How to Pay Contractors in North America [Detailed Guide]

When hiring independent contractors in North America, it's essential to first understand that each country has its own regulations, currencies, and preferred payment methods. 

While 23 countries and territories make up North America, we already covered 21 of them in How to Pay Contractors in Latin America [Detailed Guide], so this guide will only focus on contractor payments in Canada and the United States.

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Key takeaways:

• The United States and Canada each have unique contractor laws and preferred payment methods.
• Ensuring proper contracts and local compliance is essential to avoid misclassification.
• Bank transfers, digital wallets, and digital payment platforms are common payment methods.

Regulations Governing Contractor Payments in North America

Both Canada and the United States have established regulations for hiring and paying independent contractors. However, tax laws, currencies, and payment options vary between the two nations. 

United States

Independent contractors in the U.S. are governed by the Internal Revenue Service (IRS). Companies hiring contractors must:

• Ensure proper classification as an independent contractor rather than an employee (misclassification can lead to legal and financial penalties)
• Collect Form W-9 from the contractor to obtain their Taxpayer Identification Number (TIN)
• Issue Form 1099-NEC for payments exceeding USD 600 in a tax year
• Withhold taxes only if the contractor is subject to backup withholding.

Worth noting: As a U.S. territory, Puerto Rico follows U.S. tax laws but has additional local tax regulations, requiring businesses to ensure compliance with both IRS and local laws.

Canada

The Canada Revenue Agency (CRA) governs Canada's independent contractor payments. 

Key requirements include:

• Verifying the contractor's status as an independent contractor rather than an employee
• Ensuring contractors handle their tax contributions, such as the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) if applicable
• Businesses are not required to issue tax forms like the U.S. 1099-NEC, although contractors must report their own earnings

Taxation and Withholding Laws

Taxation and withholding regulations for paying independent contractors vary between the United States and Canada.

United States

• IRS classification: Contractors must be correctly classified to avoid penalties.
• Form W-9: This is required to collect the contractor's Taxpayer Identification Number (TIN).
• Form 1099-NEC: The form must be issued for payments exceeding USD 600 per year.
• Backup withholding: If the contractor does not provide a valid TIN, businesses must withhold 24% for taxes.
• State taxes: Some states impose additional reporting and taxation requirements.
• Puerto Rico: A 10% withholding tax is required on independent contractor payments.

Canada

• CRA classification: Independent contractors are responsible for their own taxes.
• GST/HST requirements: Contractors earning over CAD 30,000 annually must collect and remit GST/HST.
• No withholding taxes: Businesses do not withhold income tax unless they are paying foreign contractors.

Cross-Border Tax Treaties

The United States and Canada have cross-border tax treaties to prevent double taxation on income earned in multiple jurisdictions. 

These treaties ensure that independent contractors and businesses are not taxed on the same income by the country where the work is performed and the contractor's home country. 

United States Tax Treaties

The U.S. has tax treaties with over 60 countries, including Canada, to prevent double taxation and reduce withholding tax rates on cross-border payments. 

Some key provisions of the U.S.-Canada Tax Treaty include:

• Eliminates double taxation on income for individuals working across borders
• Reduces withholding tax rates on services and royalties
• Allows independent contractors to be taxed only in their country of residence in many cases

Canada Tax Treaties

Canada has tax treaties with over 90 countries, including:

• U.S.-Canada Tax Treaty (as mentioned above)
• Canada's treaties with Caribbean nations such as Barbados, Jamaica, and Trinidad & Tobago to reduce double taxation
• Treaties with some Central American countries, but not all (e.g., no treaty with El Salvador)

Most of these treaties help:

• Reduce withholding tax rates
• Ensure taxation only occurs in the contractor's country of residence
• Allow tax credits for income earned abroad

Tax & Social Security Obligations and Misclassification Risks

When paying independent contractors in North America, businesses must navigate several tax and social security obligations, as well as risks related to contractor misclassification. 

Here's a breakdown of the key considerations for the United States and Canada:

United States

• Tax Obligations:
  
  
  • Independent contractors in the U.S. are responsible for paying their own income taxes, including federal, state, and local taxes. Businesses must report contractor payments of USD 600 or more in a calendar year using IRS Form 1099-NEC.
  • Contractors are also subject to Self-Employment Tax (SE tax), which covers Social Security and Medicare taxes, totaling 15.3% (12.4% for Social Security and 2.9% for Medicare).
    
    
• Social Security Contributions:
  
  
  • Independent contractors do not receive the same benefits as employees (e.g., employer-paid Social Security and Medicare contributions). Contractors must pay the employer and employee portion of these taxes via SE tax.
    
    
• Misclassification Risks:
  
  
  • Misclassifying a worker as an independent contractor when they should be an employee can lead to significant penalties, including back payment of taxes, fines, and other legal issues. 
  • The IRS and the Department of Labor use tests like the "ABC Test" and "Common Law Test" to determine if a worker qualifies as an independent contractor.
  • Misclassification can result in businesses being held responsible for unpaid taxes, including Social Security and Medicare contributions, as well as potential back wages, overtime, and benefits.
  • The IRS and state labor departments often investigate whether contractors are truly independent or should be classified as employees, which can lead to costly audits.

Canada

• Tax Obligations:
  
  
  • Independent contractors in Canada must file their taxes, and businesses must issue T4A slips if payments exceed CAD 500. Contractors are responsible for their income tax and contributing to the Canada Pension Plan (CPP) and Employment Insurance (EI). However, contractors do not pay EI contributions unless they opt into it (which is uncommon).
    
