Canada vs U.S. payroll: what changes for a U.S. employer

Canadian payroll follows the same broad pattern as U.S. payroll: withhold income tax and social contributions from each pay, add the employer’s share, remit it to the tax authority, and report the year on a slip. The details differ at almost every step, and the differences are where U.S. employers get caught. This article compares the two systems; for how Canadian payroll runs step by step, see our Canadian payroll guide.

The deductions side by side

	United States	Canada
Income tax	Federal, plus state (and sometimes local)	Federal, plus provincial (Québec collects its own)
Retirement program	Social Security	Canada Pension Plan (CPP), or Québec Pension Plan (QPP) in Québec
Health program	Medicare	Public health care, funded through taxes; some provinces charge employers a payroll health tax
Unemployment	FUTA and state unemployment (employer-paid)	Employment Insurance (EI), paid by employer and employee
Parental benefits	Varies by state	Through EI; Québec runs its own plan (QPIP)
Workplace injury	State workers’ compensation	Provincial workers’ compensation board

Two practical differences stand out. First, Canadian contribution rates and maximums change every January, and CPP now has a second tier of contributions on earnings above the first ceiling. Use the CRA’s current CPP and EI pages rather than last year’s figures. Second, the employer’s EI share is higher than the employee’s, unlike Social Security and Medicare, where the two shares match.

Forms

Purpose	United States	Canada
Employee’s withholding information	W-4 (and state form)	TD1 federal and provincial forms (TP-1015.3-V in Québec)
Annual employee slip	W-2	T4 (plus RL-1 in Québec)
Annual slip for non-employees	1099-NEC	T4A, where it applies
Slip deadline	January 31	Last day of February
Record of a job ending	No federal equivalent	Record of Employment (ROE), issued to Service Canada

The Record of Employment surprises most U.S. employers: whenever an employee has an interruption of earnings (they leave, are laid off, or go on leave), the employer must issue an ROE so the employee can claim EI. We compare the slips in more detail in W-2 and 1099 vs the Canadian T4.

Remittances

U.S. employers deposit federal employment taxes on a monthly or semi-weekly schedule set by the IRS lookback rules. In Canada, the CRA assigns a remitting frequency based on the employer’s average monthly withholding: most new employers remit monthly, small employers may qualify for quarterly remitting, and larger employers remit more often. Late remittances carry penalties that start at 3% and rise to 10% of the amount due, plus interest, and the CRA can hold company directors personally liable for unremitted source deductions. Québec employers remit provincial deductions to Revenu Québec separately.

Records

The CRA expects payroll records to be kept for six years from the end of the last tax year they relate to. The IRS asks for employment tax records to be kept for at least four years. Provincial employment standards add their own requirements for hours, wages and vacation records.

Where U.S. employers go wrong

1. Applying the wrong province. Tax and employment standards follow the province where the employee works, not your head office.
2. Using last year’s rates. CPP, EI and tax brackets change each January.
3. Treating vacation as a policy choice. Vacation time and vacation pay are statutory minimums in every province.
4. Missing the ROE. It is required whenever earnings stop, not only at termination.
5. Running Canadian payroll from U.S. software without Canadian tax tables, TD1 handling and T4 or RL-1 filing.

The Employer of Record alternative

If you would rather not register as a Canadian employer at all, an Employer of Record runs Canadian payroll as the legal employer: deductions, remittances, slips, ROEs and records. You approve the hire and direct the work, and receive one monthly invoice. See how our Employer of Record service works.