Working remotely in the United States for a Canadian company is possible, but it introduces significant legal, tax, and administrative complexity for both the employee and the foreign employer. The shift in the physical location of the work from Canada to the US triggers distinct regulatory requirements. Navigating this cross-border arrangement requires careful consideration of immigration status, employment classification, tax obligations, and compliance with US labor laws.
Securing Your Right to Work in the US
The ability to perform services remotely in the US fundamentally depends on the worker possessing the legal right to work within the country. This authorization is determined by US immigration law and cannot be bypassed simply because the employer is Canadian or the payroll originates outside the US. The physical act of working on US soil dictates the jurisdiction for employment authorization.
US citizens and Lawful Permanent Residents (Green Card holders) have the unrestricted right to accept employment from any entity. For these individuals, the immigration hurdle is cleared, allowing them to focus on employment structure and tax implications. Temporary visa holders, conversely, must ensure their specific visa permits employment with a foreign entity while they reside in the US.
Many common work visas, such as the L-1, H-1B, or TN status, are tied to a sponsoring US-based entity. If the Canadian company lacks a registered US entity to act as the sponsor, the visa may not authorize remote work from the US. Attempting to work remotely on a tourist visa or an unauthorized status violates US immigration law and carries serious consequences, including potential deportation.
Choosing the Legal Employment Model
A Canadian company engaging a worker in the US must choose a legally compliant employment model, as processing payroll directly from Canada is generally not feasible. The three primary methods for engaging a US-based worker are independent contractor status, establishing a US subsidiary, or utilizing an Employer of Record (EOR) service. Each option carries different levels of administrative burden, cost, and legal risk.
The Independent Contractor (IC) model is often the least compliant method for a full-time role, carrying substantial misclassification risk under US federal and state law. The IRS uses a common law test focusing on behavioral control, financial control, and the type of relationship to determine status. A worker who is directed by the company, uses company equipment, and has a continuous relationship integral to the business will likely be deemed an employee. Misclassification can lead to severe financial penalties, including back taxes and fines.
A more robust solution is for the Canadian company to establish a US Entity or subsidiary (e.g., an LLC or Corporation). This US entity becomes the legal employer, managing all payroll, tax withholding, and labor law compliance within the US system. While this method offers the most control and the clearest path to compliance, it is also resource-intensive, requiring registration, governance, and ongoing administration in the US.
The third alternative is the use of an Employer of Record (EOR) service. An EOR legally hires the US-based worker on behalf of the Canadian company, managing all compliance, payroll, tax filings, and benefits administration. The Canadian company maintains day-to-day management of the employee’s work, while the EOR assumes the legal liability and administrative burden of being the US employer for tax purposes.
Navigating US and Canadian Tax Requirements
When an individual performs work while physically present in the US, they are subject to US federal and state tax laws, regardless of the employer’s location. Living and working in the US makes the individual a US tax resident, requiring them to file and pay US federal income tax on their worldwide income. They must also pay Federal Insurance Contributions Act (FICA) taxes, which fund Social Security and Medicare.
The worker is also subject to state and local income taxes in the state where they reside and perform the work. Having an employee in a specific state creates a “tax nexus” for the Canadian company itself. Nexus is the sufficient physical connection that allows a state to impose its taxes on the business.
A single remote employee can trigger the requirement for the Canadian company to register as an out-of-state employer and withhold state income tax. This presence may also subject the company to state corporate or franchise taxes. If properly classified as an employee, the worker receives a Form W-2; if classified as an independent contractor, they receive a Form 1099 and must pay the entire self-employment tax (both portions of FICA).
The Canada-US Tax Treaty prevents double taxation. Generally, the US, as the country of residence where the work is performed, has the primary right to tax the income. The worker can then claim a Foreign Tax Credit (FTC) on their Canadian income tax return, offsetting the Canadian tax liability by the amount of US tax paid.
Understanding Applicable Workplace Protections
The employment relationship for a US-based worker is governed by US labor law, based on the location where the work is physically performed. US federal laws, such as the Fair Labor Standards Act (FLSA) setting standards for minimum wage and overtime, apply to the Canadian company’s operations. Anti-discrimination laws, including Title VII of the Civil Rights Act and the Americans with Disabilities Act (ADA), also apply to the US-based worker.
State and local labor laws where the employee resides govern the day-to-day employment relationship, often providing protections more extensive than federal standards. These state laws cover mandatory paid sick leave, specific termination requirements, and employee expense reimbursement. The Canadian company must comply with all US federal, state, and local requirements, regardless of its internal Canadian policies.
Canadian labor laws, including provincial standards for statutory holidays and paid leave, generally do not apply to the worker performing duties in the United States. The Canadian company cannot simply extend its Canadian employment contract and policies to the US-based worker. The employer, or the EOR acting on its behalf, must also comply with US state-specific requirements for providing workers’ compensation insurance and contributing to state unemployment insurance programs.
Essential Payroll and Administrative Requirements
The Canadian company must undertake specific administrative tasks to ensure compliance in cross-border employment. If operating through a US entity or EOR, the company must establish compliant withholding processes for US taxes, including accurately calculating and remitting federal income tax, state income tax, and both portions of FICA.
The company must obtain a US Employer Identification Number (EIN) and register as an out-of-state employer with the relevant state and local revenue departments. This state registration is necessary for correctly withholding and remitting state-level taxes and is linked to the tax nexus created by the employee’s presence. Failure to register can lead to significant penalties.
Employee benefits must also meet US regulatory requirements, which differ from Canadian structures. Health insurance must comply with Affordable Care Act (ACA) mandates, and retirement plans must adhere to the rules set forth by the Employee Retirement Income Security Act (ERISA). The company must also ensure proper year-end reporting by generating and distributing Form W-2s and filing summary forms with the IRS and state authorities.