TN, Self-employed, W-2, 8233 and taxes fun

Hello,

I have started working in the US as a TN. A company is sponsoring me although I'm doing work for a third party. They consider me as an employee (W-2 at the end of the year) and withhold taxes, SSN and Medicare. I am a non-resident alien (i.e. Canadian resident for tax purposes)

I talked to Quebec's Revenue Agency and I can still file as self-employed, given my sponsor is not my direct employer (not superivising my work, no office space, etc.)

My problem is: my sponsor is withholding too much taxes vs. what I calculated I will be paying with my business expenses and I don't think I qualify for the 8233 as I am an employee.

1) Will I get every excess tax paid back (tax software, for what it's worth for simulation purposes shows only 30-40% recovery on surplus paid)

2) Any other form I can submit if I don't qualify for 8233

3) How do you file your W-2 vs. being self-employed (although the revenue agency confirmed I could, they didn't seem sure how I'd do it).

4) Any Quebec tax consultant recommended for Quebec + US taxes? I found a US tax consultant so that should also help.

Thanks,

Ed.

There you go:

"Income that residents of Canada receive for personal services performed as employees in the united states is exempt from U.S. Tax if it is not more than $10,000 for the year.
If the income is more than $10,000 for the year, it is exempt only if:

- The residents are present in the United States for no more than 183 days during the calendar year, AND
- The income is not borne by a U.S. resident employer or by a permanent establishment or fixed base of an employer in the United States."

So basically, I will have to pay US taxes + Canadian taxes (aside from anything withheld in the US) and will only be able to deduct 2% of my non-reimbursable business expenses.

My problem is: my sponsor is withholding too much taxes vs. what I calculated I will be paying with my business expenses and I don't think I qualify for the 8233 as I am an employee.

Correct. You are a direct employee.

1) Will I get every excess tax paid back (tax software, for what it's worth for simulation purposes shows only 30-40% recovery on surplus paid)

I doubt there's much in the way of tax software to help you in this situation.

If you are a resident of Québec, basically how it works is when you get your W-2 you must file a 1040NR and an 8840 (or 8833 in some situations). Then you file your Québec T1 and claim a foreign tax credit for the US income tax.

What will happen is that you will have underpaid Canadian income tax, but you will still have social security withholding in the US. So you have to pay the difference in income tax. Depending on your income, you will probably pay more tax than if you worked in Québec or lived permanently in the US, because you effectively pay the total of Canadian, Québec and US social security tax, and US social security taxes are more than CPP except at low income levels. CPP contributions stop at around $62,000 but US social security taxes go up to $103,000 (which is why US income taxes appear to be so much lower because more tax is derived via social security than in Canada). Not sure what the cut-off level is for QPP.

Your employer also has to do NRA withholding, because presumably on your W-4 you stated you were a non-resident alien. This requires a higher rate of withholding.

If you've overpaid then you get a refund obviously when you file your return so I wouldn't worry too much about withholding right now.

2) Any other form I can submit if I don't qualify for 8233

Not really because you're directly employed by them. If you were an independent contractor then you could use Form 8233.

3) How do you file your W-2 vs. being self-employed (although the revenue agency confirmed I could, they didn't seem sure how I'd do it).

The new tax treaty requires proportional payment of tax, i.e. you must pay tax proportionally based on where the work was actually performed. All the current tax publications are thus out-of-date.

If you're already self-employed in Canada, being self-employed in the US I don't think helps much because it simply means you would have to do the US withholding taxes (at the same rate they do from the sounds of it) and get an EIN rather than your employer doing it. Either way you end up with a W-2 and still have to complete your T1 the same way.

4) Any Quebec tax consultant recommended for Quebec + US taxes? I found a US tax consultant so that should also help.

I doubt it, they're generally not clued up on Canadian tax laws, let alone Québec laws. You really need someone in Québec who knows US tax laws.

In the meantime have a read of IRS publications 519, 597 and pages 22-26 of IRS publication 515 but bear in mind a couple of things when you read them -

they're out-of-date, certain things will change;
there is no mention of TN-1 status in them, the IRS generally recommends you move your tax home to the US so the first several sections of 519 explains how to do that, however (a) you may not want to; (b) you're supposed to maintain "non-immigrant intent" with TN-1 and saying you're a US resident for tax purposes may affect that; (c) it's a pig to do all the paperwork because there's things they don't mention like the RRSP stuff, etc.; (d) even bigger pig to move it back again if you're only going to be in the US for a short time.