    
• Social Security Contributions:
  
  
  • Contractors must contribute to the CPP, which is similar to the Social Security system in the U.S. For 2025, the contribution rate for self-employed individuals is 11.9% of net income.
    
    
• Misclassification Risks:
  
  
  • Misclassifying workers as independent contractors when they should be employees can result in significant penalties. The CRA examines factors such as the company's level of control over the worker and whether the worker is economically dependent on the business.
  • Contractors classified as employees would be entitled to employment benefits, and the company could be held liable for back taxes, including employment EI and CPP contributions.
  • Canada is strict about employment classifications. If a worker is economically dependent on the company and under their control, they may be deemed an employee, triggering additional liabilities for the business.

Key Takeaways:

• Independent contractors are generally responsible for their own tax and social security contributions.
• Companies must be cautious of misclassification risks, as being found guilty of misclassifying a worker can result in significant penalties.
• Businesses should ensure that their contracts with independent contractors are clear, and workers should be able to operate independently without significant control from the company.

Invoice Requirements

Contractors in the United States and Canada are generally required to provide invoices for the work they perform, and these invoices often need to meet specific requirements. 

United States

Invoice Requirements:

• Basic Information: An invoice must clearly state the following details:
  
  • The contractor's full name or business name and contact information (address, phone number, email)
  • The client's full name or business name and contact information
  • A unique invoice number for record-keeping
  • The date the invoice is issued
  • A detailed description of the services provided, including the quantity, rate, and total amount for each service
  • The payment terms (e.g., payment due upon receipt, net 30, net 60, etc.)
  • Total amount due, including applicable taxes (sales tax if applicable)
  • Payment methods accepted (bank transfer, check, online payment options)

• Tax Considerations: Contractors must be mindful of sales tax or other taxes applicable to their services, depending on the state in which they operate or the state where their client is located. Sales tax might need to be added if their services are taxable under local state laws.

Canada

Invoice Requirements:

• Basic Information: The invoicing requirements are pretty similar to the U.S. and typically include:
  
  • The contractor's name or business name and contact information
  • Client's name and contact information
  • Invoice number
  • Issue date and payment due date
  • A detailed description of the services or products provided, including quantity, unit price, and total for each item or service.
  • The total amount due, including taxes (such as GST or HST, depending on the province)
  • Payment terms (due date, early payment discounts, etc.)

• Tax Considerations:
  
  • A contractor must include the applicable tax on the invoice if registered for the GST or HST. This applies to most goods and services provided in Canada.
  • Contractors must display their GST/HST registration number on the invoice if required to charge GST/HST.

Taxes Regulations in the United States and Canada 

United States

Tax Requirements:

• The U.S. does not have a VAT system. Instead, the U.S. uses a state-level sales tax on the sale of goods and certain services.
• Sales tax is not universally applied to all services, and the rate varies by state, county, and city.
• Contractors are generally not required to charge sales tax on their services unless they provide taxable goods or services in a state where such tax applies.
• Contractors must check the sales tax rules in the state where they operate to determine if their services are taxable.
• If a contractor's services are taxable in a given state, they must register for sales tax collection with the state's revenue department and include sales tax on invoices.

Canada

Tax Requirements:

• Canada does not have a VAT system but uses a Goods and Services Tax (GST) and, in some provinces, a Harmonized Sales Tax (HST).
• Contractors may need to charge GST or HST on their services depending on the nature of their business and income level.
• GST is a federal tax set at 5%, but certain provinces apply HST (a combination of the GST and provincial sales tax), which varies between 13% and 15%, depending on the province.
• If a contractor is registered for GST/HST, they must include the tax and their GST/HST registration number on their invoices.

When is GST/HST Required?

• Contractors who earn more than a certain annual income threshold (typically CAD 30,000) must register for GST/HST and charge it on their invoices.
• If a contractor is below this threshold, they are not required to register for GST/HST, although they may voluntarily choose to do so.

Common Payment Options for U.S. and Canadian Contractors

There are several commonly used payment methods, including:

• Direct bank transfers: ACH (in the U.S.), EFT (in Canada), and local bank transfer systems in each country
• Wire transfers: Used for international payments or larger transactions
• PayPal: Widely used for small transactions
• Checks: Still used in some regions but declining in popularity
• Credit cards: Processed via platforms like PayPal, Stripe, or Payoneer
• Freelancer payment platforms: Upwork, Fiverr, or other platforms offering contractor payments

Country-Specific Payment Methods

United States

• ACH (Automated Clearing House): A common, low-cost electronic transfer method used domestically
• Venmo and Cash App: Occasionally used for contractor payments but less common for businesses due to limited invoicing capabilities

Canada

• Interac e-Transfer: A popular and fast method for domestic payments.
• EFT (Electronic Funds Transfer): Used for direct deposits from businesses.
• Wise (formerly TransferWise): Often used for cross-border payments due to better exchange rates.

In our article How to Pay International Contractors in 2025, you can learn more about contractor payment methods.

Employ and Pay Your North American Contractors with RemoFirst

Partnering with an Employer of Record (EOR) like RemoFirst ensures your contractors are correctly classified and paid on time in their local currency.

RemoFirst creates compliant contracts and manages all legally required tax withholdings and contributions. We also ensure your contractors don't get shortchanged due to fluctuations in currency exchange rates and comply with all local banking requirements.

Book a demo to learn how RemoFirst can help you pay your contractors in North America (and around the globe).