How to pay contractors in Canada from the US

US businesses that want to employ workers in Canada need to be clear on how to pay them. The payment method used can impact costs, speed, and admin time. These in turn can all affect the relationship with the contractor.

This article explains how to pay contractors in Canada for services in the US.

How to pay contractors in Canada: 4 ways to pay

Before paying a worker, it’s important to ensure that they are correctly classified as self-employed and not an employee. A worker’s employment status affects their employment insurance (EI), pension and income tax payments.¹

Whether a worker is an employee or contractor depends on whether they work independently, are free to work for multiple companies, and can accept or refuse work. Once this is clear, it's time to choose the best payment method.

There are a few different ways you can pay contractors, each with its own advantages and disadvantages.

Bank transfer

Bank transfer, or direct deposit, is a fast and convenient way to send money to an international contractor.

Funds are transferred electronically through the Automated Clearing House (ACH) networks. To pay a contractor in Canada, you need their full name, bank account number, branch address, and other information. Complete the transfer request, providing the recipient's information, currency and amount to transfer. Review the information carefully to ensure it’s accurate and avoid delays.

Authorize your bank to debit your account for the payment amount, including fees. Once the transfer is initiated, the bank will process the payment and provide a receipt.

Advantages

• Secure. Direct deposit is usually secure as it involves direct communication between financial institutions.
• High transfer limits. Banks often have higher transfer limits than money orders or money transfer services. This makes them suitable for larger payments.

Disadvantages

• High fees. Banks charge fees for international transfers, to either the sender, recipient, or both. Fees vary depending on the bank and details of the transfer.
• Time-consuming. Bank transfers can take longer to process than other payment methods. International transfers often take several business days to complete.
• Complex documentation. Bank transfers involve filling out detailed forms with recipient information. Any errors in the information provided can result in payment delays or rejection.

Payroll provider

Businesses that have a number of contractors or employees in multiple locations may prefer to use a payroll system to manage their payments.

Payroll software offers a convenient way to pay independent contractors alongside employees when running payroll. Software like Gusto, Paychex Flex, and QuickBooks, makes it easy to process payments, record accounting entries, and file tax documents for independent contractors.

Advantages

• Simplified process. Payroll systems streamline the process of paying contractors, incorporating it into the process for paying regular employees.
• Compliance and tax expertise. Payroll providers ensure that payments comply with local tax and labor regulations in different countries.
• Reporting and record-keeping. Payroll providers typically offer robust reporting and record-keeping capabilities. This makes it easier to track payments, taxes, and other financial details.

Disadvantages

• Cost. Payroll software and service providers charge fees that can vary depending on the number of contractors and the complexity of the payment requirements.
• Commitment. Using a payroll provider or service may require a business to sign a contract or commit to a specific term. This may not be ideal for businesses with sporadic contractor needs.
• Loss of control. By outsourcing the payment process to a payroll provider. A business relinquishes some control over the payment timeline and process.

International money order

An international money order is a secure and widely accepted method for sending money abroad. Money orders are available through post offices, banks, or other financial institutions.

To pay an independent contractor, fill out their name and payment details along with the currency and payment amount. Pay the required amount, which typically includes transfer fees. The money order will have a reference number for tracking purposes.

Send the money order to the contractor in Canada via registered mail or another secure method. Retain the proof of mailing and tracking information.

Advantages

• Widely accepted. International money orders are accepted by most financial institutions and can be easily deposited or cashed.
• Secure. Money orders are secure as they are prepaid and require a signature for verification.
• Clear documentation. Money orders provide a clear paper trail with receipts and tracking numbers for proof of payment.

Disadvantages

• Time-consuming. Sending money orders can be inconvenient, especially if they have to be obtained from a physical location. They also take several days for the contractor to receive in the mail and access the funds.
• Transfer limits. Money orders often have a maximum transfer limit. This may not be suitable for larger payments.
• Exchange rate fluctuations. Money orders typically use the exchange rate on the day of purchase. This means the recipient may receive a different amount due to exchange rate fluctuations.

