Decide what the relationship really is

Before choosing a setup, be clear about how the work will run. The IRS frames the US test as whether the business has the right to control what is done and how, weighing behavioral control, financial control and the type of relationship together, with no single factor deciding it. A person working set hours with your tools under your managers’ direction shows the kind of control the IRS looks for, whatever the contract calls them. Other countries apply their own tests, and the outcomes differ from one country to the next.

Getting it wrong has a cost at home as well. A business that treats an employee as a contractor without a reasonable basis can owe the employment taxes, and either party can ask the IRS for a ruling on Form SS-8, though a reply can take six months or more. The California version of the question is in employees vs. independent contractors in California.

Three ways to put someone on the team

Once the relationship is clear, the setup usually comes down to one of these:

Your own local entity. A local subsidiary becomes the employer under local law, with every payroll and contribution duty that comes with it. It tends to suit a company that plans a team in that country rather than one person.
An employer of record. A third party becomes the legal employer in that country and runs payroll and statutory contributions, so you can hire without an entity.
An independent contractor. The person runs their own business, invoices you and arranges their own cover, which holds up only if the working relationship matches.

A professional employer organization is the domestic cousin of an EOR. EOR providers describe co-employment through a PEO as needing the client to have its own entity in the country, so it is not the usual route for a first hire abroad. They also describe countries where co-employment arrangements are not lawful, one more reason to check the specific country before signing. Our guide to health coverage for EOR employees and contractors abroad compares the routes in more depth.

Health cover follows the setup

Whichever route you choose, health cover begins with the country rather than with your US benefits. Each country sets its own rules on public cover and on what an employer has to contribute, and the legal employer, whether that is your entity or the EOR, handles enrollment in whatever the law requires. A genuine contractor generally deals with the local system on their own.

An international health plan then plays one of two roles: an addition on top of the local cover or, in some countries, a stand-in for part of it. EOR services differ on what they include beyond the statutory minimum, so ask what the base service covers before adding anything. Common first-hire countries each have their own page, including Canada, Mexico, the UK, India and the Philippines, and the international overview links the rest.

Sending a US employee to work abroad

A different case arises when an existing US employee moves abroad for the company. Under the detached-worker rule in US social security agreements, an employee the employer sends temporarily to the other country keeps paying into, and stays covered by, the home system alone, generally for up to five years. The two countries can agree to extend that case by case, though extensions beyond two extra years are rare, and the agreement with Italy has no detached-worker rule.

A certificate of coverage proves the exemption. SSA asks employers to request one as early as they can, ideally before the work abroad begins, with the worker’s details, the employer’s name and address in both countries, and the transfer and expected return dates. Employers can use SSA’s online form. Some agreements run their own process; under the Spain agreement, certain certificates come from the Spanish authority instead of SSA. The health side of a move is covered in health coverage for employees who travel or relocate abroad.

Tax points to raise early

A US citizen or resident who settles abroad will often ask about the foreign earned income exclusion. It needs foreign earned income, a tax home outside the US and either bona fide residence abroad covering an unbroken stretch that takes in a whole tax year, or at least 330 full days of physical presence abroad within any 12 consecutive months. Keeping a main home in the US generally rules it out, and it lowers regular income tax only, not self-employment tax. Payroll tax, local income tax and where the person counts as employed all need answers before the offer goes out, so check with a local adviser or tax professional in both countries.

Your US insurance after the first hire abroad

A hire abroad changes the commercial side too. California requires workers’ compensation once a business has a single employee, and Labor Code section 3600.5(a) lets California hear an injury claim from outside the state when the hiring contract was made in California or the worker is regularly employed there. How your policy treats work in another country is a question for the insurer to confirm, so tell us before the start date and we will put it to them.

An EPLI application asks about contractors and leased workers, so mention a contractor or EOR hire when you renew employment practices liability. A laptop logging in from another country belongs in your cyber insurance answers as well. The rest of the startup stages, from incorporation to the first enterprise contract, are on our insurance for startups page.

A short checklist before the offer

Where the person will live and work, and for how long.
Whether the role is employment or a genuine contract, under both countries’ tests.
Which setup applies: your own entity, an employer of record or a contract.
What local cover that setup brings, and whether an international plan should add to it.
Whether a spouse or children should be included.
For a US employee being transferred, the certificate of coverage request.
A note to us so your insurers hear about the hire before day one.

Introductions for a first hire abroad

When you know the country and the setup, fill in the quote form on this page with the person’s country, how they will be engaged and whether family members should be covered. We will pass the request to a benefits partner that handles international and remote-team health coverage, and the partner and the insurer decide eligibility, plans and pricing. The employee benefits hub lists the rest of this section.

A few useful answers

Common questions

Do we need a local entity to hire our first employee abroad?

Not always. An employer of record becomes the legal employer in the country so you can hire without an entity. A PEO is different: EOR providers describe PEO co-employment as needing your company to have its own entity there.

If we hire through an employer of record, who handles health contributions?

The EOR, as the legal employer, runs payroll and the statutory contributions, including enrollment in any health scheme local law requires. Ask what its base service includes beyond that minimum.

Can a US employee who moves abroad stay on US social security?

Often, when the move is a temporary assignment to a country with a US agreement. Under the detached-worker rule, the employee generally stays in the US system for up to five years, shown by an SSA certificate of coverage.

Does the foreign earned income exclusion remove self-employment tax?

No. The IRS says the exclusion reduces regular income tax only, not self-employment tax. It is claimed on Form 2555.

Will our California workers’ comp policy respond to an employee abroad?

Do not assume it will. How a policy handles work in another country is for the insurer to confirm, so tell us before the start date and we will ask.

Hiring Your First Employee Abroad