The cross-border articles that show up when a Canadian founder searches "W-2 employees Canadian-owned LLC PEO" almost always use PEO and EOR interchangeably. They are not the same legal arrangement. PEO is co-employment with your own LLC. EOR replaces your LLC as the employer of record. The choice changes who pays state unemployment insurance, who carries permanent establishment risk back to Canada, and how much it costs you per employee per month. This post is the decision tree the SERP keeps glossing over.
30-second answer
If your Canadian-owned single-member or multi-member LLC plans to hire a W-2 employee in the US, you have three operating models. Direct registration has your LLC obtain federal and state payroll accounts in every state where the employee lives or works, file Form 941 quarterly and Form 940 annually, and remit FICA, FUTA, SUTA, and federal/state withholding on its own. PEO (Professional Employer Organization) creates a co-employment arrangement under which the PEO files payroll under its own EIN but you remain the worksite employer. EOR (Employer of Record) makes a separate legal entity the actual employer; your LLC is just the client. EOR is the only model that fully neutralizes the worker's connection to your LLC for federal and state payroll purposes, and it is the model that most aggressively reduces the permanent establishment exposure that Canadian-resident founders should worry about under Article V of the Canada-US tax treaty. Expect $400 to $1,000 per employee per month for EOR, 8 to 12 percent of payroll for PEO, and roughly $1,500 to $4,000 in setup plus ongoing CPA fees per state for direct registration.
The PEO vs EOR distinction the SERP gets wrong
Most articles describe PEO and EOR as if they were two names for the same product. They are different in three ways that matter for a Canadian-owned LLC.
| Direct registration | PEO | EOR | |
|---|---|---|---|
| Who is on the W-2 as employer | Your LLC | Co-employed: PEO files under PEO's EIN, you remain worksite employer | EOR's separate entity |
| Who registers with state UI agency | Your LLC, in each employee's state | PEO uses its own master account in most states (some require you to register too) | EOR — your LLC does not register |
| Who carries workers' comp | Your LLC | PEO master policy with your worksite rated | EOR |
| Federal forms filed | 941, 940, W-2, W-3 by your LLC | 941/940 by PEO, W-2 may be PEO or you depending on co-employment model | All payroll forms by EOR |
| Permanent establishment risk back to Canada | Highest — your LLC has a fixed payroll presence | Reduced but not eliminated — co-employment can still imply your LLC has US payroll | Lowest — the EOR is the legal employer |
| Typical cost | $1,500–$4,000 setup per state + CPA $300–$700/month | 8%–12% of gross payroll | $400–$1,000 per employee per month |
| Best for | 5+ employees concentrated in one state | 5–50 employees, you want bundled benefits | 1–5 employees, multi-state, founder optimizing for PE risk |
The reason this distinction matters: your IRS Form 941 and your state UI account both leave a paper trail showing your LLC has employees in the US. Under Canada-US Treaty Article V, an enterprise resident in Canada has a US permanent establishment if it has a "fixed place of business" or, under the services PE rule, if its services are performed by an individual present in the US for 183 or more days in any 12-month period and more than 50 percent of the LLC's gross active business revenue from services is derived from those services. When your LLC is the W-2 employer, the employee's days in the US are your days for services PE counting. When an EOR is the legal employer, those days belong to the EOR.
For Canadian founders who run their LLC from Canada and have one US employee under 183 days, direct registration with a careful Form 8833 treaty position can survive. For founders with US employees over 183 days or with US-side decision-making, EOR is what the treaty analysis usually points to.
The federal payroll obligations you actually take on
The headline cost of direct registration is not the registration. It is the five federal forms you have to keep filing forever once you have a W-2 employee.
FICA (Social Security plus Medicare). 6.2 percent Social Security on wages up to $168,600 for 2024 ($176,100 for 2025), plus 1.45 percent Medicare with no cap. The employer matches employee, so 7.65 percent employer share comes out of the LLC. Additional 0.9 percent Medicare on employee wages over $200,000 is employee-only.
FUTA (Federal Unemployment Tax Act). 6.0 percent on the first $7,000 of each employee's wages, but a 5.4 percent credit for paying state unemployment on time brings it to 0.6 percent effective, or $42 per employee per year. Filed on Form 940 annually.
Federal income tax withholding. Based on Form W-4 the employee files with you. You deposit by the schedule the IRS sets after your first 941 (semi-weekly or monthly). Reported on Form 941 quarterly.
