I’m a Canadian resident and citizen living in a border town that commutes to work in the US every day. I’m an employee of a Canadian company and work for our branch located in the US. For years I have been on the Canadian payroll paying no tax or US social security to the US and have never completed a US tax return. I’m not the only employee for this company in this position; there are many of us in the same situation.
It has recently come to our attention that our employer may have been screwing this up and should have been withholding US taxes, social security and issuing us a W2 slip every year. It appears that we also should have been filing US non-resident returns and claiming a foreign tax credit for this income in Canada. Is this correct?
Our employer recently mentioned something about setting up a US payroll to become compliant with their US reporting requirements. What are my obligations to fix this if any? Do I have any liability here or does this all fall on my employer? Will I have to refile previous US and Canadian returns to fix this? Any guidance you can provide would be appreciated.
US Payroll Requirements
Moderator: Mark T Serbinski CA CPA
Remember the issue is really the company's failure to pay THEIR portion of payroll taxes (fica) on work performed in US (they pay half and you pay half, like in Canada). To a lesser extent there is also the issue of failing to withhold and remit your share of FICA and US/state tax I presume that is what they are discussing in terms of 'becoming compliant'.
What the employees will have to do will depend on what the IRS and SSA determine the company needs to do to fix THEIR problem. They could agree to go back 3 or 6 years, or they could decide that they start now.
If it is determined that the firm should have considered this past W-2 work, then, as you say, from whatever date that was, you will need to file 1040NRs, pay the IRS (and likely the state) the required taxes, fica, penalties and interest, and then collect the refund from CRA through the foreign tax credit by amending those returns. You may even get the CPP you paid back during those years, in exchange for SS credits. Going forward that would be how you would treat any W-2 income arising from this company.
The tax liability will be yours (but should be end up being net zero). Hopefully the company would provide a service for you to file/amend all these returns due to their lack of compliance.
The company should pay any penalty and taxes, based on whatever agreement they end up making with IRS/state.
What the employees will have to do will depend on what the IRS and SSA determine the company needs to do to fix THEIR problem. They could agree to go back 3 or 6 years, or they could decide that they start now.
If it is determined that the firm should have considered this past W-2 work, then, as you say, from whatever date that was, you will need to file 1040NRs, pay the IRS (and likely the state) the required taxes, fica, penalties and interest, and then collect the refund from CRA through the foreign tax credit by amending those returns. You may even get the CPP you paid back during those years, in exchange for SS credits. Going forward that would be how you would treat any W-2 income arising from this company.
The tax liability will be yours (but should be end up being net zero). Hopefully the company would provide a service for you to file/amend all these returns due to their lack of compliance.
The company should pay any penalty and taxes, based on whatever agreement they end up making with IRS/state.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing 
Ok thanks very much for this. They have been very hush hush about everything, so I'm trying to do my own research to find out what the possible outcomes are. They mentioned something about establishing a "shadow payroll" and becoming compliant with everything starting January 1, 2017. They didn't mention anything about correcting previous returns yet; I think they are still in talks with the IRS and SSA.
As you say, I'm hoping they will do the right thing and hire an accounting firm to take care of all this for us. If not, they are going to have a lot of pissed off employees that may consider leaving the company.
As you say, I'm hoping they will do the right thing and hire an accounting firm to take care of all this for us. If not, they are going to have a lot of pissed off employees that may consider leaving the company.
Good point!
I just thought about one more thing. We currently contribute to a defined contribution pension plan and they match us. Once we start paying tax in the US, I assume there will no longer be any benefit of continuing to contributing to this pension, or an individual RRSP for that matter?
Perhaps we should lobby them to start a 401K or similar plan for us in the US; or if they will not, ask them to pay us more to compensate us for the lost contributions to the pension plan. Any thoughts on this?
I just thought about one more thing. We currently contribute to a defined contribution pension plan and they match us. Once we start paying tax in the US, I assume there will no longer be any benefit of continuing to contributing to this pension, or an individual RRSP for that matter?
Perhaps we should lobby them to start a 401K or similar plan for us in the US; or if they will not, ask them to pay us more to compensate us for the lost contributions to the pension plan. Any thoughts on this?
You will need to be careful about how the company categorizes you, as you could be simply moved to US payroll entirely, which would then entitle you to the same benefits as your US brethren.
But, then again, this may harm you in the long run if you are no longer in the Cdn pension.
Buta Cdn fimr can -- for a specific period -- have you working in US but still participating in the Cdn pension.
On that score they will obviously choose to do what benefits them, not you, so be watchful.
But, then again, this may harm you in the long run if you are no longer in the Cdn pension.
Buta Cdn fimr can -- for a specific period -- have you working in US but still participating in the Cdn pension.
On that score they will obviously choose to do what benefits them, not you, so be watchful.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
Ok thanks for the great advice!
If they do allow me to continue contributing to the Canadian pension plan, will I be able to deduct my contributions on the US side like I can in Canada? If not, would I be better served with a 401K? I read elsewhere on this site that if I invest in a 401K, I can deduct the contributions on the Canadian side. Perhaps there are downsides to this that I'm overlooking?
It just seems that if I can only deduct the contributions to a Canadian pension on the Canadian side, I will just end up paying more tax on the US side during my working years; which doesn't really help my overall position. I feel like maybe a 401K would be better if I can deduct the contributions on both sides?
I plan to commute and work at their US branch for the long-term.
If they do allow me to continue contributing to the Canadian pension plan, will I be able to deduct my contributions on the US side like I can in Canada? If not, would I be better served with a 401K? I read elsewhere on this site that if I invest in a 401K, I can deduct the contributions on the Canadian side. Perhaps there are downsides to this that I'm overlooking?
It just seems that if I can only deduct the contributions to a Canadian pension on the Canadian side, I will just end up paying more tax on the US side during my working years; which doesn't really help my overall position. I feel like maybe a 401K would be better if I can deduct the contributions on both sides?
I plan to commute and work at their US branch for the long-term.