Though there are a variety of deductions made from every employee's paycheck, payroll taxes are a specific subset of deductions made that do not include income tax or other deductions made by the employer. Payroll taxes are set at the federal level as well as the state/province and local levels. They typically go towards funding public programs that benefit the employee. 

Though payroll taxes are applied to employees in both Canada and the United States, the programs they fund and the tax rates vary. Since taxes are paid based on where the employee works from, it is important for those hiring across the border to understand the payroll tax deductions in each country.

Payroll Tax Deduction in the United States

Payroll taxes are set at the federal level in the U.S., though some states and local municipalities have additional taxes they expect employers to deduct during each pay period. In addition to the payroll deductions, there are additional taxes that employees are expected to pay like income tax, and others employers are required to pay like federal unemployment tax (FUTA). 

Payroll tax deductions in the U.S. fall under the Federal Insurance Contribution Act (FICA). These are split into two separate taxes: social security tax and medicare tax. Though these taxes come out of the employee’s pay, they are the employer’s responsibility and should be automatically deducted from each paycheck. In addition to the payroll deductions, employers are expected to prepare and file a W-2 Wage and Tax Statement. 

U.S. Payroll Tax Rates

FICA Taxes (7.65%)

Social Security Tax. 6.2% with a wage-based contribution limit

Medicare Tax: 1.45% with no cap

You can use a U.S. payroll tax calculator to calculate payroll tax responsibilities for each employee.

Payroll Tax Deduction in Canada

In Canada, payroll tax deductions are technically set at the federal level, but Quebec handles things differently than the other provinces and territories. Since payroll taxes in Canada are paid based on the province or territory in which the employee is working, this is an important distinction. 

In addition to income tax, which is set at the provincial and territorial level, Canadian employers need to deduct for Employment Insurance (EI) in all provinces and territories and the Canadian Pension Plan (CPP) in all except Quebec. In Quebec, deductions will need to be made for Employment Insurance (EI), Quebec Pension Plan (QPP), and Quebec Parental Insurance Plan. 

Canadian Payroll Tax Rates

Employment Insurance (EI): 2.21% (1.65% in Quebec)

Canada Pension Plan (CPP): 5.45%

Quebec Pension Plan (QPP): 5.9%

Quebec Parental Insurance Plan: 0.692%

You can use a Canadian payroll tax calculator to calculate payroll tax responsibilities for each employee.

Payroll Deductions: Independent Contractor vs Employee

The distinction between independent contractor vs employee is an important one. Though they may be completing similar projects, there are legal differences between these two worker classifications. In both Canada and the United States, employers are not responsible for the payroll tax deductions of independent contractors. 

The contractor is responsible for all taxes and deductions and are not eligible for benefits through the employer. Due to this difference, proper classification of workers is an important step. Misclassifying can come with legal and financial consequences for the employer. It can be viewed as tax evasion or benefits depravation and will often result in fines and penalties for the employer. In addition to these fines, it can damage the brand reputation. 

Contractor Payroll Tax Rate

United States 

In the U.S. there is a self-employment tax rate of 15.3%. That is broken down as 12.4% for social security and 2.9% for medicare. They will also likely be expected to pay federal and local income taxes. 

Canada

Unlike the U.S., which provides a simple tax rate, self-employed Canadians will need to calculate tax deductions for each individual program. Unfortunately, in Canada employers match contributions for CPP, so instead of the 5.45%, they will need to pay 10.5%. 

There is an EI program designed for self-employed individuals. Premiums for this program are based on the self-employed income and change annually. They will also differ for Quebec residents vs residents of the other provinces and territories. In 2022, you’ll pay $1.58 in EI premiums for every $100 you earn with a max contribution of $952.74. In Quebec for 2022, you’ll pay $1.20 in EI premiums for every $100 you earn with a max contribution $723.60. The lower rate is due to the benefits provided under the Québec Parental Insurance Plan.

In Canada, some self-employed contractors may also be eligible for employment insurance (EI) special benefits if they contribute towards it. 

Pay Your Employees Compliantly

Payroll can be complicated. Payroll taxes will vary from country to country and by state or province. Whether you’re hiring nationally or internationally, we can help keep you compliant. Leave it to The Payroll Edge. Contact us today!