So now you’ve got the big job and it’s time to get things done. But…the job is too big for your firm or maybe involves a sub-trade that is not your specialty. It’s time to assemble your dream team of partners to help get the job done. You’ve got sub contractors! What’s the best way to pay subcontractors or vendors to ensure your documentation is adequate to prove your payments.  

How do I pay my subcontractors?

Firstly, a caution. It’s important to define the difference between an employee and contractor. Typically, the type of working relationship is established with a contract – either a service contract or an employment contract.  But it goes beyond the contract.  An employee-employer relationship has a sense of subordination. The payer decides the work, method, and pay. Although these things can be negotiated the final say goes to the payer. A contractor works individually without supervision, with the freedom to work when and for whom they choose. Contractors typically are responsible for providing the tools & equipment necessary for work completion. You may be on the hook later if a contractor is later found to be an employee.  

When paying a contractor, it’s best to choose a method that gives an air-tight audit trail. Have your contractor provide an invoice with their company name, address, HST number, the type of services provided and the date or date-range when said service were performed. An air-tight audit proof has the invoice, the payment and the receipt. Using the right tool combines the payment and receipt.

Let’s have a look at some of the payment options with their pros and cons

  • Cheques – Tried and true, cheques are a fantastic tool to pay your contractors. You can write the invoice number and type of service in the memo. The cheque or image be returned will show on your bank statement which is very bookkeeper friendly and provides a clear audit trail.
  • Credit Card – if your subcontractor or vendor allows credit card payment, this can provide up to 30 extra days of cash flow plus air mile bonuses.  
  • Bank Direct Deposit – every big 5 bank offers a Direct Deposit Service whereby you can use the bank’s software to direct deposit into your subcontractor’s accounts. Who can argue with instant access to their cash?
  • Payment services such as Plooto or Payment Evolution allow direct deposit payments of employees, and vendors.   Both of these systems were built from the ground up to link to your accounting systems and to provide bullet proof payment receipts.  
  • Wire Transfer – Another good option as it’s easy to track and quick to process. However, you’ll be hit with some bank fees for every transfer if you choose this option. 
  • Cash – Do not pay your contractors with cash. Even with the backup invoices provided by your contractor; there is no confirmation of payment that you would be able to provide the CRA should any amounts come under review. 
  • E-transfer – Do not pay your contractors with e-transfers. The only trail leads to an email address in addition to having to pay e-transfer fees for every transfer. 

Don’t forget, if you’re in the construction business and you have contractors you must prepare T5018s within 60 days of the end of the calendar year. 

Want to know more about which payment solution is right for you? Schedule a meeting with our team to discuss the best way to optimize your subcontractor payments.