Employer of Record Basics
What is an Employer of Record (EOR) and how does it let me hire in the US without a US entity?
An Employer of Record is a third-party organisation that legally employs a worker on your behalf in the country where that worker is based. In the US the EOR holds the employment contract, is the entity named on the employee's W-2, remits federal and state tax withholding, carries workers' compensation and unemployment insurance, and administers benefits. Because the EOR already holds the registrations the law requires, you can hire immediately while your own incorporation, EIN, banking and payroll registrations are still in progress. You retain full control over who is hired, what they are paid and what they work on.
Can I legally hire a US employee before I incorporate a US entity?
Yes. US law does not require a foreign company to incorporate before someone works for it — it requires that a properly registered employer withholds and remits payroll taxes in the state where the employee physically works. An EOR satisfies that requirement on your behalf. The alternative sometimes attempted, engaging the person as an independent contractor, is only lawful if the relationship genuinely meets federal and state classification tests; a full-time worker under your direction almost never does, and misclassification carries back taxes, interest and penalties.
How is an EOR different from a staffing agency or PEO?
A staffing agency sources and supplies workers it has recruited, and usually owns the candidate relationship. An EOR does not recruit — you choose the person, and the EOR employs them for you. A PEO (Professional Employer Organisation) enters a co-employment arrangement and requires you to already have your own US entity and registrations, sharing liability with you. An EOR is the sole legal employer and requires no US entity at all, which is exactly why it works for foreign companies at the pre-incorporation stage.
Is an EOR arrangement legal in all 50 US states?
Yes, EOR employment is lawful nationwide, but the practical coverage depends on the provider. Employment law is state-level, so an EOR must hold payroll tax and unemployment insurance registrations, and workers' compensation cover, in each state where it employs someone. Reputable providers hold direct registrations in all 50 states; smaller ones subcontract to partner networks in states they do not cover directly, which dilutes accountability. Always confirm the EOR employs directly in your employee's specific state before signing.
Cost & Timeline
How much does an EOR cost compared to setting up my own US entity?
EOR pricing is typically either a flat fee of roughly $500 to $800 per employee per month, or a markup of about 10% to 15% of gross payroll, on top of the salary and employer taxes you would pay anyway. Setting up your own entity costs roughly $2,000 to $10,000 upfront for formation, registered agent, legal review and banking support, then roughly $800 to $2,500 a month for payroll software, accounting, registered agent renewal and franchise tax — largely fixed regardless of headcount. The EOR is cheaper at low headcount; your own entity wins as the team grows.
How long does it take to onboard a US employee through an EOR versus through my own entity?
Through an EOR, one to two weeks is typical: contract issue, I-9 verification, W-4 and benefits election, then the employee joins the next pay cycle. Through your own entity, expect four to eight weeks before anyone can be paid — formation and EIN take one to three weeks, the business bank account often four or more, and state payroll withholding and unemployment registrations two to four weeks each. Those steps run partly in parallel, but the bank account is usually the binding constraint.
What hidden costs come with EOR hiring (payroll tax, workers' comp, benefits admin)?
The EOR fee sits on top of true employment cost, which is what surprises most foreign employers. Budget roughly 18% to 25% above base salary for employer-side FICA at 7.65%, federal and state unemployment insurance, workers' compensation premiums that vary by state and job class, and the employer share of health insurance, which is commonly $500 to $1,000 per employee per month. Also check for one-off onboarding fees, deposits equal to a month's payroll, off-cycle payment charges, and early termination or transfer fees when you eventually move the employee to your own entity.
At what headcount does it make more financial sense to switch from EOR to your own entity?
The crossover usually falls between five and ten US employees, because EOR cost scales per head while entity cost is largely fixed. At five employees an EOR might cost $30,000 to $48,000 a year in fees alone, against roughly $10,000 to $30,000 a year to run your own entity and payroll. But cost is rarely the deciding factor: the trigger is more often a capability you cannot get through an EOR, such as granting US equity, signing US customer contracts, importing goods or holding a US bank account.
