Pay US Subcontractors From Canada: Tax, FX and Records

Start with the payee, work location and reporting scope#

To pay a US subcontractor from Canada, identify the legal supplier, confirm where the services are performed, agree the invoice currency and establish the applicable withholding/reporting path. Then approve the work, fund the payment and reconcile the result. US tax status, Canadian tax residence and physical work location are separate facts.

A worker who is actually an employee needs an employment/payroll assessment instead. The examples assume ordinary service fees; royalties, equipment rentals, regulated work and other payment categories can require different treatment. Current official guidance was checked on 3 October 2026.

Build a vendor file that answers the real questions#

For an individual US citizen or US tax resident, Form W-9 is the relevant US status/TIN form when needed for the applicable US reporting process. Form W-8BEN is for a foreign individual in a US withholding/reporting context, not a substitute for a US person’s W-9. An entity’s documentation depends on its legal and tax classification; do not select a form only from its mailing address. IRS information-return instructions explain the distinction.

Collect sensitive tax details through restricted vendor intake, separate from general invoice email. Keep the commercial contact and authorized payout contact clear. Verify new bank details or changes through an established contact channel before updating the beneficiary; an amended invoice alone is not adequate authorization to redirect a payment.

For worker classification, the IRS contractor FAQ considers behavioral control, financial control and the relationship. Document how the engagement actually works and assess the applicable employment rules for the work location. A W-9 or an invoice does not turn an employee into an independent contractor.

Apply Regulation 105 to the Canadian service facts#

CRA guidance requires withholding on payments to non-residents for non-employment services provided in Canada, normally at 15% of the gross covered amount. The payer can be Canadian or non-resident. A US supplier working entirely in the United States does not create this Canadian-services withholding trigger simply because the client is Canadian.

If a US supplier comes to Canada for paid services, assess the Canadian portion before paying, including advances relating to those services. CRA’s IC75-6R2 allocation guidance, paragraphs 32–34 permits a reasonable, documented allocation between services inside and outside Canada. Keep the contract and supporting work records; if no allocation is documented, the circular recommends withholding on the total service payment.

Use that circular’s allocation guidance alongside current treaty text. Its older reference to a 10% limit on the first CAD5,000 of certain US individuals’ fees is not a current concession: the consolidated Canada–US convention marks Article XVII as repealed. Do not copy the old rate into a payment policy.

A treaty argument that the supplier ultimately owes no Canadian tax is not, by itself, permission to skip required withholding. Obtain the applicable written CRA waiver or reduction before using it. A pending application is not an approval. Withholding is a payment on account of possible tax liability, not necessarily the supplier’s final tax bill. CRA’s T4A-NR guide describes this relief process.

Keep the withholding remittance and T4A-NR separate from the payout#

CRA requires Regulation 105 amounts to be remitted by the 15th of the month following withholding. Covered payments are reported on T4A-NR slips and a summary by the last day of February after the payment year, with a recipient copy by the same date. Reporting applies regardless of payment amount or whether tax was withheld; a waiver does not itself remove the reporting task. CRA’s non-resident-services guidance sets out these obligations.

The T4A-NR guide describes waiver applications and the payer’s need for the CRA authorization letter. Plan the application before the service/payment window, rather than assuming the supplier can fix the withholding after the transfer. Record the authorized scope, amount/rate and relevant dates so a later invoice does not silently reuse an expired or inapplicable decision.

Assign separate owners for supplier payment, CRA remittance and the annual slip. Show gross covered fees, tax withheld and net supplier payment as separate ledger amounts. The payment provider’s transfer confirmation does not demonstrate that the CRA remittance or the annual return has been completed.

A worked mixed-location invoice#

Suppose a hypothetical US corporation invoices CAD10,000 for ordinary services: CAD4,000 reasonably allocated and documented to work in Canada and CAD6,000 to work in the United States. Assume no waiver/reduction, no GST/HST or travel reimbursement and no contractual gross-up. Regulation 105 withholding is CAD4,000 × 15% = CAD600. The supplier receives CAD9,400 and CAD600 is payable to CRA.

The CAD600 is not an extra reduction in service expense, and sending only CAD9,400 without recording/remitting the withheld amount does not complete the obligation. A separate transfer fee is recorded separately. Use actual approved allocation and tax facts for a live invoice; the hypothetical numbers do not settle the supplier’s eventual Canadian income-tax liability.

Do not assume a Canadian payer is exempt from US reporting#

The IRS rules for non-US payers state that they generally have the same reporting obligations as US payers. Canadian incorporation or the absence of a US office is not a standalone 1099 exemption. Identify the legal payer, whether it meets the US/non-US payer definitions, the payee category, the payment’s source and where it is paid and received.

