Paying international employees is a structure question before it is a payments question. Money can be wired anywhere; what matters is who the legal employer is, which country's payroll taxes apply, and whether the person is an employee at all. For a US company there are three workable structures, and two federal frameworks, IRS withholding rules and Social Security totalization agreements, that decide most of the tax outcome before any provider is chosen.
The three structures: entity, EOR, contractor
First, run payroll through your own entity in the worker's country; correct at scale, expensive at a headcount of one, because it requires incorporation, employer registration and local filings before the first payslip. Second, hire through an employer of record, whose local entity employs the person on your behalf and runs compliant local payroll while you direct the work. Third, engage the person as an independent contractor, which is only lawful when the relationship genuinely is independent; a contractor who works fixed hours under your direction for one client is an employee in most countries' tests, and misclassification claims arrive with back taxes and penalties attached. The wrong answer is the common one: paying a de facto employee a gross wire and leaving both sides' obligations unfiled.
US withholding: citizenship decides more than geography
The IRS rules for a US person employing workers abroad split on the worker's status. Wages paid to a US citizen or resident for services performed outside the United States remain subject to US federal income tax withholding, with limited exceptions, including foreign earned income that qualifies under section 911, where the employee files Form 673; resident aliens cannot use that form. Wages a nonresident alien earns for work performed entirely outside the United States are foreign source income and are not subject to US withholding or reporting. In practice: a US citizen abroad on your payroll keeps a US tax relationship, while a foreign national working in their own country generally should not be on a US domestic payroll at all, which is exactly the gap a local entity or EOR fills.
Social security and totalization agreements
Without an agreement, an employee moving between countries can owe social security contributions to two systems on the same earnings. The United States has bilateral totalization agreements with 26 countries that eliminate this dual taxation: the general rule covers the worker where the work is performed, and a detached-worker exception keeps temporary transfers, typically up to five years, in their home system, evidenced by a certificate of coverage the employer requests. The agreements also let workers combine credits from both systems to qualify for benefits. If you are relocating an existing employee rather than hiring locally, check whether an agreement exists for the destination before deciding the payroll structure, because it changes the cost of both options.
Making the choice for a real headcount
For one to a few hires in a country you may not stay in, an EOR is usually the defensible middle: the person gets a real local employment relationship, contributions land in the right system, and you avoid building an entity to run one payslip. For a growing team in one country, the entity pays for itself and brings the employment relationship in-house. For genuine independent professionals, contractor terms work, documented as such and reviewed against the local test, not the convenient one. Whatever the structure, the contract and the statutes control; this page describes mechanisms and is not legal or tax advice.
Questions people ask about paying international employees
Can I just pay a foreign employee from US payroll?
Usually not well. A nonresident alien working abroad earns foreign source income outside US withholding, while their own country expects a registered employer running local payroll and contributions. A local entity or an EOR provides that; a US domestic payslip does not.
Do US citizens working abroad stay subject to US withholding?
Generally yes: wages paid by a US person to a US citizen or resident for work abroad remain subject to US federal income tax withholding, with exceptions such as qualifying foreign earned income claimed via Form 673. Resident aliens cannot use Form 673.
What does a totalization agreement change?
It prevents paying social security to two countries on the same earnings and lets credits combine across systems. The US has agreements with 26 countries; temporary transfers can stay in the home system under the detached-worker rule with a certificate of coverage.
When is a contractor arrangement the wrong answer?
When the person works like an employee: your hours, your direction, one client. Most countries' tests look at the reality, not the label, and reclassification brings back contributions and penalties. Use contractor terms for genuinely independent work only.