This is our second FAQ of this series on taxes for Canadian businesses in the USA.
What federal taxes does a Canadian business pay in the USA?
Each state has the authority to tax and the federal government also has the authority to tax. This is a summary of taxes at the Federal level.
Sales Tax & Use Tax
Sales Tax and Use Tax are imposed at the state level.
Unemployment Insurance (Payroll Tax)
If you have employees working in the USA, you must pay FUTA (Federal Unemployment Tax) on top of SUTA (State Unemployment Tax) on your employee’s gross wages up to the taxable wage base ($7,000 as of 2020). The 2020 FUTA tax rate is projected to be 6%, however, if your company pays its state unemployment taxes on time and the state you’re filing in is not a credit reduction state you can get a FUTA credit up to 5.4%. This means your remaining FUTA tax rate will only be 0.6%.
Withholding (Payroll Tax)
If you have an employee earning an income while in the USA, you must withhold a certain percentage of their income (on both the federal and state level) from each payroll. The amount of tax you withhold from an employee depends on the length of your pay period, the employee’s gross pay and the number of withholding allowances/exemptions claimed on their W-4.
Corporate Income Tax
The U.S. federal corporate tax rate is generally a flat rate of 21% of taxable income.
Excise Tax (Income Tax)
Excise Taxes are taxes paid when purchases are made on a specific good.
Estimated tax (Income Tax)
Generally, you must pay taxes on income, by making regular payments of estimated tax during the year (quarterly). Corporations generally have to make estimated tax payments if they expect to owe tax of $500 or more when their return is filed. Corporations generally use Form 1120-W to calculate estimated tax.
Availability of Treaty benefits
The Canada-USA tax treaty can provide Canadian corporations with some relief from taxation on taxes paid in the US on income earned in the US. This income that is taxed in the US is often referred to as Effectively Connected Income (ECI ).
If you are considering doing business in the USA, for example, sales over $100,000 to residents and businesses in the USA, please contact a member of the EPR tax team by completing the contact form below. Our tax experts can advise on the best structure to reduce or minimize the impact of the taxes.
Canadian and foreign tax laws are complex and have a tendency to change on a frequent basis. As such, the content published above is believed to be accurate as of the date of this post. Before implementing any tax planning, please seek professional advice from a qualified tax professional. EPR Maple Ridge Langley, Chartered Professional Accountants will not accept any liability for any tax ramifications that may result from acting based on the information contained above.