Hiring Remote Employees in Other Countries: A Guide
How US small businesses hire remote employees abroad: contractor vs EOR vs entity with real costs, W-8BEN rules, and misclassification risk.
Hiring Remote Employees in Other Countries
A practical guide for US small businesses making their first international hire
The first time I hired someone outside the US, the hard part was not finding her. It was the ninety minutes I spent that evening trying to work out whether I was about to do something expensive and irreversible. She was in Poland, she was clearly the best candidate, and every article I read either assumed I had a legal team or tried to sell me a service before explaining what the service was for.
That gap is still there. Search this topic and you get guides written for a generic company with budget, produced by vendors whose business model is the answer they recommend. What is missing is the version for a small business with no HR department, no employment lawyer on retainer, and a real question about whether a contractor agreement is going to come back and cost them.
So here is that version: what your three options actually are, what each costs in real numbers, when the cheap one stops being cheap, what the IRS specifically requires of you, what permanent establishment means in plain language, and the operational checklist for getting someone onboarded.
Everything here is general guidance rather than legal or tax advice, and for anything close to the line you want a professional. But you should understand the shape of the decision before you pay someone to help you make it. I built FirstHR for businesses at this stage.
Can You Actually Do This?
Yes. A US company can hire and pay someone living in another country, and no US law prevents it. What varies is the mechanism, the cost, and where the legal obligations land.
The complexity does not come from US law telling you no. It comes from the fact that employment is governed by the country where the person physically works, and that country has its own rules about what you owe them.
This is the mental shift that takes longest for founders. Your instinct is to think about US requirements, because that is the system you know. But if someone works from São Paulo, Brazilian labor law governs that relationship, and a US-drafted contract does not change it.
At-will employment is the clearest example of what does not travel. According to the Society for Human Resource Management (SHRM, 2023), the United States is the only jurisdiction with employment at will, so your instincts about at-will employment mean nothing to a Brazilian labor court. That is not a technicality. It is the single most important thing to internalize before making an offer.
The second shift is that the work location, not your location or theirs on paper, determines the rules. A Canadian citizen living in Portugal working for your Texas company is subject to Portuguese employment law. Nationality does not decide it. Where the laptop actually is decides it.
Your Three Options
You have three options: engage the person as an independent contractor, employ them through an employer of record (EOR), or set up your own entity in their country. Most guides list the same three routes without the numbers that would let you choose between them, so here they are with the numbers.
Notice that the contractor route is not free of cost so much as free of visible cost. What you pay for it is risk, and that risk does not show up on any invoice until it does.
None of this makes the contractor route the wrong choice. For genuine project-based work with a genuinely independent professional, it is the right one, but it should be a deliberate choice rather than a default you fall into because it is the easy one.
Which One to Pick
For a small business making a first hire abroad, the choice is almost always between a contractor and an EOR. Four questions, answered honestly, will usually settle which one you need.
| Question | If yes | If no |
|---|---|---|
| Will you set their hours and direct how the work is done? | This is employment in substance. Use an EOR | A contractor arrangement may be appropriate |
| Will they work exclusively or nearly exclusively for you, long term? | Reclassification risk is high. Lean toward an EOR | Contractor is more defensible |
| Is the work core to what your business sells? | Weighted heavily against contractor status in many countries | Peripheral or project work supports contractor status |
| Are you hiring in a country with aggressive enforcement? | Use an EOR even for arrangements that would be fine elsewhere | Contractor is lower risk, though never zero |
The honest summary: if you are hiring someone to be part of your team, working your hours, doing your core work, indefinitely, that is an employee. Calling them a contractor because it is administratively easier is the specific thing that goes wrong. Countries have seen this pattern many times and have built tests to detect it.
Contractor is the right answer when the relationship genuinely is one: a designer who has four other clients and delivers defined projects, a specialist you engage for a three-month build, a consultant who advises but does not execute. If your candidate is that person, the contractor route is straightforward.
The Contractor Route
The contractor route is the cheapest and fastest option, and it fits when the relationship is genuinely that of an independent contractor. It asks less of you than most people expect on the administrative side and more on the judgment side.
