How to Pay International Employees Compliantly

Paying overseas talent shouldn’t feel like a maze. But for U.S. companies, it often does.

You start with a simple goal: send money to your developer in Germany or your marketer in the Philippines. But then come the roadblocks: wire transfer fees ($25–50 per payment), 3–4% FX markups, and multi-day delays that frustrate your team.

The good news? There are different proven ways to pay international employees, and the right one can save you over $200 per employee each month.

But each option comes with its own legal, tax, and compliance risks. What seems like a simple payment can create tax liabilities, trigger permanent establishment, or lead to misclassification fines if you’re not careful.

In this guide, we’ll show you:

• The 3 most common international payroll methods and when to use each

• Real-world cost, risk, and speed comparisons for each option

• How global payroll platforms and EORs simplify compliance and scale

Can you legally pay foreign employees?

The short answer: yes.

But paying foreign employees comes with its caveats. It isn’t as simple as wiring money overseas. Most companies start with basic wire transfers or payment platforms, thinking they're saving money on fees. What they don't realize is that these simple payment solutions only handle the money transfer, not the legal obligations that come with it.

We’re going to look at a few payment scenarios that can get very complicated before we go deeper into payment methods in the next section.

The permanent establishment problem

When you pay a full-time international employee directly from overseas, you may accidentally trigger what's called permanent establishment (PE).

This means the foreign government could classify your company as having a taxable business presence in that country, along with corporate tax obligations, registration requirements, and penalties for non-compliance.

This could cost you:

• Corporate tax rates of 20-40% on all revenue attributed to that country
• Registration penalties ranging from $5,000-$50,000
• Ongoing compliance costs of $15,000-$30,000 annually
• Potential back-tax liability for previous years

PE isn’t just a theoretical risk. It’s enforced across Europe, Asia, and Latin America, especially if:

• Your overseas hire works full-time or has long-term responsibilities
• They generate revenue or manage business operations locally
• Your employment contracts don’t meet local labor law standards

Once triggered, PE can create a “tax nexus” that brings your company under another country’s corporate tax and reporting regime, often without you realizing it until it’s too late.

Tax obligations you can’t ignore

Even if you avoid PE, other tax liabilities still apply:

• Payroll taxes and social contributions must typically be paid in the employee’s country of residence. Failure to comply could result in penalties of 10-25% of unpaid amounts plus interest
• The U.S. also requires IRS documentation, such as Form W-8BEN, to validate foreign status and avoid penalties.
• Without a valid tax treaty, you may end up paying taxes twice, once in the U.S. and again abroad.

For instance, the U.S. maintains totalization agreements with over 30 countries to prevent dual social security payments, but these only cover some aspects of compliance. You’ll still need to understand local labor law obligations, including what’s required for benefits, insurance, termination, and more.

Additional risks you may overlook

Beyond PE and taxes, several other challenges commonly trip up companies paying employees abroad:

• Worker misclassification: Paying someone as a contractor instead of an employee can lead to legal and financial penalties ($1000-$5000 per misclassified worker) if local authorities reclassify the role.

• Visa and immigration delays: Improper payment structures can jeopardize work authorization, risking employee deportation, up to $20,000 in company fines per violation, and bans on future visa sponsorships.

• Local labor laws and statutory benefits: Most countries mandate vacation days, parental leave, health coverage, and termination protections—none of which are optional.

• Exchange rate volatility: Paying in foreign currencies can disrupt your payroll process and budgeting due to shifting rates and bank transfer fees.

• Data protection laws: If your team is based in the EU or other privacy-regulated regions, you must comply with GDPR or equivalent local data laws, especially when handling employee records or payroll information.

So what options do you have? Let’s look at how you can pay international employers without walking into the problems detailed above.

3 ways to pay international employees

Option	Cost	Setup Time	Compliance Risk	Best For
Direct HQ Payment (full-time and contractors)	$	Instant	Very High	Temporary U.S. expats
Local Entity	$$$$$	6–12 months	Low	Large teams (30+ per country)
Employer of Record	$$	1–2 weeks	Low	Teams of 1–20 per country

Depending on your team size, location, and risk tolerance, there are a few routes you can take, each with its pros, cons, and compliance implications.

Pay directly from U.S. headquarters

Some U.S. companies consider paying international workers directly from their domestic payroll or bank account through wire transfers, Wise, or by hiring them as “contractors.” It’s fast, requires no setup, and looks like a low-cost way to get started.

Sometimes you call them employees. Other times, contractors. But the mechanism is the same: you’re paying them outside any formal payroll system.

Why it's tempting:

• Cost: $25–50 per wire + 3–4% exchange rate loss
• Speed: 2–5 business days
• Setup: Zero. No contracts, no onboarding, no new tools

And for one-off projects or short-term freelancers, that might be fine.

But for full-time hires, cracks start to show quickly. Exchange rate losses eat into salaries. Delays create trust issues. And most importantly, paying a foreign individual directly, especially as a full-time hire, can trigger serious compliance issues in the worker’s home country.

You may unknowingly do the following:

• Violate local labor laws that require employer registration
• Miss mandatory tax withholdings and contributions
• Trigger permanent establishment (PE) status, exposing your company to foreign corporate taxes and regulatory scrutiny

While direct payment may be acceptable in very limited cases, it provides no legal protection for your business and no employment protections for the worker. That combination increases risk on both sides and undermines retention and trust.

