Paying someone who lives and works in another country is not a banking problem, it is an employment law problem with a bank transfer at the end. The money is easy to move; what decides whether the arrangement is lawful is who employs the person, where payroll taxes are due, and what the destination country's labour law requires of the employer. A US company has three real routes: employ through its own foreign entity, employ through an employer of record, or engage the person as a genuine independent contractor. Each route has different tax mechanics on both sides of the border, and the US side is better documented than most vendors let on, because the IRS publishes it. Nothing here is legal or tax advice; the statutes and your contracts control.
First decide the employment route, then the payment
An overseas employee must have a legal employer in the country where they work, because that country's labour law and social contributions attach there. Route one is your own entity: full control, highest fixed cost, sensible at scale in one country. Route two is an employer of record, which employs the person through its local entity, runs payroll and remits local taxes while you direct the work, sensible for small headcounts per country. Route three is a contractor agreement, lawful only when the person genuinely operates independently; the IRS classification test looks at behavioural control, financial control and the type of relationship, and a full-time person working under your direction is an employee in substance whatever the invoice says. Choosing a route by bank-transfer convenience rather than by these tests is how companies acquire misclassification liability in two countries at once.
The US withholding rules for workers abroad
The IRS splits the withholding question by the worker's status. Wages paid to a US citizen or resident alien for services performed abroad are generally still subject to federal income tax withholding, with narrow exceptions. The relief valve is the foreign earned income exclusion: a US citizen who expects to qualify, by bona fide foreign residence for a full tax year or by physical presence abroad for at least 330 full days in twelve months, can give the employer Form 673 to stop withholding on the excluded amount, which was $120,000 for 2023 and is inflation adjusted. Resident aliens cannot use Form 673 even if they will qualify for the exclusion. For a nonresident alien performing all services outside the United States, the answer is simpler: those wages are foreign source income, not subject to US federal income tax withholding or reporting at all. The local country's payroll taxes still apply in every case; the IRS rules only settle the US side.
The destination side: where the real obligations live
Whatever the US analysis says, the country where the person works expects an employer to register, withhold local income tax, pay social contributions and honour local employment rights on hours, leave, notice and termination. This is the half of the problem a wire transfer cannot solve and the half where an EOR earns its fee: its local entity is the registered employer, so the withholding, contributions and filings happen under a company built to do them in that country. If you run your own entity instead, the national tax authority's employer guidance is the primary source for what is due and when, and it is worth reading before the first payslip rather than after the first penalty. If you pay a contractor, the local obligations shift to the contractor, which is exactly why authorities on both sides examine whether the contractor label matches the working reality.
Mechanics: currency, contracts and evidence
Once the route is right, the mechanics are ordinary discipline. Pay in the currency the contract states, normally the local currency for employees, and decide in the contract who carries exchange movement. Keep the employment or contractor agreement, payslips and remittance evidence in one place, because cross-border arrangements are the first thing examined in an audit on either side. If an EOR or payroll provider sits in the middle, reconcile its reports against your bank movements monthly and ask for filing confirmations rather than assurances; deductions taken but not remitted is the recurring failure in this market. And revisit the route yearly: contractor arrangements drift into employment as involvement deepens, and an EOR that was right for two hires in a country can be wrong for twenty, where your own entity becomes cheaper than the accumulated fees.
Questions people ask about how to pay overseas employees
Can I just pay an overseas employee from US payroll?
Only if there is a lawful employer in their country handling local taxes and employment rights; US payroll alone does not discharge the destination country's obligations. For a US citizen abroad, US withholding generally still applies too, unless the Form 673 exclusion route fits.
Do I withhold US tax for a foreign employee working in their own country?
No. Per IRS guidance, wages a nonresident alien earns for services performed outside the United States are foreign source income and not subject to US federal income tax withholding or reporting. Their own country's payroll taxes apply instead.
When is a contractor arrangement safe?
When it is true: the person controls how the work is done, carries their own tools and business risk, and serves other clients. The IRS weighs behavioural control, financial control and the relationship as a whole; a contract label on an employment-shaped relationship does not survive examination, in the US or abroad.
What does the foreign earned income exclusion change for the employer?
A qualifying US citizen employee can file Form 673 so the employer stops withholding US income tax on wages the exclusion will cover, up to the inflation-adjusted cap. It changes withholding, not the local country's payroll obligations, which continue regardless.