On the administrative side, you need a written agreement covering scope, deliverables, payment terms, intellectual property (IP) assignment, and confidentiality. For anything sensitive, confidentiality belongs in a separate nondisclosure agreement (NDA), not one line in the contract.
You also need Form W-8BEN, collected before the first payment, and a payment method that handles international transfers without eating the margin. For a straightforward arrangement, that is close to the whole list.
The judgment part is harder. You need the relationship to actually stay a contractor relationship, and the pressure over time runs consistently in the other direction. You start wanting them in the standup. You start asking for availability during your hours. The project ends but the relationship continues. Each step is individually reasonable and the cumulative effect is an employment relationship with a contractor label.
Misclassification Risk, Concretely
Here is what a misclassification finding looks like: a labor authority or a court in the worker's country examines the working relationship, decides it was employment in substance, and applies employment consequences retroactively. It is the risk that matters most and gets the vaguest treatment.
The consequences typically include unpaid employer social contributions for the full period, back taxes and penalties, and the mandatory benefits the person should have received, such as paid leave, thirteenth-month pay (an extra month of salary on top of the usual twelve), and severance accrual.
The notice period and termination protection the worker was never given are added on top. In some countries an individual can bring the claim years after the relationship ends.
The signals below are what get examined. No single one decides it, and the weighting differs by country, but the pattern is recognizable.
The IRS applies its own version of this test for US purposes, organized around behavioral control, financial control, and the relationship between the parties. Its guidance on worker classification is worth reading even for international arrangements, because the reasoning is similar to what foreign authorities apply.
The Employer of Record Route
This is the route most small businesses should use for their first genuine employee abroad. It costs money visibly, which makes it feel more expensive than the contractor route, but it converts an unpriced risk into a known monthly fee.
Market data shows the published rates at the largest providers clustered tightly: $599 to $699 per worker per month on top of salary, quoted in dollars with no setup fee. Some smaller providers list lower prices. Either way, treat the list price as a starting point and get the quote for your specific country in writing.
What you get: local employment compliance handled, payroll and statutory benefits administered, a compliant employment contract, and someone else carrying the classification question. What you give up: you share control over the employment terms, offboarding runs through the provider on local notice rules, and you depend on the provider's quality in that specific country, which varies more than the marketing suggests.
Ask four questions when choosing one. Does the provider have its own entity in the country you need, or does it subcontract to a local partner? What are the offboarding terms and notice requirements? What happens to your relationship with the employee if you leave the provider? And what exactly is included in the fee, and what is billed separately?
Setting Up Your Own Entity
Setting up your own entity is the route almost no small business should take for a first hire. It is included because people ask, and because there is a point where it becomes the right call.
Establishing a legal entity abroad means incorporation, local counsel, a registered address, an accounting provider, payroll registration, and in several countries a resident director. Published cost ranges for this differ by an order of magnitude between advisory firms and between countries, so none of them is worth planning against. Price the specific country.
The recurring cost is the part founders underestimate. Annual filings, statutory accounts, and payroll administration arrive every year whether or not the country worked out, and they land on whoever runs your finance function rather than on a vendor.
What you get in exchange: no per-head fees, full control of employment terms, a genuine local presence for customers and hiring credibility, and the ability to scale headcount in that country without linear cost growth. What you take on: local corporate tax filings, payroll registration, statutory reporting, and the obligation to wind it down properly if you ever exit, which is its own project.
The Break-Even Math
The break-even comes down to one comparison: per-head EOR fees, which are published, against the fixed cost of an entity, which is not. Competing guides tend to bury this calculation, so here it is done plainly.
| Headcount in one country | EOR annual cost at $699 per worker monthly | What the entity side looks like | Which is cheaper |
|---|---|---|---|
| 1 employee | $8,388 | The full fixed bill, carried by one person | EOR, by a wide margin |
| 3 employees | $25,164 | The same fixed bill, split three ways | EOR in almost all cases |
| 10 employees | $83,880 | The same fixed bill, split ten ways | Depends entirely on the country quote |
| 20 employees | $167,760 | The same fixed bill, split twenty ways | An entity is worth pricing by now |
| 30 employees | $251,640 | The same fixed bill, split thirty ways | An entity usually wins |
The break-even is a country calculation rather than a headcount rule, because the fixed side is quoted locally and varies enormously between jurisdictions. Get a real quote for incorporation and annual maintenance in the country in question before you compare anything to it.