The foreign-payment exceptions in 26 CFR 1.6041-4(a)(2) and the remuneration rules in 1.6041A-1(d)(3) depend on defined foreign-source and outside-US payment facts. Do not substitute “paid from Canada” for those tests. A US person working in the United States generally earns US-source service income under the IRS service-source rule, regardless of the client’s location.

For ordinary reportable nonemployee service payments, the IRS contractor FAQ specifies a USD2,000 calendar-year threshold for payments after 31 December 2025. Apply the threshold only after checking reporting scope and payee/payment exceptions. The older USD600 rule belongs to earlier payment years; it is not an unresolved setting for 2026.

Form 1099-NEC instructions distinguish ordinary corporate-payment exceptions from reportable corporate legal fees and other exceptions. They also coordinate payment-card/qualifying third-party-network transactions with the settlement entity’s 1099-K reporting. A provider’s ordinary bank-transfer service does not automatically qualify for that network exception. Document the actual transaction type before removing it from NEC totals.

For a hypothetical US-resident sole proprietor who performs all ordinary consulting services in the United States and receives USD3,000 during 2026 by bank transfer to a US account, assume the payment is made in the Canadian company’s business and no payee/payment exception applies. The foreign-source exception does not fit that US work. The payment exceeds the 2026 threshold, so the company generally prepares Form 1099-NEC using the vendor’s W-9 information. Regulation 105 does not arise from this wholly US service case.

When NEC reporting applies, the IRS instructions require filing and recipient furnishing by January 31 after the payment year, with the next-business-day rule for weekends/legal holidays. The general instructions require e-filing when ten or more covered information returns are due in aggregate. Prepare the correct-year return from payment records, including foreign-currency conversion under the applicable reporting rule; do not report an unpaid invoice as a paid amount.

Keep US backup withholding distinct from Canadian withholding#

IRS backup-withholding guidance gives a 24% rate for applicable situations, including missing or incorrect TINs on covered payments. Determine whether those rules apply to the actual payer/payment, then follow the documentation, withholding and reporting requirements. Do not automatically deduct 24% from every US contractor or treat a Canadian Regulation 105 waiver as relief from US requirements.

For a US supplier whose fees are subject to US information reporting, keep a correct W-9 and the reporting decision linked to the vendor record. If the work, payee, legal payer or payment method changes, reassess the scope. Do not route a US person to Form 1042-S merely because the client is outside the United States; foreign-payee withholding/reporting requires its own analysis.

Agree currency and compare complete delivery costs#

The agreement should state whether the supplier is owed USD or CAD, who pays conversion and transfer charges, and whether the obligation is a fixed recipient amount. Compare the same invoice amount and delivery currency across a business bank wire and any approved business payment provider. Check that the service accepts your Canadian entity and the actual supplier/corridor before relying on it.

For a hypothetical USD2,000 recipient obligation, an agreed conversion quote of CAD1.35 per USD requires CAD2,700 before fees. A separately charged CAD10 sender fee makes the debit CAD2,710 if the recipient still receives USD2,000 and no other deductions apply. If an intermediary instead deducts USD20, USD1,980 does not meet a fixed USD2,000 net-recipient promise; resolve the shortfall under the agreement. These are examples, not live quotes.

Approve, release and reconcile each invoice once#

• Receive the invoice and match the legal supplier, contract, service location, amount/currency and due date.
• Have the hiring owner accept the work; record the applicable withholding and tax-reporting treatment.
• Verify beneficiary details and sufficient accessible funds; approve the payment through the established authority.
• Submit once with an internal obligation ID and retain the bank/provider reference.
• Reconcile the invoice, gross/net payment, fees and any withheld-tax liability; record confirmed returns or unresolved outcomes.

Keep an unknown, pending or held payment unresolved until the provider confirms its outcome. Looking up the original reference comes before authorizing a replacement. A new transfer ID does not prevent duplicate payment when the first transfer can still complete. For a confirmed return, reconcile returned funds and fees, correct the cause and preserve the original obligation/attempt history.

Send the supplier a remittance notice with invoice reference, payment amount/currency, tax withheld where relevant and payment reference. Use precise statuses such as submitted, pending, received or returned. A “sent” label does not establish that the supplier’s bank credited the full amount.

Close the reporting year from separate reconciled totals#

Maintain separate totals for covered Canadian services, CRA withholding/remittances, reportable US service payments and payment types assigned to another reporting party. One contractor can need different analyses for different invoices. Link every included amount to its paid record and every excluded amount to the reason for exclusion.

Before filing, reconcile the legal name/TIN or Canadian recipient identity, currency conversion, gross amount, withheld tax, filed return and recipient delivery. Save the scope decision, work-location evidence, waiver where applicable, statements and corrections under the retention rules that govern those records. A payment ledger and an invoice register can differ because of unpaid invoices, credits, returns and year-end timing; explain those differences rather than forcing every total to match.