Hire 1099 Workers in Canada

Can I Hire 1099 Workers in Canada?

As an Employer of Record that helps US companies expand their teams in Canada, there’s one question we get asked more than any other: can I hire 1099 workers in Canada? In today’s blog we will answer that question. We will also guide you through the differences between hiring in the US and in Canada.

You’ll learn about how worker types differ from one country to another, how hiring internationally will impact your local payroll, and what type of worker to hire when.

Is It Possible to Hire 1099 Workers in Canada?

Can you hire 1099 workers in Canada? The answer is no… kind of. While US companies can hire Canadian contractors and employees, they cannot hire 1099 workers. That’s because 1099s do not exist in Canada! Instead, US companies can hire three types of workers in Canada: sole proprietors, incorporated contractors, or employees via an Employer of Record.

When US companies ask us about hiring 1099 workers in Canada they are either looking for a Canadian contractor for a project, or a long-term Canadian resource and don’t know how to go about it.

Are 1099 Workers the Same as Incorporated Contractors?

American 1099 workers are independent contractors who have not yet incorporated a business. When you hire a 1099 worker, you are entering into a business-to-business relationship, not hiring an employee. 1099 workers are responsible for invoicing you for their work, managing their own tax deductions and remittances, and purchasing their own insurance.

In Canada, unincorporated independent contractors are known as sole proprietors. Just like when you hire a 1099 worker, sole proprietors are responsible for handling their own taxes, benefits, and insurance. They also supply their own tools and training. Unlike 1099 workers, you don’t issue the Canadian equivalent of a 1099 form.

Contractors who do incorporate a business are referred to as incorporated contractors. They are the equivalent of what is known as a a corp-to-corp contractor relationship in the US.

If I Don’t Need a 1099… What Form Do I Need?

What distinguishes 1099 workers from sole proprietors is that there is no 1099 form in Canada, and 1099 forms are not applicable to foreign contractors. Instead of filling out a 1099, when you hire Canadian contractors, you should request a completed W-8BEN from them. This form ensures compliance with the IRS and the Canada-US tax treaty; without it, you are required to withhold and remit 30% tax on all contractor earnings.

1099 Worker Sole Proprietor Incorporated Contractor
  • Form 1099
  • Non-incorporated, independent contractor
  • Domestic contractor
  • Responsible for own benefits and insurance
  • Form W-8BEN
  • Non-incorporated, independent contractor
  • Foreign contractor
  • Responsible for own benefits and insurance
  • W-8BEN filled out by contractor
  • Form W-8BEN
  • Incorporated, independent contractor
  • Foreign contractor
  • Responsible for own benefits and insurance
  • Files business taxes
  • W8BEN filled out by contractor

Can I Hire W2 Employees in Canada?

Can you hire W2 employees in Canada? Yes – but only if they are eligible to work in the US. You can also hire Canadian employees without issuing them a W2. Confused? Don’t worry, we’ll clear it up!

Many US and Canadian citizens hold dual citizenship or have visas allowing them to work in both countries. You can hire Canadians who are eligible to work in the US – and will work in the US – as W2 employees. Just like with any W2 employee, you will deduct and remit payroll taxes for your Canadian W2s. When they file income taxes in Canada, they will use the W2 you issue to declare their foreign income and taxes.

However, not every Canadian is eligible to work in the US. When you identify Canadian candidates who cannot or will not be working in the US, you have two options to hire them. You can open a local subsidiary, register your business and tax accounts. Or, you can hire them through an Employer of Record service. Employees you hire in Canada, either through a subsidiary or an Employer of Record, are T4 employees – not W2s. It’s the responsibility of your subsidiary or Employer of Record to payroll your T4 employees and handle taxes for them.

US-Based W2 Canada-Based W2 Canadian T4 Employee
  • Living in the US
  • Eligible to work in the US
  • Hire directly and issue W2
  • You deduct and remit payroll taxes
  • Living in Canada
  • Eligible to work in the US
  • Hire directly and issue W2
  • You deduct and remit payroll taxes
  • Living in Canada
  • Eligible to work in Canada
  • Hire through Employer of Record who issues T4
  • EOR deducts and remits payroll taxes

What is an Employer of Record?

