A Comparative Guide to Payroll Taxes in Canada and the US

Understanding Payroll Tax Differences Between Canada and the US

Despite our differences, Canadian and American payroll taxes are similar in terms of both category and cost. American employers researching  Canadian payroll to hire a Canadian remote worker for the first time should learn about how the Canadian tax system is structured, if not its specific rates and regulations, and the difference between Canadian taxes vs us taxes in terms of payroll. 

Canadian Payroll Services is a Professional Employer Organization (PEO) that offers Employer of Record (EOR) services for US companies looking to hire Canadian employees. Working with a PEO like Canadian Payroll Services can be very helpful especially if you are unfamiliar with Canadian payroll taxes.  

We handle the back-end administrative responsibilities like onboarding and payroll, so you don’t have to.  

US Vs Canadian Taxes Rates 

Employers in Canada and America are responsible for deducting and remitting employee income tax, both federal and provincial (or state). They are also responsible for the employee portion of employment insurance, healthcare tax (if applicable), and Canada Pension Plan (or Social Security). One key difference in payroll taxes is that Canadian employers supplement our universal healthcare system with an Employer Health Tax.  

Employment Insurance 2.268%
Federal & State Unemployment Tax 7-10%
Canada Pension Plan 5.7%
Social Security 6.2%
Health Tax 1 3%
Medicare Tax 1.45%

More difficult is understanding how payroll and employment standards differ from province to province. Quebec calculates vacation earnings differently than all the other 10 provinces and 3 territories. Worker’s compensation rates and class codes differ from province to province too – although your responsibilities as an employer remain the same. 

When it comes to expenses, health benefits, insurance retirement savings, and annual tax forms, things get even more complex. The Canadian Revenue Agency and IRS may be aligned on some things, but they are completely different regarding policies that govern taxable benefits and expense documentation. It’s not just rates that vary but policy intent, meaning what’s considered “reasonable” in one agency may be egregious in another. 

And while Canadian pension and Group RRSP plans are similar to American 401ks, although different based on when and how much employees are taxed, employer healthcare responsibilities are utterly dissimilar. Canada’s universal healthcare system provides for all basic medical care, excluding dental, prescription, vision, and paramedical including procedures deemed voluntary. Employers commonly provide group plans for these services, along with life and disability insurance, as a taxable benefit to their employees. 

Working With a PEO to Manage Canadian Payroll Taxes 

Working with a PEO that is familiar with the local tax laws can make the process of expanding and conducting work in Canada a much easier process.  

Canadian Payroll Services’ EOR  service is designed to minimize any confusions you encounter, taking the work of overseeing  payroll and maintaining tax compliance out of your hands. 

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