EOR vs PEO vs Contractor: How to Hire Someone in Another Country in 2026
Quick definition: An employer of record (EOR) legally employs your worker in a country where you have no company. A professional employer organization (PEO) co-employs staff of a company you already own, almost always in the US. A contractor runs their own business and invoices you, with no employment at all. The right one depends on where the person lives and how much you direct their work.
The short version: use a contractor only for independent, project-shaped work where you control the result and not the method. Use an EOR to employ someone in a country where you have no entity. Use a PEO for US employees when you already have a US company. Open your own entity when EOR fees overtake what an entity costs to run, or when the work there would create a taxable presence anyway.
Nearly every guide ranking for this question is published by a company that sells one of these models, and none of the ones we read linked the rules themselves. This one does: the IRS on PEOs and worker status, HMRC on IR35, the OECD's 2025 commentary on remote workers and permanent establishment, and German law on agency work. Where a rule is still moving, such as the US Department of Labor's contractor test, we say so.
How do EOR, PEO, contractor and your own entity compare?
| Question | Contractor | EOR | PEO (US) | Your own entity |
|---|---|---|---|---|
| Who is the legal employer? | Nobody. It is a business-to-business contract | The EOR | You, with the PEO as co-employer | You |
| Do you need a local company? | No | No | Yes, a US entity | Yes, that is the entity |
| How much do you control the work? | The result, not the method | Day to day, while the EOR holds the contract | Fully | Fully |
| Published cost, October 2026 | The invoice, plus $29 to $49 a month per contractor for a payments platform | $199 to $699 per employee per month, plus salary and employer costs | From $99 to $125 per employee per month, plus salary and employer costs | Local setup and running costs, plus payroll from about $29 per employee per month |
| Main compliance risk | Misclassification | Permanent establishment stays with you, plus local limits such as Germany's 18 months | Employment tax liability stays with you unless the PEO is IRS-certified | All of it is yours |
| Time to start | Days | Days to a few weeks | Days to weeks, once the US entity exists | Weeks to months, depending on the country |
| When to switch away | The person works only for you, on your schedule, with no end date | Fees pass the cost of running an entity, or the work creates a taxable presence | You can buy benefits and HR support more cheaply yourself | You stop hiring in that country |
The cost figures are list prices from vendor pages: contractor management from $29 at Remote and $49 at Deel, US PEO from $99 at Remote and $125 at Deel, and EOR fees from our comparison of the best employer of record services. Salary and employer contributions come on top of every one of them except the contractor.
Which one should you use? Five questions, in order
- Is the person genuinely in business for themselves? They choose how and when to work, use their own tools, can take other clients and carry some financial risk. If that describes them, a contractor agreement can be right. If it doesn't, go to question 2.
- Where do they live? If they are in the US and you have a US company, employ them directly or through a PEO. If they are abroad, keep going.
- Do you already have a company in that country? If yes, put them on your own local payroll. If not, an EOR is the fast route.
- Will their work create a taxable presence? Sales roles that meet local customers or close contracts can, whoever employs them. If so, get tax advice and price an entity now.
- How many people, and for how long? One or two hires, or a market test, suits an EOR. A growing team in one country for years means comparing EOR fees with entity costs every time you add someone.
When is a contractor the right call, and when is it misclassification?
Contractors are cheapest on paper: no employer taxes, no benefits, and a small platform fee to pay them. The risk is that the label on the contract does not decide the status. The facts do.
In the US, the IRS looks at the entire relationship and the extent of your right to direct and control the worker, grouping the evidence into behavioral control, financial control and the type of relationship. Either side can ask the IRS for a ruling on Form SS-8, but a determination can take six months or more. The Department of Labor's separate test under wage law is in flux: it proposed in February 2026 to replace its 2024 rule, and in October 2026 its rulemaking page still showed no final rule.
In the UK, contractors who work through their own limited company fall under the off-payroll working rules, known as IR35. A medium or large client must decide the worker's status itself and pass on a Status Determination Statement. For a small client, the contractor's own company decides. A company counts as small if it meets two of three tests, and from 6 April 2025 two of the thresholds rose to turnover of £15 million and a balance sheet of £7.5 million, with the 50-employee test unchanged. HMRC says the earliest tax year this changes anyone's status is 2027 to 2028.
Foreign startups should know one more UK rule. A client with no UK connection, meaning not UK resident and with no permanent establishment in the UK, is a wholly overseas client and does not need to apply the off-payroll rules. The duty to consider the older intermediaries rules moves to the contractor's own company.
The pattern that gets companies into trouble looks the same almost everywhere: a "contractor" who works only for you, full time, on your schedule, with no end date. That is the moment to move them to an EOR or your own payroll. Our contractor vs employee classification guide goes through the tests in more detail, and our roundup of contractor management software compares the platforms that pay contractors properly.
What does a PEO do, and why is it mostly a US option?
A PEO runs payroll, benefits and HR administration for a company that already employs people, and it often gives a small company access to group benefits it could not buy alone. The IRS treats a PEO as a third-party payer, and the default rule is blunt: the common-law employer, which is you, generally stays responsible for paying employment taxes and filing returns.
Certification changes that. Under Internal Revenue Code section 3511, a certified PEO (CPEO) is treated as the employer, and no other entity is, for the wages it pays to work-site employees. Before you sign, check the legal entity named on your contract against the IRS list of active CPEOs. The August 2026 report includes entities of ADP TotalSource, Insperity, Justworks, Paychex and TriNet, among others. A brand name on a website is not enough, because certification belongs to the specific entity.
Outside the US the term is used loosely. Some vendors sell a "global PEO" that is really an EOR. In a country where you already have an entity, the equivalent service is local payroll plus an HR adviser, not a PEO.
