As a Canadian company looking to expand your talent pool, hiring U.S. employees can be an excellent strategy. Whether you need local staff on the ground for sales and partnerships or have come across the ideal candidate you want to work with, but the person lives in the U.S., and moving to Canada is not an option – it’s important to navigate this process carefully to ensure compliance and efficiency.
Canadian labour laws won’t apply to the U.S. employee; instead, U.S. labour laws govern the working relationship. Here are some best practices and key considerations:
1. Use an Employer of Record (EOR) Service
For small Canadian companies, using an Employer of Record (EOR) service is often the most cost-effective and compliant way to hire U.S. employees. EORs handle payroll, benefits, and compliance issues, allowing you to focus on your core business.Popular EOR options include:
- Deel
- Remote.com
- Justworks
When choosing an EOR:
- Research multiple providers and read reviews from other companies.
- Be aware of potential hidden fees and extra costs.
- Understand what’s included in the base package and what costs extra.
| Hiring Without an EOR | Hiring With an EOR Service |
| – Incorporate in the U.S. | – Quick onboarding of U.S. employees |
| – Navigate local employment laws | – Navigates labour laws for you |
| – Manage U.S. income taxes | – Handles tax returns and income tax issues |
| – Set up health insurance | – Provides benefits, including health insurance |
| – Risk of financial penalties | – Mitigates risk of legal and financial penalties |
Some established EORs to consider include Deel, Rippling, Oyster, Velocity Global, Papaya Global, Globalization Partners and Justworks. Newer ones include Remote, Remofirst, Skuad, Multiplier, Borderless, Omnipresent and Gloroots.
2. Consider Costs and Breakeven Points
A good EOR will typically charge $500-700 per employee. Thus the cost of using an EOR service can add up to $6,000-7,000 per year per employee. This becomes more cost-effective than setting up a U.S. entity when you have fewer than 3-5 employees.
Once you reach this threshold, it may be worth considering establishing your own U.S. entity, as the EOR fees would be > 25k annually – approximately the same cost you’ll pay in accounting+legal fees while operating your own U.S. subsidiary.
3. Be Aware of Contractor vs. Employee Distinctions
While hiring U.S. workers as contractors might seem simpler, it comes with risks. The IRS has specific rules for contractor classification, including:
- Contractors should use their own equipment and tools
- Contractors should control their own time
Misclassifying employees as contractors can lead to serious legal and financial consequences.
4. Understand U.S. Employment Laws and Benefits
When hiring U.S. employees, you’ll need to comply with U.S. labour laws and provide appropriate benefits. This typically includes:
- Health insurance (which can be expensive)
- Paid time off
- Potentially retirement plans
- Plan to Issue 1099s to U.S. contractors
You would also need to register for federal and state tax identification numbers, pay payroll taxes, and adhere to workers’ compensation and unemployment insurance rules.
5. Plan for Additional Costs
Budget for various additional expenses that may arise:
- Health insurance costs for U.S. staff
- Travel medical insurance if frequent travel is required between U.S. and Canada
- Termination costs (some EORs require accumulating funds for this)
- Fees for various HR processes (e.g., firing an employee)
If you are managing this directly, you’ll need to research U.S. healthcare providers and set up a group insurance plan for your employees. Many payroll companies offer bundled benefits packages, which could save time and effort.
6. Consider Tax Implications
If your U.S. hires are in research and development roles, you may benefit from the U.S. R&D tax credit. This can significantly reduce the financial burden of hiring highly skilled employees, making it worth considering earlier than you might have thought. Speak to a tax professional to ensure you’re making the most of available incentives in Canada and the U.S. On the flip side, you may be foregoing Canadian tax credits and grants by hiring outside Canada. So, consider all the dollars you can save under each scenario.
As for the staff’s personal taxes, remember that a U.S. employee or contractor can claim foreign tax credits for Canadian income tax paid, thus reducing U.S. tax liabilities. Consult a tax practitioner for more information on how to avoid double taxation.
7. Be Mindful of Currency Exchange
Many EOR providers charge in USD. Factor in exchange rates and bank fees when budgeting for your U.S. employees’ compensation, insurance, EOR fees and associated costs. A smart way to save on these hidden costs is to have a USD account. It would be even better if you could open a U.S. account with a local U.S. banking service for your Canadian company.
It’s also super-important to be aware of the implications of sending international payments on time given the traditional banking process can be slow, cumbersome and expensive.
8. Evaluate Long-term Plans
If you anticipate significant growth in your U.S. workforce or sales volume, start planning early to establish a U.S. entity potentially. Remember that when doing so, it’s important to comply with federal regulations, including withholding taxes, filing tax returns, minimum wage and overtime laws, workplace safety regulations, and equal employment guidelines. At the state level, based on where you’re incorporated and/or where the employee is based, you must also comply with labour laws relating to breaks, leave, termination, state tax withholding and unemployment insurance.
As you can imagine, costs are only part of the story. The additional effort required to manage a U.S. entity, perform GAAP accounting and reporting, and deal with state-level requirements in the U.S. can be more what you signed up for.
9. Seek Expert Advice
Consider consulting with legal and tax professionals who specialize in cross-border employment. They can provide valuable insights and help you avoid potential pitfalls.
10. Choose Your EOR Carefully
Experiences with EOR providers can vary. While some companies have had positive experiences with providers like Deel, others have reported issues with hidden fees and unexpected costs. Do thorough research and perhaps start with a trial period before committing long-term.
It’s not terribly hard to navigate hiring in the U.S. Canadian founders do it all the time but they also make common mistakes due to the lack of transparency and the many hidden gotchas specific to the U.S.-Canada equation. Hopefully some of these tips can help you avoid those annoying obstacles that slow you down.
