In today’s remote and borderless work environment, it’s increasingly common for Canadian companies to hire or retain employees who work from the United States. But paying cross-border employees comes with complex legal, tax, and compliance challenges. If your business is based in Canada and you’re paying U.S.-based staff, you need a clear payroll strategy to avoid legal pitfalls and ensure proper tax reporting on both sides of the border.

In this post, we’ll cover best practices for running payroll in Canada for employees working in the USA, along with key compliance considerations in 2025.

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The Cross-Border Payroll Challenge

Hiring talent in the U.S. while operating from Canada opens new opportunities—but it also raises questions like:

Should I pay the employee in CAD or USD?

Do I need a U.S. payroll system or EIN (Employer Identification Number)?

What taxes do I need to withhold and where do I file them?

Am I subject to U.S. state labor laws?

These aren’t just technical questions — mistakes can lead to IRS penalties, misclassification, or even double taxation. That’s why understanding the rules on both sides is crucial.

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✅ Best Practices for Paying U.S.-Based Employees from Canada

1. Register for a U.S. EIN (Employer Identification Number)

To legally pay an employee residing in the U.S., even as a Canadian company, you’ll likely need a U.S. EIN from the IRS. This number is used for federal payroll tax filings.

> Tip: You can apply for an EIN using Form SS-4, even without a U.S. address or office.

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2. Understand U.S. State Tax Obligations

In the U.S., state-level payroll laws vary widely. If your employee works in California, New York, Texas, or elsewhere, you may need to:

Register with the state’s tax agency

Withhold state income tax

Pay into state unemployment insurance (SUI)

Comply with state labor standards (e.g. minimum wage, sick leave, overtime)

> Example: California requires employers to file DE-9 forms and remit payroll taxes monthly or quarterly, depending on payroll size.

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3. Use a Dual Payroll or Cross-Border Payroll Provider

If you’re managing payroll in-house, it’s easy to make errors across borders. Using a cross-border payroll provider helps:

Pay employees in their local currency (usually USD)

Handle U.S. and Canadian tax compliance

File forms like W-2, 1099, and T4A properly

Reduce administrative burden and risk

> Some Canadian payroll services now offer integrated solutions for U.S. workers.

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4. Handle Currency and Compensation Carefully

You can pay U.S. employees in CAD or USD, but the preferred and more practical approach is USD, since U.S. employees expect wages in their local currency.

Best practices include:

Using a USD-denominated payroll account

Ensuring clear contracts with salary terms in USD

Accounting for exchange rate fluctuations if you’re invoicing or budgeting in CAD

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5. Classify the Worker Correctly

Misclassifying a U.S.-based worker as an independent contractor when they are legally an employee can lead to:

Back taxes

Interest and penalties

Loss of business credibility

Use the IRS’s Common Law Test and consider behavioral and financial control factors.

>  If you’re unsure, consult a cross-border employment lawyer to avoid legal risks.

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6. Ensure You Meet Local Labor Laws

Even though your business is Canadian, the U.S. worker is entitled to protections under their state’s labor laws. That includes:

Minimum wage compliance

Paid sick leave (in certain states)

Overtime and break periods

Workers’ compensation coverage

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7. File Year-End Forms Correctly

For U.S. employees:

Issue Form W-2 for employees or Form 1099 for contractors

File tax forms with the IRS and Social Security Administration

Retain U.S. payroll records for at least four years

For Canadian contractors or remote workers paid from the U.S., you may still need to issue T4A or report income to the CRA.

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Bonus Tips for Smooth Cross-Border Payroll

Keep employment contracts legally compliant in both jurisdictions

Use HRIS and payroll platforms with international capabilities

Consult with a cross-border tax expert

Track remote work locations to determine proper tax withholding

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Final Thoughts: Be Proactive, Not Reactive

Paying U.S.-based employees from Canada isn’t impossible—but it does require strategic planning and ongoing compliance management. As remote work continues to reshape international hiring, cross-border payroll compliance is no longer optional — it’s essential.

By following these best practices, Canadian businesses can build U.S. teams legally, competitively, and efficiently.