The short answer: paying a sub is easy; proving you paid them, for what, and on which job is what protects you at year end. Confirm first that they are genuinely a subcontractor and not an employee, because that classification is not yours to choose freely. Then take an invoice from every sub, every time, and file it against the job.
It is the last week of February, and a contractor is scrolling a year of e-transfer history trying to answer a question that should take ten seconds: how much did he pay the tile guy last year? There were the two bathrooms in spring, something in July, the rush job before Christmas. Was the July one $2,800 or $3,200? Was one of those transfers actually to the tile guy's girlfriend's account "because his was acting up"?
He needs the number because his accountant asked, and his accountant asked because reporting payments to construction subcontractors is not optional. Somewhere between the working relationship ("Danny's solid, we sort it out as we go") and the paperwork (T5018 slips, expense support, the employee-versus-contractor question), a year of informality has become a February problem.
Paying subs cleanly is not about trust. Danny is solid. It is about the fact that every dollar you pay a subcontractor exists in three systems at once: your job costs, your tax filings, and the government's picture of the construction industry. All three want the same boring evidence.
Is this person a subcontractor or an employee?
Before any invoice or slip matters, one question sits underneath: is this person actually a subcontractor, or are they, in the eyes of the tax authorities, your employee? You do not get to decide this by agreement. Both the CRA and the IRS look past the label at the substance, and the tests rhyme with each other:
- Control. Do they decide how, when and in what order the work gets done, or do you direct them like crew?
- Tools and equipment. Theirs or yours?
- Chance of profit, risk of loss. Can they win or lose money on the job (fixed price, their own materials exposure, their own callbacks), or do they just get paid by the hour regardless?
- Integration and exclusivity. Do they run a business that serves other clients, or do they work for you, full-time, indefinitely?
A tiler with his own van, his own tools, his own insurance, three other builders on his phone, and a fixed price per bathroom is a subcontractor by any test. A guy who works only for you, forty hours a week, on your schedule, with your tools, paid hourly, is starting to look like an employee no matter what the invoice says.
Why it matters this much: if a "contractor" is reclassified as an employee, the deductions that were never withheld (income tax, CPP or Social Security contributions, EI) can land on you, with penalties and interest, going back years. It is one of the most expensive quiet mistakes a small trade business can make. This is general education, not a ruling on your situation. The line has genuine gray in it, and if any of your regulars sit near it, spend an hour with your accountant before the government spends longer.
The hire break-even calculator shows how many jobs a week one more person has to finish to pay for themselves.
An invoice from every sub, every time, no exceptions
Once someone is genuinely a subcontractor, the rule that keeps everything downstream clean is almost embarrassingly simple: no invoice, no payment. Every payment you make to a sub is triggered by an invoice from their business. That invoice carries their business name, the date, what the work was, which job or site it was for, and the amount. If they are GST/HST registered, it also shows their registration number and the tax.
This one habit is doing four jobs at once:
- It supports your expense claim. A $3,200 payment backed by an invoice is a deductible subcontract cost. The same e-transfer backed by nothing is a question mark an auditor gets to interpret, and "it was for Danny, for tile, I think July" is not an answer that ends audits.
- It supports your input tax credits. If the sub charges GST/HST, the tax you pay them is generally recoverable, but only with documentation showing the prescribed details, including their registration number. A bare transfer recovers nothing.
- It protects the subcontractor relationship. Invoices force the scope conversation (what exactly was the $3,200 for?) to happen at billing time, when memories are fresh, instead of at year-end or mid-dispute.
- It reinforces their contractor status. A sub who invoices from their own business, in their own name, for defined work, looks like what they are: an independent business. A sub paid round numbers on Fridays with no paper looks like payroll being done badly, exactly the picture you never want to present.
Two supporting rules. Pay the business, not the person's cousin's account, however temporarily broken someone's banking is; the payee on your records should match the name on the invoice. And pay traceably: e-transfer, check, anything with a trail. Cash to subs is legal but evidentially radioactive, and if you must, get a signed dated receipt on the spot.
"New year, new rule at my end, and the accountant's on me: I can't send anything without an invoice, even a one-liner from your phone. Send it with the job address on it and I'll pay same day."
Every sub you work with has heard this before, and the good ones already do it. Same-day payment against a proper invoice is a trade most subs will happily take.
What goes in a one-page sub agreement?
An invoice documents payment; a contract documents the deal. With regular subs, a short agreement, signed once, covering how you work together, prevents most of the disputes that poison good relationships:
- Scope and price basis. Fixed price per unit of work, or a rate, and what is included: materials, disposal, callbacks.
- Quality and deficiencies. Who fixes what, and on whose dime, when something fails inspection or a client rejects it.
