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Book a call ↗Withholding tax is tax that the payer deducts at source from a payment and pays to the tax authority on the recipient's behalf. The most common example is income tax taken from each salary payment through payroll. Governments also use withholding on payments to foreign persons, so tax is collected before the money leaves the country.
For a US company with people in Europe, two questions come up: who withholds income tax for a European employee, and whether the US withholds anything when you pay a European contractor. The answers point in different directions.
Withholding on wages in Europe
Each European country runs its own payroll withholding, and the employer operates it. In the UK, employers deduct income tax and National Insurance through PAYE, report to HMRC on or before each payday and pay HMRC, usually monthly (gov.uk). For 2026/27 the personal allowance is £12,570, with 20%, 40% and 45% bands in England, Wales and Northern Ireland and six bands in Scotland (HMRC). In Estonia the employer withholds income tax at 22% in 2026 and declares it on the monthly TSD return (Estonian Tax and Customs Board).
US withholding on payments abroad
| Situation | US withholding | Basis |
|---|---|---|
| US-source income paid to a foreign person | Generally 30%, unless a treaty or the tax code lowers it | IRS: NRA withholding |
| Pay for services performed in the US | Subject to the 30% rule | IRS: pay for personal services |
| Pay for services performed entirely outside the US | Generally none, because the income is foreign-source | IRS: source of personal service income |
The IRS sources pay for personal services where the work is performed, regardless of where the contract is signed or who pays (IRS). The 30% applies to fixed or periodic income from US sources (IRS: FDAP income). Read together, a European contractor's fees for work done entirely in Europe are generally foreign-source and outside NRA withholding. That is our reading of the IRS pages, not a single IRS statement, and mixed US and non-US work is split by days.
What it means when you hire in Europe
For an employee, withholding happens in Europe, through local payroll you run yourself or through an Employer of Record. For an independent contractor, the contractor pays their own income tax at home, and on the US side you collect a W-8BEN to document foreign status. The contractor's invoice carries no US tax. Contractor or Employer of Record? covers which model fits which role.
This is general information, not legal or tax advice. Rules differ by country and change, so confirm your case with a local lawyer or accountant.
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