Compliance & Risk
Who is legally responsible for payroll tax withholding under an EOR model?
The EOR is. As the legal employer it withholds federal income tax, Social Security and Medicare, and applicable state and local taxes, remits them on the statutory schedule, files quarterly Form 941 and state returns, and issues the employee's W-2. Your obligation is to fund payroll accurately and on time under the service agreement. Read the indemnity clause carefully: strong EOR agreements indemnify you for the EOR's own filing errors, while you remain responsible for information you supplied incorrectly, such as a wrong work state or misstated compensation.
Does using an EOR protect me from state-level employment law violations?
Partly. The EOR carries administrative compliance — registrations, withholding, statutory insurance, mandated leave accrual, final-pay rules and wage-and-hour classification. It does not carry the consequences of your management decisions. Discrimination, harassment, retaliation and wrongful-termination claims follow the party that directed the conduct, which is you. Keep documented performance records, route terminations through the EOR's counsel before acting, and treat at-will employment as narrower than it sounds, since most claims are pleaded as discrimination rather than breach of contract.
What happens to my US employees if I switch from an EOR to my own entity later?
They are transferred, not re-recruited, and a well-run transition is invisible to them. Form the entity and complete state payroll registrations first, then run one parallel pay cycle to validate calculations, transfer employment on a pay-period boundary, and move benefits so there is no coverage gap. Employees sign a new employment agreement with your entity, and accrued PTO and tenure are typically carried across by agreement. Check the EOR contract for notice periods and transfer or conversion fees before you set the date.
Do I still need workers' compensation insurance if I use an EOR?
No separate policy is needed for EOR-employed staff — the EOR is the legal employer and carries workers' compensation, which is mandatory in almost every state. Verify that the cover is in place in your employee's state and ask for the certificate. You will need your own workers' compensation policy the moment you employ anyone directly through your own US entity, and you may still need general liability or professional indemnity cover in your own name if US customers require a certificate of insurance naming them.
Practical Next Steps
What documents does an EOR need from a foreign company to start hiring?
Typically your certificate of incorporation or equivalent registration, proof of directors and beneficial owners for anti-money-laundering checks, a signed EOR service agreement, and the role details: job title, duties, work state, compensation, start date, benefits level and any variable pay. You will also confirm intellectual property assignment terms so work product flows to your parent company, and provide a funding method for payroll. Most providers can complete this in a few business days once the documents are supplied.
Can an EOR sponsor a US work visa for an employee I want to hire?
Some can, but treat it as a specialist service rather than a standard feature. A minority of EORs sponsor H-1B or similar visas, and the process runs on statutory timelines measured in months, with caps and lotteries for some categories. Intra-company transfer visas such as the L-1 generally require a qualifying relationship between a foreign and a US entity, which an EOR arrangement does not create — that route usually needs your own US subsidiary. If visa sponsorship is central to your plan, incorporate early rather than relying on an EOR.
How do benefits (health insurance, 401k) work for employees hired through an EOR?
Employees join the EOR's group plans, which is normally an advantage: a large provider's pool buys better health, dental and vision cover than a three-person startup could obtain alone. Most EORs also offer a 401(k) plan with optional employer matching, plus life and disability cover. You choose the benefits tier and the employer contribution level, and the cost is passed through to you. Competitive health cover is not optional in the US market — it is a primary factor in whether strong candidates accept an offer.
When should a foreign company graduate from EOR to full operations enablement (entity, payroll, banking)?
Graduate when a business capability, not just cost, demands it: granting US equity, signing contracts under US law, invoicing US customers domestically, importing goods, claiming R&D credits, or exceeding roughly five to ten US employees. Start the entity, EIN and banking work about three months before the intended switch, because banking is the long pole. Running the EOR phase and the entity build in parallel — the approach we take in our US market entry operations enablement programme — means the switch happens on a date you chose rather than under pressure.