Paying International Employees: A Complete Guide
It’s a privilege of the 21st Century to be able to tap into international talent so easily.
However, if paying workers in the U.S. is fiddly enough, try adding the complication of paying international employees into the mix.
New territories mean new labor laws and customs to navigate and adhere to. Use this guide to help you understand the challenges of paying international employees and what your options are.
Challenges Of Paying International Employees
Let’s start with what you need to be most conscious about when paying international employees.
The process is complex due to differing legal, tax, and regulatory requirements across various jurisdictions:
1. Local labor and employer tax laws compliance
Every country has its own rules about how employees should be treated—things like paid leave, notice periods, and minimum wage.
You also have to pay your share of employer taxes like health insurance or pension contributions.
It’s less about taxes and more about being a legal employer. If you skip this, you might face lawsuits or labor board penalties. It’s what keeps you legit in the eyes of the law.
2. International payments and fees
Handling payroll in multiple currencies can be challenging due to exchange rate fluctuations and banking requirements and fees.
As Raoul P.E. Schweicher, Managing Partner at MS Advisory, highlights, “Payment rails are fragmented and expensive. Traditional SWIFT transfers take 3-5 days and cost 3-4% in fees. Workers need instant payments but face KYC holds lasting 2-10 days when banks demand extra documentation.
Further, FX swings can destroy 12% of payroll costs overnight. Workers get frustrated when their "stable" salary drops due to exchange rate movements they can't control”.
3. Tax withholding and reporting
When you pay employees abroad, you need to be careful to withhold the right amount of income tax and social security from their paycheck.
Some countries also want you to give employees end-of-year tax forms. It’s all about staying on the taxman’s good side. Mess this up, and you risk fines or audits.
4. Employee classification (contractor vs. employee)
Just because you call someone a contractor doesn’t mean local laws agree. If they’re working like an employee—full-time, reporting to a manager, using your tools—some countries will reclassify them.
A short engagement in the United States might pass for contract work, but in Spain the same arrangement triggers full employee protections.
That could mean you owe back pay, taxes, or even benefits. It’s one of the most common compliance slip-ups. When in doubt, check local rules or use an EOR to stay safe.
5. Data protection and payroll security
Payroll data is super sensitive—names, salaries, bank info, tax IDs. Some countries have strict data privacy laws (like GDPR in Europe), and you’ve got to follow them.
You need to store and share data securely, or you could get hit with big fines. It’s not just a legal risk—it’s a trust issue too. Your team expects you to keep their info safe.
6. Integration with internal systems
Global payroll doesn’t work well if it’s stuck in a silo. Ideally, it should connect to your HR system, time tracking, and finance tools.
If it doesn’t, you’ll end up copying data manually, which leads to mistakes and delays. The more countries you hire in, the more painful that becomes. Integration helps everything run smoother.
7. Time zone differences
Time differences matter when paying international employees because payroll cut-off dates, banking hours, and public holidays vary by country and can delay salary transfers.
As Kevin Marshall, CPA and personal finance professional at Amortization Calculator, puts it, “Payroll calendars rarely line up when the head office sits ten time zones away from the satellite team. A file that closes at noon in New York is already past the bank-cutoff in Manila".
How To Pay International Employees
Ultimately, your options for paying international employees depend on how much responsibility you want to take regarding their overall employment.
Broadly, you have five options here:
1. Handle the process in-house
Some organizations, particularly larger ones, choose to manage global payroll internally using separate business entities in each jurisdiction.
Of course, this means 1) setting up business entities in multiple jurisdictions and 2) hiring personnel to process the payroll.
The advantages of this are that you completely own the payroll process and experience.
While global payroll software can help, the complexity of this process and the resources required lead many organizations to choose alternative methods.
Advantages: Greater control and customization.
Disadvantages: Complexity and resource requirements.
2. Outsource using an employer of record
Rather than try and run global payroll in-house, many organizations outsource the process to an employer of record (EOR).
An EOR acts as the employer in the jurisdiction where you want to hire workers and handles all the administrative functions such as payroll.
They’ll have a legal entity in the jurisdiction of choice and specialists to handle all the admin for you and keep you compliant.
Some of these services can help you get set up and hiring in less than a month.
Advantages: Simple, quick, and less resource intensive.
Disadvantages: Reduced control and service dependency.
3. Outsource to a global payroll provider
Another option is to use a global payroll provider that consolidates payroll processing across multiple countries into one platform.
