Your company has probably been selling to Americans for years. Contracts in dollars, calls at awkward hours. Employing an American is not an extension of that. It is a different transaction, and it runs on two separate tracks that do not touch each other.
One track is the person: getting someone in Austin or New Jersey onto a payroll that withholds US tax correctly and gives them the benefits an American expects. That part is straightforward once you know the options.
The other track is the money, and this is where India-headquartered companies meet a set of rules that companies in most other countries never encounter. Sending capital abroad to fund a US company is a regulated act under FEMA. Paying someone for work is not.
Which track you end up on depends on one early decision, so it is worth making that decision deliberately.
FEMA Rules for Funding a US Subsidiary From India
Setting up and funding a US subsidiary counts as Overseas Direct Investment. The framework has been in place since the Foreign Exchange Management (Overseas Investment) Rules came into force in August 2022, and it brings a compliance chain that continues for as long as the entity exists.
The shape of it:
Most outbound investment goes through the automatic route, which needs no prior RBI approval provided every condition is met. Your total financial commitment across all foreign entities, counting equity, loans, and guarantees, cannot exceed 400% of your net worth per the last audited balance sheet.
The investment routes through your authorized dealer bank. You file Form FC, the US entity receives a Unique Identification Number, and from then on you file an Annual Performance Report for that entity by 31 December each year.
Late filing carries a Late Submission Fee starting at ₹7,500 and rising with transaction value and delay. An unresolved delay can bar you from making further financial commitment to that entity until it is cleared, which is a harder problem than the fee itself.
Three conditions catch people out:
- Round-tripping draws scrutiny. Investing in a foreign entity that already holds investment back into India gets examined closely.
- Structure layers are capped. A commitment creating more than two layers of foreign subsidiaries is not permitted.
- Startups may fund overseas investment only from internal accruals, not borrowed money.
If you are a founder investing personally rather than through the company, that is the Liberalized Remittance Scheme instead, capped at USD 250,000 per financial year and limited to operating entities.
Now the part that matters for hiring: none of this applies when you pay an Employer of Record. That is a service fee for work performed, not capital invested abroad, so it sits outside the ODI framework entirely. No Form FC, no UIN, no annual report, no net worth ceiling.
For a company putting two or three people in the US to test the market, that difference alone often settles the question. Confirm your specific position with your AD bank or CA before committing either way, since the rules are detailed and they move.
Three Ways to Employ a US Worker From India
Using an Employer of Record
An Employer of Record is a US company that employs your hire on your behalf. It runs their payroll, withholds federal and state taxes, files with the IRS and the state, enrolls them in health cover and other benefits, and holds the legal employment relationship. Your team manages their work exactly as they would anyone else.
You pay salary, employer-side taxes, and a per-employee fee. No US incorporation, no capital transfer, no state registrations in your name.
This suits a company hiring one to fifteen Americans that wants them working in days rather than months. It suits you less well once twenty or more people sit in a single state, and the US has become a permanent operation, since the fee then starts losing to the cost of your own entity.
The trade is that the EOR sits between you and the employment relationship. Contract changes, terminations, and unusual benefits requests go through them.
Setting Up Your Own US Entity
You incorporate in the US, usually a Delaware LLC or C-corp, obtain an Employer Identification Number, open US banking, register as an employer in each state where someone lives, build payroll, and appoint a US accountant.
Incorporation is the cheap part, and it is the part people quote. A Delaware LLC files in about a day, and the EIN issues quickly for under $100. Everything after that is where the money goes: state-by-state registration, multi-state payroll, federal and state filings, and US benefits administration. Realistic all-in setup runs $5,000 to $40,000 depending on how many states you touch, plus the FEMA compliance chain above, plus obligations that never end.
Worth doing when the US is a committed long-term market and headcount in one state is heading past ten or fifteen. If you already run payroll in more than one country, the mechanics will be familiar.
One warning: a US PEO is not an alternative here. PEOs operate on co-employment and assume you already own the US entity. With no US company, a PEO cannot employ anyone for you. An EOR can.
Engaging a US Contractor
Engaging someone through a contractor arrangement is fast and cheap, and legitimate when the relationship genuinely is contracting: their hours, their equipment, other clients, invoices for deliverables, their own tax. You collect a Form W-9, pay invoices, and issue a 1099 at year-end.
It stops being legitimate when the person works full time, only for you, on your schedule and systems, reporting to your manager. The IRS applies its own test, and individual states apply theirs, with California's ABC test treating most full-time workers as employees, whatever the contract says. Getting it wrong means back taxes, unpaid overtime, penalties, and the employer contributions you skipped.
Indian companies often assume US classification rules are looser than India's. They are not looser; they are differently enforced, and the penalties land on the foreign company as readily as a domestic one.
US State-by-State Employment Compliance
Here is something that works in your favor: you already understand this problem.
Employment in India varies by state. Shops and Establishments Acts differ, professional tax differs, and the paperwork your payroll files in Karnataka is not the paperwork it files in Maharashtra. Even with the labor codes consolidating federal law, state rules still decide the practical filing obligations.
The US works the same way, at a larger scale. Your engineer in Seattle sits under different tax, wage, and leave rules than your salesperson in Austin. A third hire in New York means three sets of employer registrations, three state tax regimes, three unemployment insurance accounts, and in some states a separate paid-family-leave contribution.
Incorporating does not solve it. A Delaware entity gives you a US employer, not compliance in the states where your people live. You register and file in each one either way.
The practical consequence: your US headcount can look small and your compliance footprint large. Five people across five states is five sets of obligations, which is the situation an EOR is built for.
