The US-Canada border is one of the friendliest in the world. As a result, many people move back and forth across the border. I am one of those people. I grew up in Canada, went to university and worked in the US, moved back to Canada for a few years, and now live back in the US.
It’s important for people considering moving across the border to understand the difference between the two countries' personal tax systems. Although the principles in each country are similar, the implementation is quite different.
This is the third in a series of posts on the topic.
In my first post I wrote about the differences in tax agencies, impact of moving, filing status, and income tax rates.
In my second post I explained deductions and credits, which can be a confusing concept especially when comparing Canada and the US.
Deductions are credits are one reason income tax rates have little to do with how much income-related tax you actually pay.
In this post, I’ll explain the another reason: payroll tax.
I say "income-related” because payroll tax is not technically income tax, but it is directly related to your income. Income tax and payroll tax are calculated together in both US and Canada tax returns.
Conventional wisdom says taxes are higher in Canada than the US. They must be higher: Canada is more socialized, especially with its universal health care system that residents pay little to nothing for.
This may be true for some situations, but it wasn’t for mine. My income-related taxes went up, mainly because of payroll tax. (On top of taxes, I pay high health care premiums, but that’s another topic.)
Those who move to the US and earn between $50,000 and $120,000 find US payroll tax to be a shocker. In fact, most people earning up to $120,000 will pay much more in payroll tax than income tax.
The payroll tax concept is similar between the two countries. Both contribute to retirement and unemployment programs, and both are mostly split evenly between employees and employers. In both countries self-employed people pay both the employee and employer side.
In Canada, payroll tax consists of:
- Canada Pension Plan (CPP), which pays for retirement benefits (4.95% each up to about $50,000 in earnings)
- Employment insurance (EI), which provides unemployment benefits (up to about $50,000, employees pay 1.88% and employers pay 1.4x the employee rate - 2.63%)
In the US, payroll tax consists of:
- Federal Insurance Contributions Act (FICA), which includes:
- Social security for retirement benefits (6.2% each up to about $120,000 - there’s the big difference)
- Medicare for age 65+ health insurance (1.45% each on all wages with an additional 0.9% from employees only on income over $200,000)
- Federal Unemployment Tax Act (FUTA) (6% up to $7000 earnings paid by employers only)
- State Unemployment Tax Act (SUTA) (rate varies, usually paid by employers only)
ADP provides a simple guide to payroll taxes by state here.
The CRA website has a good guide to all Canada tax rates here.
In both Canada and the US, those who earn income without taxing being withheld must pay quarterly estimated tax quarterly. The deadlines and amounts required are different between the countries. Further, the calculations and requirements can be complicated.
If you are self-employed or for other reasons do not have enough tax withheld to cover the tax you owe for the year, I encourage you to review these rules carefully. Otherwise, you could be hit with significant penalties and interest.
Everyone's situation is different of course. My tax in the US is higher than Canada, but others may find the opposite depending on income level, type of income, and deductions and credits available.
When comparing the two tax systems, don’t forget payroll tax. Income tax rates get all the attention, but payroll tax is the largest factor for most people.
Disclaimer: I am a CPA in both Canada (Chartered Professional Accountant) and the US (Certified Public Accountant), but I am not a tax expert and this post is not meant to be professional advice. My goal is not to write a definitive guide. Rather, my goal is to give you a starting point for your own further research and/or discussions with your tax advisor.