SUTA (State Unemployment Tax Act). Rates are state-specific. New employer rates run from roughly 1.0 percent in Texas to over 4.0 percent in some northeastern states, applied to a state-specific wage base ($7,000 in Arizona, $73,500 in Washington for 2025).
State income tax withholding. Required in 41 states plus DC. Nine states have no state income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, Wyoming. (New Hampshire taxes interest and dividends only and is phasing that out.) If your only employee is in one of those nine, you skip state income tax withholding entirely.
If you hire an employee in California, you also register with EDD (Employment Development Department) for state UI, ETT (Employment Training Tax), SDI (State Disability Insurance), and PIT (Personal Income Tax) withholding. Four separate accounts. California EDD does not accept SS-4-style fax registration; you do it online or by paper Form DE 1.
State registration is per-employee-state, not per-LLC-state
The most common direct-registration mistake is registering only in your LLC's formation state. If your LLC is formed in Wyoming and your one employee lives in California, you register for California payroll, not Wyoming. The employee's state of residence and physical work location determine where SUTA and state withholding apply. Your Wyoming formation gives you no relief.
If you hire across multiple states, you register in every state where any employee works. This is not the same as foreign qualification (which is a separate question; we cover the trigger matrix in our foreign qualification guide for non-resident LLCs). You can have payroll registration in California, New York, and Texas while your LLC is foreign-qualified in only one or none of those.
Setup time per state runs from same-day (Texas TWC) to 4–6 weeks (some northeastern states). Per state, you pick up an unemployment insurance account number, a state withholding account number, sometimes a workers' compensation policy obligation (mandatory in every state except Texas, where it is optional but rarely skipped).
When direct registration breaks even on EOR
Run the numbers for a single $80,000 employee in California for one year.
| Cost component | Direct registration | EOR at $700/month |
|---|---|---|
| EOR fee | — | $8,400 |
| FICA employer (7.65% × $80,000) | $6,120 | (included in EOR's invoice or added on top depending on EOR) |
| FUTA effective | $42 | (included) |
| California SUTA (3.4% new employer × $7,000 wage base) | $238 | (included) |
| California ETT, SDI | $7 + employee-paid SDI | (included) |
| Workers' comp premium ($1,500–$3,000 typical for a desk job at $80K) | $2,000 | (included) |
| Setup (LLC accounts: federal EIN already, state UI, state withholding, EDD, workers' comp) | $1,500–$3,000 one-time | $0 |
| CPA payroll filing (Form 941 × 4, Form 940, W-2/W-3, state quarterly) | $3,600–$6,000/year | $0 |
| Software (Gusto, Rippling, ADP) | $1,000–$2,000/year | $0 |
EOR comes in at roughly $8,400 plus payroll. Direct registration comes in at roughly $14,500 plus payroll in year one and $13,000 plus payroll in subsequent years. For one US employee, EOR wins on cash cost. The math flips around three to five employees in the same state, where the per-employee CPA and software cost stops scaling linearly.
This is before you price in the value of not creating a US payroll footprint that could be argued as a permanent establishment. If your LLC is genuinely run from Canada and the US employee is sales or support, EOR's PE neutralization is worth more than the cash savings on its own.
Three worked scenarios
Scenario 1: One California-based engineer at $80,000
Canadian founder, Wyoming LLC, hiring one US-resident software engineer in San Francisco. Founder runs the LLC from Toronto, no US sales offices.
Right answer: EOR. PE risk is moderate — engineer is doing core product development, which under treaty analysis can be the LLC's "principal activity" and could trigger services PE if the engineer's days in the US plus founder's days approach 183 in a 12-month window. EOR cleanly puts the engineer on a separate legal entity. Annual cost roughly $8,400 EOR fee plus salary.
Avoid: PEO. California is one of the harder states for PEO co-employment because EDD often requires the worksite employer to register too, eroding the simplicity that PEOs are supposed to deliver.
Scenario 2: Five-person sales team across Texas, Florida, and Wyoming
Canadian founder, Delaware LLC, hiring five US sales reps spread across three no-state-income-tax states.
Right answer: PEO if you want bundled health benefits, direct registration if you have a US-based CPA already running the books. Texas, Florida, and Wyoming are all relatively friendly to direct payroll registration. Annual cost: PEO at 10% of $500,000 payroll is $50,000; direct registration runs roughly $30,000–$40,000 once you amortize CPA across five employees.
PE consideration: five US sales reps with US-based revenue is a stronger indicator that your LLC has a US trade or business, which is a separate concept from PE but related. Get a treaty analysis with Form 8833 in your back pocket either way.
