Taxes for Canadian Businesses in the USA – Federal

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Question:

What federal taxes does a Canadian business pay in the USA?

Discussion:

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.

Answer:

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 employees 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 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 employees 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 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 ).