Also the one big caveat that only affects Canadians is the departure tax. If you move your tax home to the US you automatically become subject to it. Not such a problem for Joe Blow who only owns a house and a car, but if you have your own business you're far more likely to get hit with it. Have a read of: http://www.cra-arc.gc.ca/tx/nnrsdnts/nd ... n-eng.html

There you go:

"Income that residents of Canada receive for personal services performed as employees in the united states is exempt from U.S. Tax if it is not more than $10,000 for the year.
If the income is more than $10,000 for the year, it is exempt only if:

- The residents are present in the United States for no more than 183 days during the calendar year, AND
- The income is not borne by a U.S. resident employer or by a permanent establishment or fixed base of an employer in the United States."

So basically, I will have to pay US taxes + Canadian taxes (aside from anything withheld in the US) and will only be able to deduct 2% of my non-reimbursable business expenses.

You don't benefit from this, the income is borne by a US resident employer so it doesn't apply. They have to do NRA withholding.

This is a subject that scares me to death. I can't find any accountant that will touch my tax situation.
As i was refused entry to the US, i lived 2005 in Canada, but also due to problems for my employer i incoporated a company, and that company invoiced my employer. So in the end, my employer hired a Canadian Corporation to do work for it, I did the work, and the corporation paid me.

now i have to pay taxes. i simply refuse to pay US anything i don't really care the consequences or laws, if they won't let me enter the country they won't get a penny from me.

What i don't know is how to file my Canadian taxes for this year, and the reason i still havn't done it, is because i'm still trying to figure them out! and revenue canada has been NO help at all in this, and i'm frankly totaly lost - i've been ordered to file, and i have got to the point where i'm about to say "I earned $X per month for 12 months, here's my taxes, you go figure it out". I'm affraid that while it helps my employer to have a "Foreign company on Contract" it doesn't help me in any way - i would also like to know if i can have my company as a kind of "referring company" that simply hires me on contract, and writes up invoices (like elance or something) as i'm affraid that i'll get killed with double the taxes.

Now - i don't even live in Canada. I plan to be away for 5 years, with only one visit for 28 days last July. (which was after 22 months being away) that i will have non-residency, but i still own the corporation for the benefit of my US employer, and i just recently learned that i need to be a Canadian residence in order to maintain my Corporation as the only shareholder.

bleeding heck - does trying to earn a living neeeeeed to be so difficult, confusing and expensive?

Doesn't sound that complicated frankly. If all the work is done outside the US it's pretty simple to file, it's even easier for corporations. They just file 1120-F and 8833 to declare their US-source income. There's no tax if all the work was peformed outside the US, i.e. it has a US client, it invoices them for work performed outside the US.

It's just a filing requirement really. Essentially all you're doing is making a tax treaty claim so the client doesn't have to do non-resident withholding.

I'd say it's a very unwise decision not to file if you're supposed to, because the IRS isn't going to come after that corporation - they're going to go after your client who I suspect is not going to be happy you've stuck them in an awkward tax situation.

If you receive income from a Canadian corporation, i.e. you have Canadian-source income but your principal residence is Bangladesh, that's also pretty easy from a filing standpoint, just file a non-resident T1 and claim a foreign tax credit in Bangladesh. Just read the instructions for the non-resident T1. You need to make the CRA aware that you're non-resident.

Thanks a lot for the answer Steven, you really know this stuff inside out and it took me so serious time + reading to digest this.

I spoke at length with my employer who's now offering the option of incorporating in Canada and paying that company directly (so no withholding) and the company would pay me a salary in return.

I was your previous post in august on the subject and still had some open questions, if you don't mind:

1) The corporation really has to pay US taxes for US revenues? As a self-employed, I used to only pay Canadian taxes (when working from Canada for a US client) and thought you could "export" services.

2) The main point behind trying to be self-employed was to deduct my IT, phone and misc. expenses which I obviously can't as an employee. Being a company, would that allow the company to deduct part or full apartment + flights back to MTL (I'm a canadian resident for tax purposes, have residential ties in Quebec). If not, then the savings from being incorporated might not offset the extra cost.

3) The salary question: if I don't have to pay US taxes, then I can pay a salary and deduct it, otherwise I would either have to pay salary and do US withholding OR pay a dividend (non-tax deductible) but only 50% tax rate as it is a capital gain?

I really need to find a good accountant on this, but google has been of no help. Any one you could recommend in Quebec, as this will either cost me $20k this year (as an employee) or save me $5-10k in taxes, so a net cost/gain of $30k either way.

1) The corporation really has to pay US taxes for US revenues? As a self-employed, I used to only pay Canadian taxes (when working from Canada for a US client) and thought you could "export" services.

