Three ways to employ someone in the US
| Your own payroll | PEO | EOR | |
|---|---|---|---|
| Who is the legal employer? | Your US company | Co-employment: you and the PEO | The EOR provider |
| Need a US entity? | Yes | Yes | No |
| Benefits (health insurance, 401(k)) | You source them | Access to the PEO’s larger plans | Provided by the EOR |
| Best for | Several US hires, in-house finance support | First few hires with competitive benefits | Testing the US market before incorporating |
A PEO (professional employer organisation) runs payroll, tax filings and benefits for your US company. An EOR (employer of record) employs the person on your behalf — useful if you don’t yet have a US company.
If you employ directly: set-up steps
- EIN for the US company — EIN guide.
- Register in the employee’s state: state income-tax withholding and state unemployment insurance accounts. An employee working in a state usually also means registering the company to do business there — see foreign qualification.
- Workers’ compensation insurance — required in most states once you have employees.
- Payroll provider to calculate withholding, pay taxes and file returns.
- Employment documents: offer letter, confidentiality and IP assignment agreement, and a handbook as you grow.
Federal payroll taxes in 2026
| Tax | Employer | Employee (withheld) |
|---|---|---|
| Social Security | 6.2% on wages up to $184,500 | 6.2% on wages up to $184,500 |
| Medicare | 1.45% on all wages | 1.45% on all wages (+0.9% above $200,000) |
| Federal unemployment (FUTA) | 6% on the first $7,000 of wages, usually reduced to 0.6% after the credit for state unemployment tax | — |
| Federal income tax | — | Withheld based on the employee’s Form W-4 |
On top of these come state unemployment insurance, state (and sometimes local) income-tax withholding, and any state-specific programmes such as disability or paid family leave.
Paperwork for each new hire
- Form I-9 — you must verify each employee’s identity and authorisation to work in the US within the first days of employment. Some states also require E-Verify.
- Form W-4 (federal) and the state withholding form.
- New-hire reporting to the state within its deadline.
- Required state and federal labour-law notices.
Recurring payroll filings
- Form 941 — quarterly federal payroll return.
- Form 940 — annual FUTA return, due 31 January.
- Form W-2 — to each employee and the Social Security Administration by 31 January.
- State withholding and unemployment returns on each state’s schedule.
All of these belong on your US compliance calendar.
Employee or contractor?
Paying a US-based person as an independent contractor (with a Form 1099-NEC) is simpler — but only if they genuinely are one. Control over how and when they work, integration into your team and ongoing, full-time work point towards employment. Misclassification can bring back payroll taxes, penalties and state claims, and some states apply stricter tests than the IRS.
Knock-on effects in India
- Transfer pricing: if the US company’s team supports the Indian parent (or vice versa), the intercompany charge must be at arm’s length. See US subsidiary of an Indian company.
- Funding payroll from India: money sent from the Indian parent is overseas investment or a loan under FEMA and must be reported. See ODI rules.
- Stock options for US hires are granted by the US company; for the team in India, see US parent ESOPs.
Frequently asked questions
Do I need a US company to hire an employee in the US?
What payroll taxes does a US employer pay in 2026?
What forms are needed when hiring a US employee?
Does hiring an employee in a US state create tax obligations there?
Please note: this guide is general information based on the rules as they stood on the review date above. Regulations and RBI/CBDT procedures change often — please get advice on your specific facts before acting.