Cost of Hiring a US Employee From India
The federal number is smaller than most Indian finance teams expect.
Employer-side FICA is 7.65% of wages, made up of 6.2% Social Security up to the annual wage cap and 1.45% Medicare, with federal unemployment adding a small amount per head. Set against 12% EPF plus ESI plus gratuity accrual plus statutory bonus, the US federal burden is genuinely light.
The state layer is where it stops being predictable. Unemployment insurance carries a different rate and wage base in every state. Several states add disability or paid-leave contributions. Workers' compensation is mandatory almost everywhere and priced by role and location.
Then there is health insurance, which is not a tax and has no Indian equivalent. There is no national system funded by employer contributions. American candidates in professional roles expect employer-sponsored medical cover as a baseline, and for a small team it can be one of the larger lines in the budget. An EOR gives you group rates that an Indian company with three US employees could not negotiate alone.
If you use an EOR, add the fee. Ours is $579 per employee per month, flat, with no deposit and no pre-funding. Some providers hold a deposit worth a month of salary or charge a percentage of payroll, so ask for the full structure rather than the headline rate. It also helps to compare what a hire costs across countries before you settle on where the role should sit.
India-US Time Zone Overlap
India sits at UTC+5:30, which puts you nine and a half hours from New York and twelve and a half hours from San Francisco. That is inconvenient, and it is far better than the rest of the region works with. A team finishing at 7 pm IST catches the start of the New York morning. Companies in Singapore or Tokyo have no equivalent window, which is why hiring into the US from elsewhere in Asia turns into an async problem in a way it does not for you.
Indian companies also arrive with an advantage nobody else has: three decades of institutional practice running US-hours coverage. Your organization already knows how to hold a conversation across that gap.
The West Coast is the harder half. Twelve and a half hours leaves almost nothing, so a US team split between coasts needs a deliberate answer rather than an assumption.
What Surprises Indian Employers About US Hiring
At-will employment. Most US states allow either side to end the relationship at any time, with no statutory notice and no severance. After India, where thirty to ninety-day notice is the market norm and larger establishments face real procedural requirements before terminating, this reads less like flexibility and more like an absence of process. Notice is something you write into the contract, not something you inherit.
Nothing accrues the way gratuity does. There is no US equivalent of a statutory end-of-service payment building up in the background. Your long-term liability per employee is lower. Your monthly benefits cost is higher.
Retirement is optional in law and expected in practice. There is no mandatory employer contribution equivalent to EPF. There is a strong market expectation of a 401(k), often with a matching contribution, for professional roles.
A US salesperson can create a tax question. If someone in the US concludes contracts on your behalf, it can create a taxable presence for your company there, separate from any employment obligation. Raise it with your tax adviser before the first large deal closes, not after.
How to Phase Your US Hiring
Start on an EOR for the first few hires. It avoids the ODI process entirely, needs no incorporation, and puts someone on payroll in days. If the market does not develop, you end a service contract rather than winding up a company and repatriating capital.
Incorporate once the picture is clear: one state past roughly ten people, revenue that justifies the compliance overhead, and a decision that the US is permanent. Then run the entity for your concentrated team and keep scattered remote employees on the EOR, which is where most companies settle anyway.
Use contractors only where the work is genuinely independent. A full-time role dressed as contracting costs more than it saves in the US.
If you are comparing providers rather than routes, our list of EOR providers operating in the United States covers pricing, onboarding speed, and compliance coverage across twelve platforms.
Frequently Asked Questions
Can an Indian Company Hire a US Employee Without a US Entity?
Yes. An Employer of Record employs the person through its own US entity and handles federal and state payroll, tax withholding, benefits, and compliance while your team directs the work. Incorporating is the alternative, and it takes longer, costs more upfront, and brings your US operation inside the FEMA overseas investment framework, which paying an EOR does not.
What FEMA Compliance Applies to Funding a US Subsidiary?
Capitalizing a US entity is Overseas Direct Investment. Most cases go through the automatic route with no prior RBI approval, subject to a ceiling of 400% of net worth across all foreign entities. You file Form FC through your authorized dealer bank, the entity receives a Unique Identification Number, and you file an Annual Performance Report by 31 December each year. Late filing carries fees and can block further funding until resolved. Confirm your position with your AD bank, since conditions vary by sector and structure.
Can We Pay a US Employee From Our Indian Payroll?
No. Someone working in the US is employed under US federal and state law, with US tax withholding, FICA, and US benefits. An Indian payroll system cannot produce a W-2 or remit to the IRS, and paying a full-time worker by invoice risks reclassification, back taxes, and penalties in whichever state they live in.
How Much Above Salary Should We Budget for a US Hire?
Employer-side FICA is 7.65%, plus state unemployment and workers' compensation, which vary by state. The larger variable is health insurance, an employer-funded benefit with no Indian equivalent that American candidates expect as standard. Add either an EOR fee or the setup and ongoing cost of a US entity, which starts around $5,000 and reaches $40,000 depending on how many states you cover.
How Long Does It Take to Get an American Working?
Days through an EOR, once documentation is complete. Through your own entity, weeks to several months, covering incorporation, banking, state registrations, payroll setup, and the FEMA filings that accompany the capital transfer.
Does Our US Hire Need Any Visa or Sponsorship?
Not if they are a US citizen or already authorized to work in the US and are staying there. You are employing an American where they already live, so no immigration process applies. Sponsorship only arises if you relocate someone into the US, which is a separate exercise with its own timeline.
