The question founders ask is “can we just pay them from the US account?” The honest answer is that you can, right up until someone asks which country’s filings cover it — and then the answer depends on a structure decision nobody made deliberately.
A US company with people in India has three possible structures: independent contractors, an employer of record or paymaster arrangement, or its own Indian subsidiary. Each one puts the filing obligations in a different place. The US side is largely about documentation and sourcing; the India side is about withholding, social security and statutory registrations. The gap between them is where the problems live.
Working out which structure your India team actually needs? WhatsApp us your headcount and how long they have been with you.
Quick Summary
| Structure | US side | India side |
| Independent contractors | W-8BEN on file; no 1099 where services are performed wholly outside the US | Contractor invoices and pays own tax; GST if registered; no employer obligations |
| EOR / paymaster | Payment to the EOR, documented as a service fee | EOR is the employer of record — TDS, PF, ESIC, PT, gratuity all sit with them |
| Own Indian subsidiary | Transfer pricing on intercompany charges; consolidation | Full employer stack: salary TDS, PF, ESIC, Professional Tax, labour codes, ROC |
| Employees paid directly from the US with no structure | Documentation problem | Permanent establishment risk, unregistered employer exposure |
💡 TaxKitab Tip The structure question is really a duration question. Under a year, with genuinely independent people who control their own hours and tools, contractors usually work. Beyond a year, with full-time people reporting into your managers on your schedule, the contractor label stops being accurate and both countries start looking at it differently. Decide at the point where the first person goes full-time, not at the point where someone asks. Changing structure later is a migration; choosing it at the start is a form.
Option 1: Independent Contractors
The simplest arrangement, and the one most companies begin with.
On the US side. Collect a Form W-8BEN from each individual (or W-8BEN-E from an entity) certifying non-US status. Keep it on file — it is not filed with the IRS, and it is what you produce on audit.
Where the services are performed entirely outside the United States, the compensation is foreign-source under IRC §861(a)(3) and §862(a)(3), which source services income to where the work is physically performed. There is generally no Form 1099 and no US withholding. The rule follows the location of the work — not nationality, your location, the bank account or the currency.
Without a valid W-8 on file, presumption rules can require you to treat the payee as a US person, triggering 1099 reporting and 24% backup withholding.
On the India side. The contractor invoices you, declares the income and pays their own tax. Above the GST registration threshold they register, and an export of services to a US company is zero-rated subject to conditions including payment in convertible foreign exchange.
You have no Indian employer obligations here — which is why it is attractive and why it gets stretched past the point where it is true. The tests are in contractor versus employee in India.
Option 2: EOR or Paymaster
A third party employs the person in India and invoices you. You pay a service fee; they run the employment.
On the US side this is straightforward — a payment to a service provider, documented as such, with the usual W-8BEN-E if the provider is a foreign entity.
On the India side the employer obligations sit with the EOR: salary TDS, Provident Fund, ESIC, Professional Tax, gratuity, and the labour codes in force from 21 November 2025, including the two-working-day settlement deadline on exit.
You give up direct control over terms and pay a layer of cost; you get a compliant employment relationship without incorporating. The trade-offs are in EOR versus subsidiary for India compliance.
Option 3: Your Own Indian Subsidiary
The full structure, and the right answer once the team is large enough or the work is core.
On the India side you take on the whole employer stack — salary TDS under the Income-tax Act, 2025, Provident Fund, ESIC, Professional Tax, the labour codes, plus the company’s own ROC filings, statutory audit and annual return. A subsidiary files even in a year with no revenue, which surprises most parents — see the India entity that files even with no revenue.
On the US side the intercompany relationship becomes a transfer pricing matter. If the Indian entity provides services to the US parent, it must be paid at arm’s length, and both countries will look at the margin. A cost-plus arrangement is common and needs documentation on both sides, not just an intercompany invoice.
The reporting burden and what the parent actually gets each month is covered in monthly reporting from an India subsidiary, and the cost picture in what it costs to run an India subsidiary.
The Gap: Paying Employees Directly With No Structure
The arrangement that creates the most exposure is also the most common at the start: full-time people in India, paid as contractors from the US account, with no Indian entity and no EOR.
Two risks compound. In India, a person who functions as an employee may be treated as one, with the US company exposed as an unregistered employer. And a US company with people in India performing core functions on its behalf can raise a permanent establishment question — which, answered the wrong way, brings Indian corporate tax on attributable profits rather than payroll penalties alone.
Neither risk shows up until something else prompts a look: a funding round, an acquisition, or a disgruntled exit.
One practical point across all three structures: remittances between India and a foreign party run through the exchange control rules, and certain payments need Form 15CA with a chartered accountant’s Form 15CB certificate before the bank will process them — see Form 15CA and 15CB for foreign remittance.
How We Work on This
We handle the India side — books, payroll processing, statutory registrations, monthly reporting to the US parent, and the documentation that keeps the two sets of records agreeing.
The US side — returns, elections, transfer pricing positions and anything before the IRS — sits with our US partner, an IRS Enrolled Agent, under a separate engagement with you. Enrolled Agents are licensed by the IRS and have full representation rights before it.
Frequently Asked Questions
Do we issue a 1099 to our Indian contractors? Generally no, where the services are performed entirely outside the US. Collect a W-8BEN instead and keep it on file. The 1099-NEC threshold rose to $2,000 for payments after 31 December 2025, but the threshold is beside the point if the payee is a documented foreign person working abroad.
What if a contractor visits the US for a few weeks? Compensation is allocated to where the work was performed, time-based by default under Treasury Regulation §1.861-4(b). Days in the US generate US-source income, bringing withholding and reporting into play. Keep day records.
At what headcount should we incorporate in India? There is no statutory number. The practical triggers are full-time people, core rather than peripheral work, a need to hold IP or sign Indian contracts, and investors asking.
Can the parent just reimburse costs instead of paying a margin? Not reliably. An Indian entity serving its parent generally needs an arm’s length return, and cost reimbursement with no margin invites an adjustment on both sides.
Does the Indian subsidiary have to use April to March as its financial year? Yes, by default under Section 2(41) of the Companies Act, 2013 — though a subsidiary of a foreign company can apply to the Regional Director for a different year. The detail is in two sets of books for an India subsidiary.
Who decides whether we have a permanent establishment? Ultimately the tax authorities, on the facts. It turns on what the India team actually does and whose business they are carrying on. It is worth a view from both sides before the structure settles, not after.
References
- Internal Revenue Code §861(a)(3) and §862(a)(3) — source of compensation for personal services; Treasury Regulation §1.861-4(b) — allocation where services are partly performed in the US
- IRC §3406 — backup withholding where payee documentation is absent; Treasury Regulation §1.6049-5(d)(2) — presumption rules
- Forms W-8BEN and W-8BEN-E; Form 1099-NEC threshold of $2,000 for payments after 31 December 2025 under the One Big Beautiful Bill Act
- Companies Act, 2013, Section 2(41); Code on Wages, 2019 and the labour codes in force from 21 November 2025
- India–US Double Taxation Avoidance Agreement, Article 5 (permanent establishment)
⚠️ Structure choice carries tax, labour and exchange-control consequences in two countries, and permanent establishment is fact-specific. Nothing here is a conclusion about your own arrangement — take advice on both sides before deciding or changing.
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