How to Set Up Payroll for Remote Workers in India
A decision framework and step-by-step guide to setting up compliant payroll for remote workers in India. Always confirm with a cross-border tax advisor.
What you will learn
- The three legal paths: contractor, Employer of Record, and own Indian entity
- FEMA and RBI basics for cross-border payments
- Statutory employer costs in India (PF, ESI, gratuity, bonus)
- Tax withholding and the DTAA between India and the US
- When each path makes sense for your scale
Before you start
- You have budgeted for the engagement
- You have access to a CPA or cross-border tax advisor
- You have a clear view on how many India hires you expect in 12-24 months
- You have basic US or home-country tax compliance in place
The step-by-step process
Step 1: Choose the engagement model
Three paths dominate. Independent contractor is fastest but carries misclassification risk. Employer of Record (EOR) uses a third-party Indian entity to legally employ the person on your behalf - the most common model for 1-50 dedicated remote hires. Own Indian entity (typically a private limited company) becomes cost-effective at 20+ hires, but comes with significant compliance burden. Pick based on your 24-month hiring plan, not just the first hire.
Step 2: Understand statutory employer costs
For employee arrangements (EOR or own entity), Indian law requires: Provident Fund (employer contribution typically 12% up to statutory ceiling), gratuity accrual (generally 4.81% of base for employees with 5+ years), statutory bonus (typically 8.33% for eligible workers), paid leave, and in some states, Professional Tax. Contractor arrangements avoid these but carry legal risk if the engagement looks like employment (set hours, exclusive work, managed day-to-day).
Step 3: Handle FEMA and RBI compliance for outbound payments
If you are paying from a US or UK account to an Indian entity (EOR) or contractor, payments are generally straightforward via SWIFT or Wise/OFX. Indian recipients must hold a compliant bank account. Contractor earnings from abroad are taxed in India as business or professional income. Employed earnings via an EOR are processed in INR through standard payroll. India's Liberalised Remittance Scheme and FEMA regulations change periodically - work with a CPA or your EOR to confirm current rules.
Step 4: Set up tax withholding correctly
For employee arrangements, TDS (tax deducted at source) is withheld by the EOR or your Indian entity from gross salary each month. For contractors, Indian contractors invoicing a US company typically file a W-8BEN-E if the contractor is an entity or W-8BEN if individual, to avoid US withholding under the India-US DTAA. Missing these forms can trigger 30% US withholding. Consult a cross-border CPA.
Step 5: Document the engagement in a compliant contract
The contract must match the substance of the engagement. For employees: working hours, salary, PF and gratuity references, leave policy, confidentiality, notice period (often 30-90 days in India). For contractors: deliverables, fee schedule, independent-contractor language, IP assignment, and no-exclusivity clauses. Both should include NDA and IP clauses enforceable under Indian law.
Step 6: Set the payroll cadence and handle currency
Employee payroll in India is typically monthly, paid in INR by month-end. An EOR will run the full cycle including payslips, tax deposits, and statutory filings. For contractors, invoice monthly in USD or INR, with a fixed conversion convention noted in the contract. Document the rate-fixing mechanism to avoid disputes during currency swings.
Step 7: Reconcile and audit annually
At year-end, review: are classifications still correct, have contractor engagements drifted toward employment, are all statutory filings current, have tax forms (W-8BEN, W-8BEN-E, Form 16 for Indian employees) been issued. Misclassification risks usually creep in gradually and show up in audits. An annual legal and accounting review catches them early. Always consult a CPA for specific filings.
Common mistakes to avoid
- Treating a long-term engagement as 'contractor' for years - misclassification risk
- Paying in USD to personal bank accounts without documentation - compliance exposure
- Missing W-8BEN forms - triggers 30% US withholding on payments
- Skipping gratuity accrual for employees - Indian labor law violation
- No annual compliance review - risks compound
Tools and templates
- An Employer of Record (EOR) for employment-path payroll
- Wise, OFX, or Payoneer for contractor payments
- RazorpayX or Zoho Payroll for in-India payroll (with own entity)
- A cross-border CPA or tax advisor
- A compliance tracker such as Deel or Remote's compliance dashboard
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Book a Free Discovery Call →Frequently asked questions
Do I need an Indian entity to hire in India?
No. An Employer of Record (EOR) or a managed staffing partner handles legal employment on your behalf. You only need your own entity at substantial scale (typically 20+ hires).
Is paying an Indian contractor legal from the US?
Yes. Ensure a valid independent-contractor agreement, a signed W-8BEN or W-8BEN-E, and compliance with India's FEMA rules. Consult a CPA.
What is Provident Fund (PF) and who pays it?
PF is India's mandatory retirement savings program. For most employees, employer and employee each contribute 12% of basic salary (subject to statutory ceilings). An EOR handles the mechanics.
Does the India-US DTAA reduce my tax burden?
The Double Taxation Avoidance Agreement prevents the same income from being taxed by both countries. Proper forms (W-8BEN, tax residency certificates) are required. Consult a CPA for your specific case.
How often does Indian payroll compliance change?
Major changes annually (typically in the Union Budget in February) and smaller regulatory updates throughout the year. Your EOR or a local CPA should keep you current.