All sprites are square...
Depending on which transparency mode you use, you can make the background of the sprite appear transparent. Using additive transparency is best. You can also assign the last color in the sprite's palette to a flag color, use that where you want the sprite to be transparent, then use alphatest.
when you have made the .bmp with indexed color, and you are converting it to a .spr with sprWIZ at the end of the process it asks you for wich transparency mode you want, AlphaTest (makes the last color in the color palette transparen't), additive (makes black transparent), grayscale, or no transparency.
what color is the background? and if so what do you mean by square? do you mean there is a thin line around the sprite that is a square? if so, try shrinking the object in the picture so that it is away from the edge of the picture. or you could just show a screenshot.