How to pay international employees from a US company comes down to one decision made before any money moves: whether the person is an independent contractor you pay by invoice, an employee hired through an employer of record (EOR), or an employee of your own foreign entity. That choice decides who withholds tax and which US forms you file.
This guide walks a US business owner or controller through how to pay international employees and contractors as of October 2026. It covers worker classification abroad, Form W-8BEN for foreign contractors, totalization agreements, the EOR versus entity decision, Form 1042-S, FBAR reporting for foreign bank accounts and the permanent establishment exposure that comes with a team on the ground.
Classification abroad follows the labor and tax law of the country where the person works. A US company can sign a contractor agreement that looks clean under US rules and still find that the local authority treats the relationship as employment, with back payroll taxes, social contributions and statutory benefits owed.
The practical signals are similar in most countries. If you set the hours, supervise the work day to day, supply the equipment and treat the person as part of the core team, the arrangement leans toward employment. A contractor who runs an independent business, serves other clients and controls how the work gets done looks more like a genuine contractor. Get local advice before a long engagement starts, since a contract label alone rarely settles the question.
Inside the US, the classification rules for workers in more than one state are their own topic. If part of your team is domestic and hybrid, see the guide on a hybrid employee working in two states.
For a foreign individual contractor, the US tax answer turns on where the work is physically done. IRS Publication 515 states that "The place where the services are performed determines the source of the income, regardless of where the contract was made, the place of payment, or the residence of the payer" (IRS Publication 515). Work performed entirely outside the United States is foreign-source income, so a US payer generally has no US withholding on it.
Collect a Form W-8BEN from each foreign individual contractor before the first payment. It documents that the person is a foreign person. Publication 515 notes that "Foreign persons who provide a valid Form W-8 (or applicable documentary evidence when permitted in lieu of a Form W-8) are exempt from backup withholding and Form 1099 reporting." The IRS instructions say "You must give Form W-8BEN to the withholding agent or payer if you are a nonresident alien" and "Do not send Form W-8BEN to the IRS" (IRS Instructions for Form W-8BEN). Keep it on file. A W-8BEN generally remains valid from the date it is signed until the last day of the third succeeding calendar year, unless a change in circumstances makes it incorrect.
If the contractor bills through a company, the form changes. A foreign entity gives you Form W-8BEN-E, which also captures its chapter 4 (FATCA) status.
The picture changes once the contractor performs services on US soil, for example during a week of onsite meetings. Pay for those days is US-source income. Publication 515 says that for "Compensation for independent personal services," you "must withhold at the statutory rate of 30% on all payments" unless a withholding agreement or final payment exemption applies, and a treaty exemption is claimed on Form 8233. When work is split, the IRS says the allocation is "In most cases" made "on a time basis."
Worked example (illustrative figures):
| Item | Amount |
|---|---|
| Annual contract fee | $66,000 |
| Total days of service | 220 |
| Days worked in the US | 11 |
| US-source portion ($66,000 x 11 / 220) | $3,300 |
| 30% withholding on the US-source portion, if no treaty exemption is claimed | $990 |
The $62,700 earned for work done abroad stays foreign-source. The $3,300 is reported on Form 1042-S.
Form 1042-S reports US-source payments to foreign persons that fall under chapter 3 withholding. Publication 515 states: "You are required to report payments subject to chapter 3 withholding on Form 1042-S and to file a tax return on Form 1042." A contractor who never sets foot in the US and is paid only for foreign work usually produces no 1042-S. The US-days scenario above does.
Filing has changed for 2026. Publication 515 says IRIS "must be used to e-file 2026 Forms 1042-S (due March 15, 2027)," as the older FIRE system is retired for tax year 2026. For box-by-box detail, income codes and the recipient copies, see Form 1042-S explained for withholding agents and payees.
A foreign national employee who lives and works abroad is outside US wage withholding. Publication 515 states: "Compensation paid to a nonresident alien (other than a resident of Puerto Rico, discussed later) for services performed outside the United States is not considered wages and is not subject to withholding." The local country's payroll rules apply instead, and someone with a local presence has to run them. There are two common routes.
Employer of record. An EOR provider is the legal employer in the worker's country. It issues the local employment contract, runs local payroll, withholds and remits local income tax and social contributions, and provides statutory benefits. You direct the work and pay the EOR a service fee on top of the employment cost. It is the fastest way to hire one or two people in a new country without forming a company there.
Your own foreign entity. A subsidiary or registered branch in the country employs the staff directly through a local payroll provider. Setup takes longer and brings local accounting, statutory filings and corporate tax. A US owner of a foreign corporation also takes on US information returns, starting with the Form 5471 filing requirements for US owners of foreign corporations.
| Factor | Contractor (invoice) | Employer of record | Own foreign entity |
|---|---|---|---|
| Legal employer | None | EOR provider | Your subsidiary or branch |
| Local payroll tax and benefits | Contractor handles own | EOR runs them | Your local payroll provider runs them |
| Main US paperwork | W-8BEN or W-8BEN-E; 1042-S if any US-source pay | EOR invoices and contract | Form 5471 or other ownership returns |
| Misclassification risk | Highest | Low | Low |
| Typical fit | Short, project-based work | First hires in a country | A sizable, long-term team |
The comparison works much like the domestic choice between a co-employment model and running payroll yourself, covered in PEO vs in-house payroll.