The only thing to be mindful of here is that you still need to have a local legal entity in each country where employees are based.
The provider can streamline payroll calculations, tax filings, and reporting—but they don’t act as the legal employer. You're still on the hook for compliance, contracts, and benefits.
Advantages: Centralized payroll operations, consistent reporting across countries, and improved efficiency as you scale internationally.
Disadvantages: Still requires local entities in each country, is less cost-effective if you’re only hiring in one or two countries.
4. Outsource to a local entity
Another option is to outsource payroll and HR tasks to a local payroll provider, HR consultancy, or PEO.
They’ll give you access to local expertise and are often a more cost-effective method than using an EOR.
The only thing to be mindful of here is that you still need to have a legal entity in the country to use this model.
Advantages: Access to local expertise, ensures in-country compliance, and offers tailored support.
Disadvantages: You still have to establish a local entity first.
5. Use contractors
Another option is to hire contractors who are, in theory, simpler to employ.
The only thing to be mindful of here is that, if local authorities legally classify your contractor as an employee, your company is liable for unpaid taxes, back pay, and benefits. You could also get additional fines.
Advantages: Simple and easy.
Disadvantages: Still have to factor in local laws and regulations and those of your home country.
Paying International Employees: 6-Step Decision-Making Process
Managing international payroll or choosing how to pay global talent comes down to a few key variables: worker classification, legal infrastructure, team size, urgency, and risk tolerance.
Use this framework helps you make the right choice based on your unique context.:
1. Assess your business needs and goals
- Geographical presence: Consider the countries where you currently have employees and where you plan to expand. The legal and administrative challenges vary by country and some are much more complex and protracted than others.
- Employee count: Determine how many employees you have internationally and the projected growth in these numbers. If you're hiring 1–2 workers in a country, an EOR or contractor arrangement may be the simplest route. If you’re hiring 3–10 workers in one country, it might justify setting up a legal entity and outsourcing to a local payroll provider.
- Core business focus: Evaluate whether managing payroll internally would distract from your core business activities.
- Timescale: If you need to hire quickly and don’t want to set up a local entity, an EOR provides a fast, compliant solution. If you're on a tight budget and hiring for short-term or project-based work, a contractor arrangement might make more sense—provided the compliance risk is low.
2. Evaluate your current resources
- Expertise: Do you have, or can you reasonably acquire, the necessary expertise in international labor laws, tax regulations, and payroll processing?
- Technology: Assess whether you have the technology to manage payroll efficiently across different countries, including compliance updates and integration with other systems.
- Budget: Consider the financial implications including the cost of setting up and maintaining an in-house process versus outsourcing fees.
3. Assess pros and cons
- Control and customization: In-house processing gives you more control and potentially more customization options, which is valuable if you have complex payroll needs.
- Scalability: Outsourcing to an EOR or payroll service can scale more easily with your business growth, especially in new markets.
- Risk management: Outsourcing can reduce the risk of non-compliance and the burden of legal penalties.
4. Long-term strategic fit
- Cost: While outsourcing might seem more expensive upfront, it could be more cost-effective in the long run by avoiding fines and reducing the need for specialized staff.
- Business strategy: Align your choice with your overall business strategy. If rapid international expansion is a goal, outsourcing or using contractors might provide the agility you need.
5. Request proposals and conduct due diligence
Request detailed proposals from several EOR and global payroll service providers. Things to look out for besides cost and reputation:
- Local expertise
- Transparent pricing
- Accurate employer burden calculations
- Customer support levels
- Long-term scalability
- Partner-dependent vs owned entity providers (the latter is recommended).
- Check references and reviews.
6. Make a decision
Make a decision based on your business’s capacity to manage payroll internally without compromising compliance and operational efficiency, and how well each option supports your long-term business objectives.
Quick summary: Best fit by scenario
- You need to hire quickly in a new country and don’t have a legal entity → Use an EOR.
- You’re hiring a freelancer for short-term work → Engage a contractor, ensuring classification is compliant.
- You already have a local entity and just need help running payroll → Outsource to a local payroll provider.
- You’re expanding long-term in a country with a growing team → Set up a local entity and build HR/payroll processes in-house or with support.
- You’re hiring across many countries and want centralized oversight → Use a global payroll platform, combined with your own entities or local providers.