The table understates two points. The setup cost is sunk immediately while EOR fees are cancelable, and an entity commits you to a country in a way an EOR does not. For a business still validating whether hiring in a market works, that optionality has real value.
The arithmetic is also per country. Fifteen people spread across six countries is an EOR situation, not an entity situation, even though the total headcount looks like it might justify one.
Your US Tax Obligations
Your US tax obligations depend on who you are paying and where they physically do the work. Most guides name-drop this topic without explaining it. The rules are not complicated once laid out, and getting the sequence wrong is what creates exposure.
Start with the foreign contractor performing all services outside the US. The IRS rule on the source of personal service income is that the place where the services are performed generally decides it, regardless of where the contract was made, where payment happens, or where the payer lives. For this contractor, that makes the income foreign-source.
That usually means no Form 1042-S, because that reporting attaches to US-source payments. It also means no Form 1099, as long as their foreign status is documented before you pay. What you must do is collect Form W-8BEN from an individual, or W-8BEN-E from an entity, before the first payment. That form is the documentation.
Skip the form and the presumption rules take over. An individual you cannot tie to documentation is generally presumed to be a US person. The payment can then require a Form 1099 and, while no taxpayer ID is on file, 24 percent backup withholding, which is tax you hold back from each payment and send to the IRS.
The liability sits with you as the payer. If you have already paid the contractor in full and the obligation is assessed later, you are out of pocket and asking someone in another country to send money back. Collect the form first.
Per the IRS instructions for Form W-8BEN, the form generally stays in effect until the last day of the third calendar year after the year it is signed, so this is not a monthly task.
Even a few days worked inside the US change the answer. Pay attributable to days physically worked in the United States becomes US-source income, and 30 percent nonresident alien withholding can apply to that portion. A contractor who visits for a week of meetings and works during it has created a reporting question. Track it.
Tax treaties change that arithmetic where they apply. The US has income tax treaties with a substantial number of countries, and a treaty can reduce withholding on US-source income, sometimes to zero. For an individual contractor paid for work done inside the United States, the W-8BEN instructions say to claim that treaty benefit on Form 8233 rather than on the W-8BEN.
Genuine employees abroad are a separate case. As a general rule, wages for services performed outside the US by nonresident aliens are foreign-source and, in the words of the IRS page on persons employed abroad by a US person, not subject to reporting and withholding of US federal income tax.
Local rules in the employee's country still apply in full, and handling them is what an EOR is for.
| Situation | Form you need | Withholding | Common mistake |
|---|---|---|---|
| Foreign contractor, all work outside the US | W-8BEN (individual) or W-8BEN-E (entity) | Generally none once documented | Collecting the form after the first payment, or sending a 1099 instead |
| Foreign contractor who works some days inside the US | W-8BEN plus tracking of US workdays | US-source portion may be subject to withholding | Not tracking the visit at all |
| Employee abroad via EOR | Handled by the provider locally | Local withholding by the provider | Assuming US payroll rules still apply somewhere |
| US citizen living abroad working for you | Standard US employment forms | US withholding generally continues to apply | Treating them as a foreign hire because of where they live |
That last row catches people. A US citizen who moved to Lisbon is still a US person for tax purposes, and your US payroll obligations largely continue, while Portugal may also have claims. The same IRS page on persons employed abroad says that wages a US employer pays a US citizen working abroad are generally subject to federal income tax withholding.
For nonresident aliens, the withholding rules are set out in full in the IRS material on pay for personal services and in Publication 515.