Pay through a local entity (with or without a payroll vendor)

If your company has already set up a legal entity in the employee’s country, you can run a compliant local payroll and pay them like any domestic employee. It’s the most formal way to pay internationally. And it gives you full control over contracts, salaries, tax withholdings, benefits, and reporting.

Why it’s tempting:

• Cost: High upfront. Setup typically exceeds $50,000 per country
• Speed: 2–4 weeks (if the entity is already active)
• Setup: Full entity required. Local bank account, tax registration, HR/payroll infrastructure

And if you’re building a 50+ person team in one country, this approach can make sense.

Once the entity is live, you have two options: run payroll in-house or outsource it to a local payroll vendor. Vendors handle salary disbursement, withholdings, and local filings—but only after you’ve completed all legal setup and maintain full compliance liability.

Pay through an employer of record

When you need to pay international employees fast, without setting up entities or juggling local laws, an EOR is the most flexible and compliant route.

An EOR acts as the legal employer of your international team, handling contracts, payroll, taxes, social contributions, and statutory benefits, so you don’t need to set up a local entity.

You still manage your employee’s day-to-day work. But the EOR handles everything else behind the scenes.

Why it’s tempting:

• Cost: $300–$1,000/month per employee (flat fee that covers payroll, compliance, filings, and support)
• Speed: 48 hours to 5 business days to onboard and start payroll
• Setup: Minimal. No entities, no local vendors, no tax registrations. Just sign once.

For U.S. companies, this means:

• No wrangling foreign labor laws or tax codes
• No delays waiting on entity setup
• No risk of misclassification or accidental permanent establishment
• One monthly invoice, clean, predictable, and in USD

And when things go sideways, the right EOR steps in.

More companies are choosing EORs over traditional methods. Here are 5 Reasons Why EORs Are the Smartest Path for U.S. Companies.

Why EORs are the smart payment + compliance solution

If you're trying to pay employees internationally without a legal entity, an Employer of Record (EOR) is often the safest, fastest, and most efficient option. For U.S. companies trying to navigate unfamiliar labor laws, avoid tax missteps, and onboard talent quickly, EORs offer a way forward without the typical legal and logistical overhead.

Here’s why more companies are making EORs their go-to strategy for global payroll (and hiring):

1. You stay compliant from day one

EORs take responsibility for ensuring all employment contracts, benefits, and payroll processes follow local labor laws. That means no guessing, no Googling foreign employment standards, and no scrambling for legal interpretations.

The ROI: Avoid $5,000-50,000 in compliance penalties and save $15,000-30,000 annually on legal consultations you won't need.

2. You don’t need to hire local lawyers

Because the EOR is the legal employer, they manage all jurisdiction-specific requirements. You don’t need to retain local lawyers or compliance consultants in every country you hire in. This saves time and significantly reduces costs and risk.

Compare this to DIY: $5,000-15,000 per country for legal setup + ongoing consultation fees vs. comprehensive EOR coverage included in monthly fee.

3. You get one invoice

Instead of tracking multi-country payrolls, FX conversions, and vendor bills, you receive a single monthly invoice in USD. It covers salaries, benefits, tax contributions, and the EOR fee, so your finance team knows exactly what to expect each month.

Budget predictability: No more surprise $10,000 compliance bills or unexpected tax penalties, just one clean monthly cost.

4. You can pay employees in 1-2 weeks, not months

Setting up a local entity can take 6-12 months and cost tens of thousands of dollars. With an EOR, you can onboard employees in a new country in as little as 1–2 weeks, without opening a local business or navigating foreign bureaucracy.

Time to revenue: Start benefiting from international talent weeks or months faster than entity setup allows.

5. You avoid costly misclassification mistakes

Misclassifying an employee as a contractor is one of the most common and costly mistakes in global hiring, costing $1,000-5,000 per worker plus back-pay liability.. An EOR hires your international worker as a full-time employee, ensuring proper status, protections, and contributions are in place from day one.

Risk elimination: Zero misclassification risk vs. high penalty exposure with contractor arrangements.

But not all EORs offer the same experience. While some are built for volume, Rivermate treats you like a partner:

• When CloudCart needed backdated contracts resolved in 48 hours to help their employees meet housing deadlines, we delivered.

• When Hightekers needed complex contract customizations across 5 European countries, we handled every detail.

• When Boloo needed to transition a developer from contractor to employee status across country borders, we made it seamless.

That's the difference between automated EOR services and true partnership.

Rivermate supports everything from urgent contract adjustments to hands-on workforce guidance and offers true human support, not automated chatbots. For U.S. companies navigating edge cases, complex markets, or rapid scale, that flexibility can make all the difference.

Ready to pay international employees safely?

You've seen the compliance risks of DIY approaches. You understand why simple payment platforms leave you exposed. And you know that setting up entities is expensive and slow.

Rivermate isn’t just an EOR—it’s a responsive extension of your HR, legal, and payroll teams, equipped to handle both the routine and the unexpected.

With Rivermate, you get:

• Compliant, country-specific employment arrangements—without opening local entities
• Seamless onboarding, payroll, and benefits handled by in-country experts
• Direct support from real humans—via Slack, WhatsApp, or email
• One monthly invoice in your local currency (billed in Euro, USD, and GPB) USD, across 150+ countries

Whether you're hiring one person in Berlin or scaling a global support team, Rivermate EOR helps you stay focused on growth, not paperwork.

Book a free 30-minute consultation with us today!

Book a demo to see how it works.