U.S. Tax Obligations When Paying Foreign Employees
If your U.S.-based company is hiring or paying employees who live and work outside the United States, it's important to understand your U.S. tax obligations—and just as importantly, what doesn’t apply.
Below is a breakdown of key considerations to stay compliant when paying foreign employees.
1. Location of work determines tax withholding
If a foreign employee works entirely outside the U.S., and is not a U.S. citizen or U.S. resident, then:
- The U.S. generally does not require federal income tax withholding.
- FICA (Social Security and Medicare) and FUTA (Federal Unemployment Tax) also typically do not apply.
- However, your company may have tax obligations in the employee’s country, including:
- Employer contributions to local social insurance schemes
- Local income tax withholding
- Registration with foreign tax authorities
Important: If the worker performs any work within the U.S., or is a U.S. person (citizen or resident), then U.S. tax laws do apply.
2. IRS forms to be aware of
When hiring foreign individuals or entities, the IRS has specific forms to establish tax status and prevent misreporting:
- Form W-8BEN (for individuals) or W-8BEN-E (for entities):
- Used to certify that the foreign worker is not a U.S. person.
- Helps avoid U.S. tax withholding on payments made abroad.
- Form 1042-S:
- Used to report U.S.-sourced income paid to foreign persons, if any withholding was required.
- Form 1099:
- Not required for foreign contractors performing work outside the U.S.—only for U.S.-based contractors.
3. No U.S. payroll taxes for offshore work
When foreign employees or contractors are located entirely outside the U.S., and do not have U.S. source income:
- You do not need to withhold U.S. payroll taxes.
- You do not need to pay employer-side Social Security, Medicare, or unemployment taxes.
However, if the foreign employee is a U.S. citizen or resident, you must withhold and pay taxes just as you would for a domestic employee—regardless of their work location.
4. Risk of permanent establishment (PE)
Something to be aware of is that hiring international employees can create a “permanent establishment” in the employee’s country—meaning:
- Your company might be considered to have a taxable business presence in that country.
- This can trigger corporate income tax, VAT, or local payroll obligations.
To mitigate this risk, many companies use:
- Employers of Record (EORs) to employ the worker locally.
- Legal advice to understand thresholds for PE in each country.
Summary of key points
- No U.S. payroll taxes apply to foreign employees working outside the U.S., unless they are U.S. persons.
- Form W-8BEN/E should be collected from foreign contractors to certify non-U.S. status.
- Form 1099 is not required for foreign workers with no U.S. source income.
- You are likely subject to tax and labor obligations in the foreign country where the employee resides.
- Be aware of permanent establishment risks when hiring foreign workers directly.
Paying International Employees Best Practices
If you decide to go it alone and handle the process in-house, here are some best practices to help guide you:
1. Stay updated on local laws
Continuously check your knowledge of local employment laws, tax regulations, and reporting requirements in each country.
As Katherine Loranger, CPO at Safeguard Global, recommends “Build in monthly reviews—not annual ones. Validate classifications proactively: With the rise of remote-first models, we’ve seen a 26% increase in misclassification risk.
If you're hiring contractors internationally, ensure your risk model is reviewed by regional legal experts—before payroll begins.”
Similarly, Ashley Akin, CPA and tax consultant at Gold IRA Companies, recommends to “Build a compliance calendar that looks at least 12 to 18 months ahead, with time built in to adjust workflows when new rules come in. That helps prevent last-minute errors and makes international payroll much more manageable.”
2. Leverage technology
Use advanced payroll software that can handle multiple currencies, languages, and regulatory environments.
Ensure the technology is scalable and can integrate with other HR and accounting systems.
3. Don’t count on technology too much
As Akin highlights out, “Payroll software is helpful but not perfect. It can handle calculations and local deductions, but manual checks are still needed. I suggest doing quarterly audits to catch things like outdated tax IDs, incorrect addresses, or GDPR issues related to expired consent".
4. Write clear policies
As Marshall highlights, “Policies matter just as much as software. Declare in writing how and when conversions happen, whether the company or the employee absorbs rate swings, and how benefit deductions apply.
Review the document twice a year the same way you review vendor contracts, because the laws behind it do not stand still".
5. Regular audits and reconciliations
Regardless of whether payroll is international or not, it’s good practice to conduct regular payroll audits to ensure accuracy and compliance.
6. Effective communication
Maintain clear and open communication channels with your employees regarding payroll matters. This covers providing detailed pay slips explaining any deductions clearly and being responsive to payroll queries.