Employers of Record hire workers on behalf of companies that do not have a local presence and handle payroll, taxes, and local compliance for them. With an EOR, companies can grow their teams in new markets without creating a local subsidiary or opening tax accounts.

Hiring through an EOR is the ideal solution for companies that want to hire just one Canadian remote worker, or a small team. Working with an EOR allows them to hire quickly, compliantly, and without the costs and responsibilities of setting up a new local business.

On the other hand, companies that want to expand operations into Canada by opening a new retail location, office, or warehouse may prefer to open a local subsidiary. While it is the slower and more expensive option, having a local subsidiary means that you cannot accidentally create a permanent establishment.

Instead, you will have a compliantly established local business with no risk of back taxes. A subsidiary is also necessary for companies that expect to pay sales or business tax in Canada.

Employer of Record Subsidiary
  • Who is the Employer: the EOR
  • Who Directs the Employee: You
  • Who Handles Payroll: EOR
  • Who Handles Compliance: EOR
  • Who Handles Insurance: EOR
  • Time to Onboard: Two weeks
  • Cost to Setup: $0-$1500
  • Who is the Employer: You
  • Who Directs the Employee: You
  • Who Handles Payroll: You
  • Who Handles Compliance: You
  • Who Handles Insurance: You
  • Time to Onboard: Six to eight weeks for business and account creation; two weeks for payroll setup
  • Cost to Setup: $5000-$10000

Should I Hire Contractors in Canada or Employees?

While working with contractors has its advantages, they are not a substitute for full-time employees – and the two worker types cannot be treated interchangeably.

Contractors are experienced, independent workers with specialized skills. They are a great fit for project-based work, outsourcing certain functions, or adding temporary support to your team. Because they are not your employees, you are not responsible for making employer tax contributions or managing a payroll.

While this may look like easy cost savings, keep in mind that independent contractors are independent: they may have multiple clients; they can set their own hours of work and choose their approach; and they may not be available for other projects or work within your organization.

So, if contractors are exactly what you are looking for, then that is who you should hire! On the other hand, if you’re looking for employees but don’t know how to hire in Canada, that is where a subsidiary or Employer of Record comes in.

Contractor Employee
  • Self-directed and sets own schedule
  • Can subcontract
  • Responsible for purchasing own equipment, providing own training
  • Deducts and remits own taxes
  • You set their goals and hours and direct their day-to-day
  • Eligible for advancement within the company
  • You provide equipment and training
  • You deduct and remit taxes for them

Risks of Hiring Contractors in Canada

While there are many benefits to hiring contractors in Canada, there are also some risks. If you are their sole source of income, there is a risk that the CRA will deem your newly hired sole proprietor as either a personal service business, or a full-time employee. As a personal service business, your worker will undergo an audit and be forced to pay back taxes and fines. If they are deemed an employee, you will also be audited and assessed for back taxes and fines.

While incorporated contractors cannot be deemed to be personal service businesses, they can be investigated for tax evasion. When you hire an incorporated contractor but treat them as an employee, you are effectively evading employer taxes. Meanwhile, your employee is reaping the tax benefits of being a small business owner. The Canada Revenue Agency does not look kindly on such situations.

Misclassification is always a risk when it comes to hiring contractors. Mitigate that risk by understanding the difference between contractors and employees.

Sole Proprietors Incorporated Contractors
  • The worker IS the business
  • Invoice clients and must charge GST/HST after $30k fees
  • Worker misclassification risk high
  • An employee of their own incorporated business
  • Invoice clients and charge GST/HST
  • Worker misclassification risk reduced

How an Employer of Record (EOR) Helps You Hire

Employers of record hire employees on your behalf, in countries where you do not have a legal presence. EOR is the perfect solution for companies hiring just one Canadian worker, or companies that want to hire in Canada without expanding local operations.

Canadian Payroll Services is a local Employer of Record specializing in the Canadian market. Our certified human resources and payroll professionals are laser-focused on delivering the best outsourcing experience in Canada.

Want to learn more about how Canadian Payroll Services can help? Get in touch!

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