Scenario 3: Canadian engineer working from Canada for your Canadian-owned US LLC
Canadian founder in Vancouver, Wyoming LLC, hiring a Canadian engineer in Toronto who works from home.
Right answer: not W-2 at all. A Canadian resident performing services from Canada for your US LLC is paid through a Canadian-side employment arrangement (your Canadian operating company, your Canadian sole proprietorship as an intermediary, or a Canadian PEO/EOR like ADP Canada or Deel Canada). The engineer gets a T4, not a W-2. Your Wyoming LLC issues no 1099 and no 1042-S because the income is Canadian-source services.
The misconception that this scenario needs a 1099-NEC from the LLC comes up in almost every Canadian founder's first hire. We treat the 1099-NEC version of the contractor question in detail in our 1099-NEC guide for Canadian-owned LLCs; the W-2 / T4 version always routes through the Canadian payroll system, never the US one.
The W-2 vs 1099 misclassification trap
If you treat someone as a 1099 contractor when the IRS or CRA would call them an employee, the penalties stack up fast. IRS Form SS-8 is what a worker files to get a determination — you find out about it when you receive an SS-8 notice asking your side of the story. CRA's equivalent dispute process runs through the Canada Revenue Agency CPP/EI ruling (Form CPT1) or the related employer-employee determination.
US factors the IRS weighs (common-law test):
- Behavioral control: do you direct how the work is done
- Financial control: who supplies tools, who bears profit/loss risk, can the worker work for others
- Relationship: written contract, benefits, permanency, services are a key activity of the LLC
If you misclassify and the IRS reclassifies, you owe employer-side FICA, FUTA, SUTA, plus penalties. Section 530 safe harbor can sometimes protect you if you had a reasonable basis for the classification, but it is fact-specific.
When PEO is the right call
PEO works best when you have 5–50 US employees concentrated in 1–5 states, you want to offer competitive health benefits without negotiating a small-group rate yourself, and you do not mind the LLC remaining the worksite employer for state purposes. Justworks, Insperity, TriNet, and ADP TotalSource are the names that come up most often in this segment.
PEO does not work as cleanly for very small headcounts (the per-employee fee structure makes it expensive at 1–2 employees) or for teams scattered across many states (you eventually still need to register in some of those states regardless of PEO).
When EOR is the right call
EOR works best when you have 1–5 US employees, you are scaling cautiously and want to avoid the per-state registration overhead, you want PE risk minimized for the Canadian-resident owner, or you are testing a US market and may pull out within 12 months. Deel, Remote.com, Oyster, Velocity Global, and Globalization Partners (now G-P) compete in this segment.
The EOR's contract is between the EOR and your LLC. The employee signs with the EOR. Your LLC pays the EOR a single invoice that covers gross wages plus employer taxes plus the EOR fee. You keep day-to-day direction of the employee's work, but legal employment sits with the EOR.
Frequently asked questions
Can my Canadian-owned LLC just pay a US person without W-2 or 1099? No. Section 6041 requires the LLC to file an information return whenever it pays $600+ for services. If the worker is an employee, you file W-2. If a contractor, you file 1099-NEC. Paying without either is a misclassification that exposes you to back taxes and penalties.
Does my LLC need a registered agent change before hiring? No. Registered agent is a state-of-formation requirement and is independent of payroll. You will, however, need a service-of-process address in each new state if you foreign-qualify there.
Do I need a US bank account before payroll? Yes for direct registration, no for EOR. Direct registration requires a US bank account for IRS EFTPS payroll deposits. EOR invoices can be paid from a Canadian or US account, depending on the EOR.
What about Section 199A QBI deduction? Hiring W-2 employees affects your QBI W-2 wages limit. We cover that in detail in our Section 199A QBI guide for Canadian-owned LLCs. Short version: above the QBI threshold, the deduction is capped at 50 percent of W-2 wages paid by the LLC. EOR W-2 wages do not count as your LLC's W-2 wages because the EOR is the employer.
Can I use a PEO and an EOR together? Yes, for different employees. Some founders run their core team through an EOR for PE reasons and put a separate state-concentrated team on a PEO.
How long does setup take? EOR: 1–2 weeks. PEO: 2–4 weeks with onboarding. Direct registration: 4–8 weeks per state, longer in some northeastern states.
The right call depends on headcount, geography, your PE posture, and how aggressively you want to localize benefits. Map your hiring plan against the matrix above before you commit. If the analysis points to EOR for the founding team and PEO for a sales push later, that is a perfectly reasonable two-track approach.