What does an EOR take off your plate, and what stays with you?
An EOR is the legal employer. It issues a contract that follows local law, runs payroll, pays employer contributions, administers statutory benefits and handles the paperwork when someone leaves. You set the work, the goals and the salary. Many providers also hold a refundable deposit: Deel's standard deposit is 1 to 1.5 months of all charges and Oyster's is about one month of total cost.
Three things stay with you. The first is the cost of ending the job: notice and severance follow local law, and the EOR passes those costs to you. The second is local limits on the model. In Germany, lending an employee to another company is temporary agency work under the AÜG: the lender needs a permit, and the same worker may not be placed with the same client for more than 18 consecutive months. Ask your EOR what happens at month 18. The third is your company's tax position, which is the part most vendor guides leave out.
Does an EOR protect you from permanent establishment risk?
No. A permanent establishment (PE) is a taxable presence for your company in another country. It turns on what the work is, not on whose payroll the person sits. An EOR can employ your salesperson in France perfectly legally, and your company can still owe French corporate tax on the profits that presence earns.
Tax treaties are usually based on the OECD Model Tax Convention, and two of its tests matter for remote hires. The first is the fixed place of business, which now explicitly covers home offices. The OECD's 2025 update to the commentary says a home office generally is not a place of business for the employer if the person works there for less than 50% of their working time over any 12-month period.
Above 50%, it depends on the facts, and the main question is whether there is a commercial reason for the person to be in that country. The commentary's examples of a commercial reason include meeting your customers there, finding new customers, or managing suppliers. Letting someone work from home abroad only to hire or keep them is not one.
The second test is the dependent agent rule in Article 5(5) of the Model Convention. A person who habitually concludes contracts for your company, or habitually plays the principal role in contracts you then sign without material changes, can create a PE on their own.
In practice, an engineer working from home in Portugal for your US product team is the low-risk case. A country manager in Germany who meets customers and negotiates their contracts is the case to take to a tax adviser before you hire, whichever model you use. Individual treaties differ from the model, so the real answer depends on the treaty between your two countries.
When should you set up your own entity?
An EOR fee is a running cost that grows with every hire. An entity has a setup cost and a running cost, mostly accounting, local payroll, statutory filings and in some countries an audit, that rises slowly as you add people. Here are the EOR fees alone for one country:
| Employees in one country | EOR fees per year at $599 a month | EOR fees per year at $199 a month |
|---|---|---|
| 1 employee | $7,188 | $2,388 |
| 3 employees | $21,564 | $7,164 |
| 5 employees | $35,940 | $11,940 |
| 10 employees | $71,880 | $23,880 |
Ask a local accountant to quote for incorporating and running a subsidiary, and add payroll at roughly $29 per employee per month through a global payroll provider such as Remote or Papaya Global. Spread the setup cost over the years you expect to stay. When that yearly figure drops below the EOR line for your headcount, the entity is the cheaper option. Run the sum at your third hire and again at your fifth.
Fees are not the only trigger. Open an entity sooner if sales staff already give you a permanent establishment risk, if a German hire is approaching 18 months, or if you want to offer local equity or benefit plans an EOR cannot run. If you are building the rest of your HR stack at the same time, our startup HR software guide maps the tools to each stage of growth.
Key takeaways
- An EOR is the legal employer where you have no entity, a PEO co-employs staff of an entity you already have (almost always in the US), and a contractor is not employed at all.
- Under IRS rules you generally stay liable for employment taxes when you use a PEO, unless the PEO entity is certified under Internal Revenue Code section 3511.
- UK off-payroll rules make medium and large clients decide a contractor's status, while clients with no UK connection fall outside them.
- The OECD's 2025 commentary says a home office generally does not create a permanent establishment below 50% of working time over 12 months; above that, a commercial reason such as serving local customers decides.
- Using an EOR does not remove permanent establishment risk, and in Germany agency-style employment with the same client is capped at 18 consecutive months.
- Published fees in October 2026 were $29 to $49 a month for contractor platforms, $99 to $125 for US PEOs and $199 to $699 for EORs, per person.
Frequently Asked Questions
What is the difference between an EOR and a PEO?
An EOR is the sole legal employer in a country where you have no entity. A PEO is a co-employer alongside your own company, almost always in the US, so you need an entity first.
Can a PEO hire employees in another country?
Not in the US sense of the term. A PEO works with your existing entity. To employ someone abroad without an entity you need an EOR, even if a vendor calls it a "global PEO".
Is it cheaper to hire an international contractor than an employee?
Month to month, yes: no employer contributions and a $29 to $49 platform fee. If the relationship looks like employment, back taxes and penalties can wipe out the saving.
How do I hire an employee in another country without an entity?
Use an employer of record. It signs a local employment contract, runs payroll and pays employer costs, and you pay it the salary, those costs and a monthly fee.
Does using an EOR create a permanent establishment?
The EOR neither creates one nor prevents one. Permanent establishment depends on the work, for example an employee who meets local customers or concludes contracts for you.
What is a certified PEO?
A PEO the IRS has certified under section 7705. It is treated as the employer for federal employment taxes on wages it pays to work-site employees, which a non-certified PEO is not.
How long can you employ someone through an EOR?
Usually as long as you like, and G-P, for one, sets no minimum term. In Germany, agency-style arrangements are capped at 18 consecutive months with the same client under the AÜG.
Whichever model you pick, you still need one place that knows who works for you. TracefyHR is not an EOR or a PEO and does not pay contractors; it is the HR system that keeps the employee record, leave and attendance for your whole team, including people employed through an EOR. See how it works for remote teams or start a 30 day trial with no card.