Permanent Establishment in Plain Language
The risk is real but frequently overstated by vendors selling the solution to it. The activity that most reliably creates it is someone habitually negotiating and concluding contracts on your behalf in that country, which is why a salesperson abroad is higher risk than a developer. Performing core revenue-generating functions from a fixed location abroad is the other main pathway.
The guidance improved considerably with the 2025 update to the Model Tax Convention of the Organization for Economic Cooperation and Development (OECD). The update was approved by the Committee on Fiscal Affairs on October 13, 2025 and adopted by the OECD Council on November 18, 2025.
The update rewrites the Commentary on Article 5 to clarify when a home counts as a place of business for the enterprise someone works for, and it introduces a two-part framework.
Most summaries of this rule omit two caveats. First, the framework is symmetrical rather than a simple safe harbor, the kind of line that protects you only while you stay under it. Below 50 percent generally means no place of business, but 50 percent or more does not automatically mean a permanent establishment either.
The second caveat is that OECD commentary is guidance for interpreting bilateral tax treaties, and countries adopt it at different speeds. The update records dissent: Chile, the Czech Republic, and Israel entered observations on the new paragraphs, and India rejects the time threshold and the commercial-reason test. Treat the framework as the direction of travel and a strong argument, not as a guarantee.
For a small business, the practical response is proportionate: know which of your international people are doing sales or contract-signing work, keep a record of where people are working, and get advice before hiring someone abroad whose job is to close local deals.
Choosing Where to Hire
If you get to choose where to hire, four variables matter: time zone overlap, English proficiency for the roles you need, cost, and enforcement posture, meaning how readily the country reclassifies contractor arrangements as employment. Most small businesses do not make that choice, because they find a good candidate who happens to live somewhere first. It comes up when you decide where to focus a search.
| Region | Time zone fit with US | What to know |
|---|---|---|
| Latin America (Colombia, Mexico, Argentina, Brazil) | Excellent, mostly within a few hours | Strong nearshore talent and heavy US demand. Brazil in particular enforces reclassification aggressively, so use an EOR for anything resembling employment |
| Eastern Europe (Poland, Romania, Ukraine) | Poor for real-time with the US West Coast, manageable with East Coast mornings | Deep engineering talent. EU members bring General Data Protection Regulation (GDPR) obligations and structured employment protection |
| Philippines and Southeast Asia | Inverted; overlap requires someone shifting hours | Large English-speaking talent pool, established outsourcing infrastructure, generally lower cost |
| India | Inverted, with a common early-morning or late-evening overlap window | Very large talent pool across technical and operational roles, mature contracting norms |
| Western Europe (Germany, France, Spain) | Limited overlap with US mornings | Strong employment protection, high mandatory benefits, and aggressive reclassification enforcement. EOR territory, not contractor territory |
Time zone deserves more weight than it usually gets in this decision. A candidate eleven hours away who is objectively stronger can still be the worse hire for a small team that solves problems by talking to each other. Decide honestly how much real-time collaboration the role requires before optimizing for talent or cost.
Global Recruitment on a Small Team
Whether you call it global recruitment or global talent acquisition, at a small company it is a search you run yourself rather than a function you staff. What changes is where you look. A worldwide posting returns hundreds of applications nobody can assess, while a search aimed at one country returns candidates whose rate, notice period, and overlap you can price.
Screen for the job as it will actually be done. If most of the work arrives in writing, a short paid work sample tells you more than a call does, and holding the interview inside their working hours rather than yours is both a courtesy and a live test of the overlap you decided the role needed.
Settle the pay question before you quote a number, because it is the part of the strategy that is hardest to reverse. The choice is between the local market rate in each country and one global band for the role: local rates cost less but produce awkward comparisons between teammates, while a single band does the opposite. The global compensation guide works through both.
Paying People Abroad
Paying people abroad is mechanically the easiest part of the whole process, and the details that cause friction are contractual rather than technical.
For contractors, an international payment platform or a multi-currency business account handles the transfer. The question to settle in writing is who bears exchange-rate movement and transfer fees.