- Insurance and licensing. Their liability coverage, their trade license, their workers' compensation status, with proof. In many provinces and states, an uninsured sub's incident can climb up to you, and workers' comp boards may treat uncovered subs as your workers for premium purposes. Check your local rules; this varies a lot.
- Payment terms. Invoice required, payment window, holdback terms if you use them. (Construction holdback and lien rules are provincial and state law with real teeth: another accountant-or-lawyer conversation for your jurisdiction.)
One page beats zero pages by an enormous margin, and beats a handshake by more than that.
Year-end slips: T5018 and 1099-NEC, without the February scramble
Now the part the February contractor was dreading, which is only dreadful when the year behind it was informal.
Canada: the T5018. If your business's primary activity is construction and you pay subcontractors for construction services, you are generally required to file T5018 slips reporting what you paid each sub over the year, including the GST/HST component, on either a calendar-year or fiscal-year basis. The threshold is low (payments of $500 or more), so it captures nearly every real working relationship. The T5018 exists precisely because the construction industry runs on subcontracting; it is how the CRA cross-checks that the $18,400 you deducted for Danny is the $18,400 Danny reported.
US: the 1099-NEC. Payments of $600 or more in a year to a non-corporate contractor for services generally require a 1099-NEC, filed with the IRS and copied to the sub, by the end of January. The clean-hands habit here is the W-9: collect it (their legal name, entity type and taxpayer ID) before the first payment, while you still hold the money and therefore the upper hand. Do not leave it to January, when you hold neither and the deadline is yours alone.
The details (thresholds, dates, electronic filing rules) shift over time and by situation, so let your accountant own the mechanics. What you own is the input, and this is the entire point: a slip is just the sum of a year of payments to one sub. If every payment was invoice-backed, job-tagged and recorded when it happened, slip season is a report someone runs. If the year lives in an e-transfer scroll, slip season is forensic accounting, performed annually, by the person whose time is worth the most on a roof.
Keep sub costs on the job, not just in the books
One more habit separates contractors who price well from those who guess: every sub invoice lands on the specific job that consumed it, not just in a general "subcontracts" expense pile.
Your tax return only needs the total. Your business needs the distribution. The bathroom that quoted at $12,000 and used $4,100 of subs is a different lesson from the one that used $2,600, and if sub costs float free of jobs, both bathrooms look the same and the lesson is lost. Subcontractor spending is often a trade business's largest and lumpiest cost category; untracked per job, it is the biggest single distortion in your job profitability numbers, and therefore in your pricing.
Zeus keeps the whole chain in one place. Subs live in the subcontractor directory with their agreements recorded against them — who is doing what, at what price, on what terms — on file, findable. Their costs are recorded against the job that used them, so every job's profitability report includes what the subs on it actually cost, and a sub's year is the sum of their entries when slip season comes. Time entries exist too, for scheduling and coordinating subs and crew on the Work Board, but honestly: Zeus does not do payroll, and does not pretend to. It tracks the inputs (who, what job, what cost, what document), and the paying of wages and the filing of slips run through your accountant or payroll provider, fed by records that are finally clean.
Danny stays solid. The paperwork gets solid to match. And next February, "how much did I pay the tile guy" takes the ten seconds it always should have.
Frequently asked questions
My sub won't invoice me. He says he's never needed to. What now?
Make it easy before making it firm: a one-line invoice from a phone app, or even a signed dated note with the job address and amount, clears your bar. If he still refuses, understand what you are being asked to carry: an expense you may struggle to defend, an ITC you cannot claim, and a working relationship that looks like informal payroll. That is him transferring his admin allergy onto your tax risk. The good version of this conversation happens once; most subs adapt in a week.
Do I need to file a T5018 for a sub who charged me GST/HST? Their number is on the invoice anyway.
Generally yes, if you meet the filing criteria; the slip reports the payment including the GST/HST component, and the CRA uses it for cross-matching regardless of the sub's own compliance. The invoice and the slip do different jobs: one supports your deduction and ITC, the other reports the relationship. Your accountant can confirm whether your business is in the primarily-construction category the T5018 rules capture.
A sub wants to be paid partly in cash "to keep it simple." Should I?
Cash payment is legal; unrecorded cash payment is where the trouble lives, and "keep it simple" usually means unrecorded. Your position is unchanged either way: invoice first, payment recorded, slip totals accurate. If a sub's price depends on part of it never being written down, the discount is not for simplicity, and the risk it prices in (denied expenses, reassessment, being party to someone else's underreporting) sits with you. Politely decline the arrangement, not necessarily the sub.
What paperwork should I have on file before a new sub's first day?
Four things: the signed one-page agreement, proof of liability insurance, workers' compensation status per your province or state's rules, and their business details, meaning a GST/HST number in Canada or a completed W-9 in the US. Collect them when the relationship starts and the money is still ahead of you; every one of them is miserable to obtain retroactively in the last week of February.
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