'Paste Image' is a 2D operation and is slow. Sprites are 3D and very fast.
You should just cycle through your sprites in the order that you're going to layer them and set their priority 1 higher. The higher the priority, the higher the layer.
Quote: "My next question is, will this have any effect on collision detection? I think if my actual sprite is hidden, it will still be able to collide with other sprites, so I'm guessing that the collision detection will be fine."
Hidden sprites still collide. All you have to do is make sprite visibility a condition of collision. That is, for whatever condition you're going to perform, the sprite must collide and be visible.

Come see the WIP!