If you agree a rate in dollars and the contractor is paid in local currency, their income moves with the exchange rate through no action of theirs. If you agree in their currency, your cost moves instead. Either is fine. Leaving it unstated is not, because it becomes a recurring conversation that slowly sours a good relationship.
For employees through an EOR, the provider runs local payroll and invoices you, usually monthly, covering salary, employer contributions, and their fee. For your own entity, you run local payroll with local registration and withholding, generally with a local provider or one of the global payroll solutions that consolidate several countries into one run.
What does not work is paying a foreign employee through your US payroll system. Local law requires local withholding and social contributions that your US system cannot produce, and doing it anyway leaves the person personally exposed to their own tax authority.
The Onboarding Checklist
Onboarding is the part almost every competing guide skips, because it is operational rather than legal and does not sell anything. It is also where a technically compliant hire turns into a person who is actually productive.
The last item carries more weight than it appears to. International hires frequently get a thinner onboarding, not from any decision but because the standard process assumes proximity and nobody rewrote it. The result is someone who is compliant on paper and disconnected in practice, which shows up later as attrition.
Keep one record per hire, filled in as you go rather than reconstructed later. The dates matter as much as the answers: which day the tax form was collected, which day the contract was reviewed and by whom, which day the equipment decision was made. Those are the fields you will want when someone asks what the arrangement actually was, and they are the ones nobody writes down while the hire is going well.
Global Onboarding Without a Second Process
Global onboarding works best as one process with a country layer attached, rather than a separate track per country. The parts that make somebody feel hired stay identical everywhere: the welcome, the first-week schedule, the introductions, and the thirty-day check-ins. Only the paperwork, the equipment route, and the local contract review change by country.
Write that country layer down once per country instead of rediscovering it with every hire: which forms get collected before the first payment, who reviewed the contract locally, what the notice period is there, and how hardware arrives without a customs surprise. Your second hire in Colombia should then take a fraction of the time the first one did.
Sequence matters more than content when the person is eight hours away. Accounts and equipment land before day one, which is the whole argument for preboarding when shipping takes three weeks. The first call sits inside their working hours rather than yours, and the manager owns the first two weeks in writing. Anything left to be arranged live gets arranged a day late.
Managing Across Time Zones
Compliance gets the attention because it has deadlines and penalties. Whether the arrangement actually works is decided by something less dramatic: whether the person feels like part of the company or like an external resource.
Three things matter disproportionately at small scale. The first is defining the overlap window explicitly rather than leaving availability to be inferred. Without a stated expectation, people default to being available constantly and then resent it.
The second is writing more down than feels necessary. Decisions made verbally in your office are invisible to someone six time zones away, and they will find out late every time.
The third is giving international hires the same access to you that local people have. In a small company the founder is the main information channel, and being outside it is isolating in a way that compounds.
A fourth thing matters and gets missed because it is not about access. How direct feedback is expected to be, and whether a slipping date is flagged the day you know or only reported when it arrives, are unwritten conventions that differ between working cultures.
Two people can each be behaving considerately by the rules they learned while reading each other as vague or unreliable. Across six time zones, that misreading runs for a full day before anyone catches it. Making those expectations explicit with the whole team is the practical core of cross cultural training, and at a small company it is one conversation rather than a purchase.
Common Mistakes
The mistakes below recur across small businesses making international hires. Most are sequencing errors rather than judgment errors, which is good news, because sequencing is fixable with a checklist.
The one that costs the most is the first, because it is a belief rather than an oversight. A contractor agreement is a description of a relationship, not a determination of it.