Sending a US citizen or resident employee overseas works differently. IRS Publication 54 lists the exceptions under which US social security and Medicare taxes still apply to work done abroad, including when "You are working for an American employer," which covers a corporation organized under US or state law (IRS Publication 54). That person stays on US payroll for FICA, and may also owe social tax in the host country.
Totalization agreements prevent paying twice. Publication 54 explains that under these agreements "dual coverage and dual contributions (taxes) for the same work are eliminated," and that "if you are temporarily sent to work in a foreign country and your pay would otherwise be subject to social security taxes in both the United States and that country, you can generally remain covered only by U.S. social security." To keep the employee on US coverage only, the employer should get a certificate of coverage from the Social Security Administration. The same document works in the other direction: the IRS notes that a foreign worker in the US who claims an exemption from US Social Security and Medicare taxes under an agreement must "secure a Certificate of Coverage from the social security agency of their home country" (IRS: Totalization Agreements). Not every country has an agreement with the US, so check the country before the assignment starts.
Worked example: a US citizen on a temporary assignment earns $120,000 and stays covered by US social security under an agreement. Using the IRS rates of 6.2% for Social Security and 1.45% for Medicare per side, and the 2026 Social Security wage base of $184,500 (IRS Topic 751), the employer pays $7,440 plus $1,740, or $9,180, and withholds the same $9,180 from the employee. Without a certificate of coverage, host-country contributions could be due on the same pay.
The employee may be able to reduce US income tax on that salary with the foreign earned income exclusion on Form 2555, a decision made on the individual's return.
Some companies open a bank account in the worker's country to pay salaries or local suppliers in local currency. That account can trigger an FBAR. The IRS states that "A U.S. person, including a citizen, resident, corporation, partnership, limited liability company" must file when "the aggregate value of those foreign financial accounts exceeded $10,000 at any time during the calendar year reported" (IRS: Report of Foreign Bank and Financial Accounts).
The test adds up the highest balances. Two local accounts that peak at $6,000 and $5,500 total $11,500, so an FBAR is due even though neither account alone crossed $10,000. The report is "due April 15 following the calendar year reported," filers get "an automatic extension to October 15," and it must be filed "electronically through FinCEN's BSA E-Filing System." US employees with signature authority over the company account can have their own filing duty too. The step-by-step process is in FBAR filing and FinCEN Form 114.
Employees on the ground can create a taxable presence for your company abroad, called a permanent establishment (PE). If a tax authority finds one, it can expect a corporate tax return and local books for the profit tied to that presence. The risk rises when local staff negotiate or conclude contracts for the company, or when the company has a fixed place of business at its disposal in that country. An EOR moves the employment obligations to the provider, and it does not by itself remove PE exposure created by what the employee does. Treaty wording and home-office guidance vary; one country pair is worked through in detail in US-UK permanent establishment risk for remote employees.
Once the legal structure is set, the payment mechanics are simpler. Contractors are usually paid by international wire or a cross-border payment platform. EOR workers are paid by the EOR, which invoices you. Entity employees are paid through local payroll in local currency.
Compare fees for the actual corridors and amounts. Some services charge a flat fee per transfer, which is fine for monthly pay and expensive for small payments. Others build their margin into the exchange rate, which is harder to see. Paying in the worker's local currency protects their take-home pay from exchange swings and moves that risk to you, a trade-off discussed in global expansion, currency risk and transfer pricing.
Keep the same discipline you apply to domestic payroll. For each person, track gross pay, local taxes, benefits and employer cost, and tie each figure to the contract and to any EOR or platform invoice. Store the W-8BEN or W-8BEN-E, any certificate of coverage, US-day counts for contractors who travel and the maximum balance of each foreign account during the year. Summaries by country help with US year-end work, while local filings need detailed breakdowns. If your domestic setup is still being built, the guide to payroll for remote workers covers the US side.
Most companies start with one or two hires and ad hoc arrangements. Review the setup as headcount grows in a country, since the point where an entity becomes cheaper than an EOR, or where PE exposure becomes material, tends to arrive gradually.
Do I need to withhold US tax when I pay a foreign contractor? Generally no, if all of the work is performed outside the United States, because the IRS sources service income to where the work is done. Collect a Form W-8BEN (or W-8BEN-E for an entity). If the contractor works some days in the US, the pay for those days is US-source and is subject to 30% withholding unless an exemption applies.
Does a foreign contractor get a Form 1099-NEC? No. The IRS states that foreign persons who provide a valid Form W-8 are exempt from backup withholding and Form 1099 reporting. US-source payments to foreign persons go on Form 1042-S instead.
Is an employer of record the same as a PEO? No. A PEO is a co-employment arrangement that usually serves employees in the US where the client already operates, while an EOR becomes the sole legal employer in a country where the client has no entity.
Do I file an FBAR for a foreign bank account the company uses for payroll? Yes, if the combined maximum balance of the company's foreign accounts exceeded $10,000 at any time during the year. The FBAR is filed electronically with FinCEN, due April 15 with an automatic extension to October 15.
Madras Accountancy supports US businesses and their CPA firms with bookkeeping, payroll records and tax preparation for teams that include international contractors and employees, including W-8 collection, 1042-S preparation support and year-end reconciliation of EOR and foreign payroll costs. To talk through your setup, contact our team.
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