Money transfer service

Transfer services provide a convenient and efficient way to send funds internationally. To choose a reliable money transfer service, research reputable money transfer services that offer competitive exchange rates and low fees. Popular options include Remitly, Xoom, OFX, XE, Wise, and Western Union.

Create an account with your chosen money transfer service. Provide the necessary information and complete any required identity verification. Enter the contractor's details, including their name, contact information, and bank account details. Enter the amount you wish to send and select the desired currency. Depending on the service, you can pay for the transfer using a bank account, credit card, or other available methods.

It's good to inform the contractor that you have made the transfer and provide the transaction or reference numbers.

Pay Employees With BatchTransfer

BatchTransfer has an easy-to-use instant payments system that allows you to make multiple payments, for both domestic and international, in one go. Small businesses and enterprises can get access to BatchTransfer with no additional cost after getting a Wise Business account.

BatchTransfer’s core strengths for payroll:

What sets BatchTransfer apart is its commitment to providing the mid-market rate for currency conversions. This means that businesses get a fair and transparent deal when making international payments.

Another perk of using BatchTransfer for international payroll is its extensive coverage of over countries and currencies! With features like automatic payment scheduling and API integration, small businesses can streamline their payroll process, freeing up valuable time and resources for other important tasks.

• How can businesses use BatchTransfer for payroll?: Businesses can send up to 1000 payments with a single click with BatchTransfer. US-based business can access BatchTransfer at no extra charge.

• Connect to your accounting software: You can easily manage and reconcile your mass payments through accounting software integrations such as QuickBooks or Xero.

Start making payments
with BatchTransfer >>

Advantages

• Convenience. Money transfer services offer online platforms and mobile apps to initiate transfers efficiently.
• Speed. Transfers can be completed quickly, often within minutes or a few business days.
• Flexible payment options. You can typically fund money transfers using various payment methods such as bank accounts, credit cards, or debit cards.

Disadvantages

• Fees. Service providers often charge fees, including transaction fees and currency conversion fees. These can add up, especially for larger transfers.
• Exchange rates. Money transfer services often add markups to the exchange rate, making them less favorable than the rates provided by banks or currency exchange specialists.
• Service limitations. Some services may have restrictions on the maximum transfer amount or specific countries they can send funds to.

Taxes for paying contractors in Canada

Businesses based in the US need to be aware that they don’t need to deduct withholding taxes from their payments to Canadian contractors. There is a tax agreement between the US and Canada that means contractors in Canada do not need to pay US taxes as well as Canadian taxes. They just need to submit the Internal Revenue Service (IRS) form W-8 to the company they work with.

Contractors based in Canada are responsible for reporting their own income and paying taxes to the Canada Revenue Agency (CRA).

Save Time and Money On Overseas Payments With Wise Business

Wise Business can help you save big time on international payments.

Wise is not a bank, but a Money Services Business (MSB) provider and a smart alternative to banks. The Wise Business account is designed with international business in mind, and makes it easy to send, hold, and manage business funds in currencies.

Signing up to Wise Business allows access to BatchTransfer which you can use to pay up to 1000 invoices in one go. This is perfect for small businesses that are managing a global team, saving a ton of time and hassle when making payments.

Some key features of Wise Business include:

• Mid-market rate: Get the mid-market exchange rate with no hidden fees on international transfers

• Global Account: Send money to countries and hold multiple currencies, all in one place. You can also get major currency account details for a one-off fee to receive overseas payments like a local

• Access to BatchTransfer: Pay up to 1000 invoices in one click. Save time, money, and stress when you make 1000 payments in one click with BatchTransfer payments. Access to BatchTransfer is free with a Wise Business account

• Auto-conversions: Don't like the current currency exchange rate? Set your desired rate, and Wise sends the transfer the moment the rate is met

• Free invoicing tool: Generate and send professional invoices

• No minimum balance requirements or monthly fees: US-based businesses can open an account for free. Learn more about fees here

Use Wise Business >>

Source checked July 25, 2023.