Your First International Hire, Step by Step
Here is the whole process as one sequence, for a small business hiring abroad for the first time.
| Stage | What to do | Timing |
|---|---|---|
| Before you post the role | Decide whether this is contractor or employee work in substance. Check enforcement posture in countries you would consider | Before any candidate contact |
| During the search | Confirm where the candidate actually lives and works, not just their nationality. Time zone overlap is a real selection criterion | Throughout |
| Before the offer | Pick your route. If EOR, get a written quote for that specific country rather than relying on the list price | One to two weeks before offer |
| At offer stage | Contract reviewed against local law: notice period, mandatory benefits, IP assignment, confidentiality | Before signing |
| Before the first payment | Collect Form W-8BEN or W-8BEN-E. Set up the payment method and agree who absorbs fees and exchange movement | Before any money moves |
| Before the start date | Equipment decided and ordered or stipend agreed. Accounts and access provisioned. Onboarding plan written | One to two weeks ahead |
| First 30 days | Same onboarding as a domestic hire, adapted for time zone. Explicit check-ins, since you will not catch problems by walking past their desk | Ongoing |
| At 12 months | Review contractor relationships specifically for drift toward employment. This is the review that prevents the expensive version | Annually, calendared |
That last row is the one I would add to every guide on this topic. Nothing about international hiring goes wrong dramatically on day one. It goes wrong slowly, as a defensible arrangement becomes an indefensible one through a series of individually sensible decisions. An annual review catches it while it is still cheap to fix.
Scoring the seven signals listed earlier is the easy half of that review, and it works the same way whether the contractor is in Ohio or Osaka. The half that only exists when the person is abroad is what a bad score actually costs in their country, and whether it is even the same country it was twelve months ago. That is what the review below asks: which authority would examine the arrangement, what a retroactive finding would cost under their rules, and how that number compares with an EOR quote for the same person.
How FirstHR Fits
FirstHR handles the operational layer that international hiring makes harder. Employee records sit in one place regardless of country, and structured onboarding means a hire in Bogotá gets the same first week as one in Boston.
Document management keeps contracts and tax forms findable rather than scattered across email, and the org chart reflects a distributed team rather than a floor plan. It is built for small businesses, at flat, predictable pricing rather than per-employee pricing.
Employer of record services, foreign payroll, and tax advice come from specialists, and you should be suspicious of anyone claiming a single tool covers all of it. For an employee abroad you will need an EOR or an entity, and for anything close to a compliance line you need a professional in that country. What a system does is keep the operational side consistent, so your fifth international hire is not improvised the way the first one was.
Frequently Asked Questions
Can a US company hire an employee in another country?
Yes. There are three ways to do it. You can engage the person as an independent contractor, which is fastest and cheapest but carries the highest misclassification risk. You can use an employer of record, which takes on the legal employer role in the person’s country while you manage their day-to-day work; the largest providers publish rates of $599 to $699 per worker per month on top of salary. Or you can establish your own legal entity in that country, which means incorporation, local counsel, accounting, and payroll registration, quoted locally and repeated in smaller form every year. For a small business making a first international hire, the choice is almost always between the first two.
How do I hire someone who lives in another country?
Start by deciding whether the relationship is genuinely a contractor arrangement or an employment relationship in substance, because that determines your route. If they set their own hours, work for other clients, and deliver defined projects, a contractor agreement plus a collected Form W-8BEN may be sufficient. If you need fixed hours, direction over how the work is done, and integration into your team, use an employer of record. Then handle the operational pieces: a contract that works under local law, intellectual property assignment valid in that country, equipment, and payment in local currency.
Do I need an entity to hire employees abroad?
No, and for most small businesses you should not create one for a first hire. An employer of record lets you hire a genuine employee in another country without establishing a legal entity there, because the provider is the legal employer locally. Your own entity carries a fixed bill instead: incorporation, local counsel, an accounting provider, payroll registration, and annual filings that arrive whether you have one employee there or thirty. Published estimates for that bill vary so widely between advisers, and between countries, that the only figure worth using is a quote for the specific country. The arithmetic usually only works once a meaningful number of people share the fixed cost.
What is an employer of record?
An employer of record, or EOR, is a provider that becomes the legal employer of your worker in the country where that person works. That is how a US business can employ someone in, say, Poland or Colombia without registering a company of its own there. The provider signs the employment contract as the employer, pays the person through local payroll, takes local taxes out of their pay and hands them to the tax authorities, and supplies the benefits local law makes mandatory. You still direct the work from day to day. The cost is a flat monthly fee per worker on top of what you pay the person. The largest providers advertise $599 to $699 for that fee, so get a written quote for the specific country before you commit.