You can, whether you're self-employed or the corporation does it, there is no tax provided (a) the work is performed outside the US and (b) the individual or corporation makes a tax treaty claim. With an individual it's 1040NR and 8833, with a corporation it's 1120-F and 8833.

A lot of people seem to think 1120-F is the hard bit, but it's easy if you've prepared all the paperwork for your T2. 8833 is actually the hard bit as all the questions are open-ended, call the IRS and specifically ask them how to fill it in, be prepared to wait for a long time to get an agent who knows.

2) The main point behind trying to be self-employed was to deduct my IT, phone and misc. expenses which I obviously can't as an employee. Being a company, would that allow the company to deduct part or full apartment + flights back to MTL (I'm a canadian resident for tax purposes, have residential ties in Quebec). If not, then the savings from being incorporated might not offset the extra cost.

I think your problem here is understanding how corporations work, every legitimate business cost is deductible against corporation tax, including salaries (but not dividends). If it's a capital cost (e.g. a computer) then you have to use CCA, but presumably you already know how to that as self-employed people have to do it too.

There is a big caveat to using a corporation - if you own a CCPC, that CCPC relies on your resident status in Canada to be a CCPC. If you leave Canada permanently (i.e. move your tax home abroad), it reverts to being a normal corporation which means much higher corporation taxes. In addition, you are far more likely to get hit with departure tax as it is far easier for the CRA to assess what your assets are. For example if your corporation has only one share that you paid $1 for (which is the usual method of setting it up), your corporation will have retained earnings unless you pay everything out as salary.

This is a capital gain as the corporation is worth more than the $1 you paid for it. Capital gains in excess of $50,000 (total, not just your corp.) are subject to departure tax at a rate of 25%, so say for example your corporation was worth $60,000 when you leave Canada and you have no other eligible assets with a capital gain (most Canadian real estate is exempt), you would owe the CRA $2,500.

You can pay out more salary of course to avoid it, but then you pay more personal income tax.

3) The salary question: if I don't have to pay US taxes, then I can pay a salary and deduct it, otherwise I would either have to pay salary and do US withholding OR pay a dividend (non-tax deductible) but only 50% tax rate as it is a capital gain?

Don't use dividends ever is the simple advice, there is no advantage from paying out that way as you have to pay personal income tax on dividends and on salary. Salary is deductible against corporation tax, dividends are not. As you own the corporation, dividends are pointless. CGT is about selling your stocks in the corporation, which you would never do.

If it means US payroll paperwork, you'll have to do it, better to do that than pay out wads of corporation tax.

The only time you should ever use dividends imo is if the corporation is defunct or makes a loss for the year. In that case there is no corporation tax so there is no reason not to pay out as dividends.

Where this is likely to come up is if you ever moved permanently to the US. There is no corporation tax because it has no income anymore, so the residency status necessary for CCPC is irrelevant. However to pay out the remaining funds as salary you have to do payroll withholding in the US, which means you have to register for it.

The simpler solution is to pay out the remaining assets as dividends and pay US personal income tax on them. Then the corporation is worthless and you simply dissolve it.

(Bearing in mind however the CRA will use the amount in the corporation on the date you moved to determine departure tax).

I really need to find a good accountant on this, but google has been of no help. Any one you could recommend in Quebec, as this will either cost me $20k this year (as an employee) or save me $5-10k in taxes, so a net cost/gain of $30k either way.

Don't know of anyone in Québec, but I'm sure there is someone, ask around at accountants.

Thanks!

Got a call from a Tax Lawyer from Quebec this morning who said to forget about the idea as a one-client company where I would work at the client's site is basically an employee-employer relationship and that the gov't would get on my case.!

To be honest I'm losing track of what your situation is, exactly.

If you are working for them on-site and you're on TN-1 you have to be directly employed, so you just put down "non-resident alien" on the W-4 and file non-resident on 1040NR and file an 8840 every year if you live primarily in Québec.

If you're working primarily in the US there's no point to a Canadian corporation because it makes it massively more complex, use a US corporation. If you are non-resident it would have to be a C-corp though, only residents can use S-corp.

To be honest I think my original answer is the solution, but you will end up paying a lot of tax that way because you effectively pay the combination of US social security tax and Canadian income tax after you claim the foreign tax credit for the US income tax.

You can't register as self-employed in the US so there's no other way to do it if you continue to live in Québec.

The fact that you're self-employed in Québec is largely meaningless, because your job is in the US and you are directly paid by them, the only difference is you use a different tax return form in the US to a resident and you still have to file a T1 in Québec.