As Askin notes, “I advise clients to confirm each worker's bank details, tax residency, and address up front, then review it quarterly.
This prevents last-minute problems like failed payments or tax form delays. If tax rules change, explain them clearly and early so workers aren’t surprised when net pay shifts.”
7. Hedge FX exposure systematically
Hedging FX exposure is considered a best practice for international payroll when you're paying employees in foreign currencies and want to avoid surprises from exchange rate fluctuations.
It helps with budgeting, cost control, and providing consistent payments—especially if you're managing payroll from a single currency like USD.
Common methods include forward contracts, multi-currency accounts, or platforms that offer fixed exchange rates. However, if your payments are low-volume or occasional, the complexity of hedging may not be worth it.
It’s most useful when payroll costs are high or based in volatile currency markets.
8. Centralized reporting
Centralized reporting is a best practice in global payroll because it gives you a single view of payroll costs, tax obligations, and headcount across all countries, helps with budgeting, compliance monitoring, and executive reporting.
For example, instead of pulling separate spreadsheets from providers in Brazil, Germany, and Japan, you can view all payroll data in one dashboard.
It saves time, reduces errors, and supports better decision-making. That said, it often requires integrated systems or a global payroll provider to work well.
9. Never outsource accountability
Lastly, as Loranger advises, “Never outsource accountability. Whether you’re using an EOR or managing payroll in-house, someone internally needs to own compliance intelligence.”
10. Designate a “timezone skeptic”
As Marshall suggests, designate someone on the payroll crew whose only job is to ask, before every run, whether the chosen date actually exists in every country involved. It sounds trivial until you bump into a mid-week national holiday you did not see coming.
11. Use encrypted channels and 2-fact authentication
Again, as Marshall suggests, “We push all payroll data through encrypted channels and store it on servers that meet the stricter standard among the countries where we operate.
Use two-factor authentication everywhere, run background checks on any vendor who touches payroll data, and limit access internally to the narrowest group you can. People will grumble about the extra login step. They stop grumbling the day a phishing attempt fails because of it”.
Costs Of Paying International Employees
To help you consider the costs associated with paying international employees, we've broken them down in a table with estimates around what each one could set you back in USD.
| Category | Cost Type | Details | Estimated Cost |
| Software | Software and infrastructure | Initial costs for multi-country payroll software and necessary IT infrastructure. | $50,000 - $200,000 |
| Software | Integration costs | Costs for integrating payroll system with HR and accounting software | $10,000 - $50,000 |
| Operational | Salaries for payroll staff | Wages for payroll specialists familiar with international regulations. | $60,000 - $120,000 per year |
| Operational | Training costs | Costs for regular training to stay updated on technologies and legislative changes. | $5,000 - $20,000 per year |
| Compliance and Regulatory | Legal and Consulting fees | Fees for legal experts or consultants to ensure compliance and navigate bureaucratic processes. | $20,000 - $100,000 per year |
| Compliance and Regulatory | Audit fees | Costs for conducting regular audits for accuracy and compliance. | $10,000 - $30,000 per year |
| Outsourcing | Service provider fees | Fees for global payroll providers, varying by employee count, countries, and service complexity. | $15 - $50 per employee per month |
| Currency Exchange & Transaction | Currency conversion | Costs for converting currencies for international payroll disbursements. | 0.5% - 2% of transaction amount |
| Currency Exchange & Transaction | Bank fees | Bank transaction fees for international transfers and payments. | $10 - $50 per transaction |
| Error Rectification and Penalties | Error correction | Costs to correct payroll errors, including back payments and interest. | $5,000 - $20,000 per incident |
| Error Rectification and Penalties | Penalties for non-compliance | Fines and penalties for non-compliance with payroll-related laws. | $10,000 - $50,000 per incident |
| Miscellaneous Costs | Project management | Project management costs for implementing new systems or changing providers. | $10,000 - $40,000 per project |
Don’t Let Payroll Get In The Way Of International Talent
Now you know what your options are and what to expect, don’t let something as trivial as payroll get in the way of leveraging international talent.
There are many options you can take, and, as Loranger puts it so well, “We’ve seen success when companies treat their global payroll teams not as administrators, but as strategic partners in workforce planning. When people feel seen, paid correctly, and protected, that’s when loyalty grows, and risk drops”.
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