Do I file a 1099 for a foreign contractor?
Generally no, as long as the contractor is a non-US person who does all of the work outside the United States and you hold proof of that status. Pay for work done abroad is generally foreign-source income, so Form 1042-S does not apply, and a payment backed by valid documentation of foreign status, obtained before you pay, is exempt from Form 1099 reporting. That documentation is Form W-8BEN for an individual contractor, or Form W-8BEN-E when the contractor is an entity, and it should be in your files before the first payment goes out. The picture changes once the person works any days physically inside the United States, because pay for those days is US-source.
What happens if I do not collect a W-8BEN?
Without valid documentation of foreign status, the IRS presumption rules generally treat an individual contractor as a US person. That can make the payment reportable on Form 1099 and subject to backup withholding at 24 percent for as long as no taxpayer identification number is on file. Any portion paid for work done inside the United States is generally US-source, and nonresident alien withholding at 30 percent applies to it unless an exemption, such as a treaty exemption, is claimed. The liability falls on you as the payer, not on the contractor, which means you could owe the withholding out of your own pocket after having already paid the contractor in full. Collect the form before the first payment. A W-8BEN generally remains valid through the end of the third succeeding calendar year.
What is permanent establishment risk?
Permanent establishment risk is the chance that your company ends up with a taxable presence in another country, which gives that country the right to tax the profits connected to it. A single remote worker can create one, particularly someone who habitually negotiates and closes contracts for you there, or who does the core revenue-generating work of the business from that country. The fallout is local corporate income tax, a duty to register, and penalties on tax that should have been paid in earlier periods. Being a small company does not reduce the risk.
Does one remote employee abroad create a permanent establishment?
Not automatically. The November 2025 OECD update to the Commentary on its Model Tax Convention deals with exactly this situation. The test starts with time: if less than 50 percent of a person’s total working time over a twelve-month period is spent working from a home or similar place, that place is generally not treated as a place of business for your company. Reaching or passing that mark still does not make a permanent establishment automatic. The answer then turns on whether there is a commercial reason for the person to be in that country, such as serving customers there. Countries adopt OECD commentary at different speeds, so treat this as guidance rather than a guarantee.
Is it cheaper to hire remote employees in other countries?
Often, but the salary difference is not the whole picture. Add the employer of record fee if you use one, currency conversion and transfer costs, equipment shipping or a hardware stipend, and the time your team spends coordinating across time zones. Some countries also require mandatory benefits, bonuses, or severance accruals that do not exist in the US. The saving is usually real but smaller than a raw salary comparison suggests, and a misclassification finding can erase several years of it at once.
What is the difference between hiring a contractor and an employee internationally?
A contractor controls how and when they work, typically serves multiple clients, supplies their own tools, and is engaged for defined deliverables. An employee works under your direction, on your schedule, usually exclusively, and is integrated into your team. The distinction matters because employment brings local obligations: payroll taxes, mandatory benefits, notice periods, and severance. Critically, the classification is determined by the substance of the relationship under the worker’s local law, not by what your contract calls it.
Which countries are riskiest for contractor arrangements?
Several countries are known for aggressive enforcement against contractor arrangements that look like employment, including Brazil, Spain, France, and Germany. In these jurisdictions a long-running, exclusive, full-time contractor relationship is likely to be reclassified as employment, with back taxes, social contributions, benefits, and penalties applied retroactively. This does not mean avoiding these countries; it means using an employer of record rather than a contractor agreement when hiring there.
How do I pay a remote employee in another country?
How you pay depends on the route you hired them through. A contractor is usually paid through an international payment platform or a business account that can send multi-currency transfers, and the two of you should settle in writing who absorbs exchange-rate swings and transfer fees. An employee hired through an employer of record is paid by the provider’s local payroll, and you settle one combined invoice from the provider. With your own entity, the payroll is yours to run in that country, including local registration and withholding. Running a foreign employee through your US payroll generally does not work, since their country requires its own withholding and contributions.