you’d get credit for the taxes that you paid in the US.
In general, this is an extremely bad idea because you won’t be paying into CPP and EI. If you lose your job, you won’t be eligible for EI.
You have two options, you work for the company as a contractor, in which case do factor in the CPP and EI contributions as you will be responsible for both the employer and employee portions in deciding your hourly rate. One thing to note is that if you work full time only for this one company, then you’re not a contractor and will be classified as an employee and should that happen your employer is liable for fines and paying their portion of EI and CPP.
Another option is for your company to work with a payroll provider with operations in Canada, you will be an employer of this Canadian company and be contracted out to the American company. There’s an overhead of between 10 - 15% of your base salary that the intermediate company will charge for their services. In my opinion, this is the most hassle free way. The previous option involves a bit more work, the advantage there is that you will end up with more money in your pocket as there is no middle man, but talk to an accountant and determine your hourly rate, otherwise you’ll end up with much less money when the government has taken their cut.
Thanks for detailed response panditji. Very helpful.
I am wondering what is the least overhead method (overhead for company, not me) for a US company to pay someone working in Canada. I am currently waiting for PPR and working in the US as a full time employee at a small < 20 person startup. From experience, even if my company allows me to work from Canada, they would want to make sure that the overhead on their side in minimal simply due to limited time and resources the company has, to deal with this stuff.
Given that, what do you think is the best option to go about it if I am trying to optimize for reducing the US employer overhead? Is it to set myself up as an independent contractor? Is that a long and expensive process on my side? Or do you think going the payroll provider method is more easier for the US employer to deal with?
Also, I am not sure what you mean when you say the following:
“One thing to note is that if you work full time only for this one company, then you’re not a contractor and will be classified as an employee and should that happen your employer is liable for fines and paying their portion of EI and CPP.”
I assume you are talking about setting oneself up as an independent contractor in Canada (which means registering oneself as a company in Canada right?) and then working for the US company as a contractor right? If so, how can I ever be considered as employee of the US company? Or did you mean employee of the Canadian company (which is basically my own company). Also, are you saying the US company be liable for Canadian EI and CPP? Just want to make sure I understand what you mean by “company” in your note.
As Panditji said, “You have two options, you work for the company as a contractor, … (or) work with a payroll provider with operations in Canada, you will be an employer of this Canadian company and be contracted out to the American company.” This is good advice and a payroll provider may cost you something but it’s probably the quickest and easiest way to go, but keep in mind that the provider will probably sit on your payroll for at least ten days after it’s received from your client to be sure the incoming transfer has cleared their bank without recourse. You can also just incorporate and invoice your American client as a supplier monthly. This is the easiest route for your client.
Keep a few points in mind though;
It’s not a good idea to have the US client put you on their payroll. They will need to deduct FICA and other US deductions at source, not all of it is recoverable by you and you will need to file both Canadian and American income tax returns. If the client is in a state with state taxes, and you are resident in Quebec, you could end up doing four income tax returns every year. Imagine the bureaucratic headache.
Whatever way you go be sure you’re paying Canadian DAS monthly. Keep up the CPP (Or RRQ in Quebec) deductions and other government items. Don’t make the mistake, as many do, of forgoing both the personal and employer portion of government pension contributions.
Be careful that you don’t become eligible for GST/QST collection. As a 100% exported service you should be exempt, but that needs to be confirmed by government.
Above all, no matter which way you go, invest a few bucks and get the formal advice of a Canadian CPA firm which is familiar with cross border transactions. Doing this wrong can generate significant penalties most of which will come out of the woodwork long after you’ve spent the money. If you intend to do this long term, or you intend to add more clients later, bite the bullet and incorporate. BUT WHATEVER YOU DO, SEE AN EXPERIENCED CPA.
(1) If I were to start the incorporation process today (assume through a Canadian lawyer), how long does it take to incorporate a company in Canada and then officially start working with the US company as a contractor? Do you have a rough duration in mind?
(2) To handle the entire process of incorporation and to advice me on taxes, I assume it is safest to go through a law firm and an accounting (CPA) firm, correct? What do you think is the right approach to find a reputable firm, as I have no experience with law/CPA firm in general. I would appreciate it if you could give some pointers.
(3) Do you know a ballpark figure for much it would cost for the services of a law firm?
The actual incorporation process, for a federal corporation, is completed in only a matter of hours, if you’re incorporating as a numbered company it will be done the same day. All Canadian federal corporations are initially incorporated as numbered companies then a name is added later in the incorporation process. Adding a name depends on how quickly the NUANS (Name search) search can be effected. Usually, if there are no conflicts, a day or two. Googling your preferred names is no guarantee but it can be useful to do as much checking as you can in preparation for the process.
Assuming you’re just setting up an uncomplicated corporate entity for the purpose you described it’s probably easier and less costly if you simply get a good CPA firm to handle both processes. They will have an affiliated law firm. Discuss your incorporation needs and get a quote for them to handle the ongoing accounting requirements at the same time. Any of the big four will give you good advice, Deloite, PWC, EY or KPMG. It may be a little less expensive, and probably more responsive, to go to the next level, say, BDO or Grant Thornton. I don’t know which city you will be operating in but any major metropolitan area will have an affiliate of all these firms. Resist the temptation to use some friend of a friend who happens to have an accounting degree. You only do this once. Do it right.
You can actually do the incorporation yourself directly with the government for less than $300. Unless you’re familiar with corporate law and accountancy I would recommend you go the CPA firm route. Hard to say what that initial cost will be but $2,000/$8,000 would be a good ballpark figure. Don’t skimp on this stuff. Invest the few thousand up front, it will save you pain later and it’s a depreciable asset on future tax returns.
Sorry, didn’t see the forums for a few days but this is some good reading material to help better understand the distinction between an employee and contractor.
To put this in simpler terms, if for example in your contract with your US employer there is a clause for exclusivity or a non-compete which makes it so that you can only work for that employer (and this is fairly common in full time jobs) then the relationship is an employee-employer and not a contractor-business. If on the other hand you’re working with multiple employers as a contractor, setting your own rates and hours then that is a contractor-business relationship.
But as @hslawd has said, this really requires a consultation with a qualified CPA. Don’t skip this now otherwise come tax time, you could be in for a rude shock.