diff --git a/src/libs/PaymentUtils.ts b/src/libs/PaymentUtils.ts
index 888035e4d6b3..591b5701e094 100644
--- a/src/libs/PaymentUtils.ts
+++ b/src/libs/PaymentUtils.ts
@@ -225,7 +225,6 @@ const isSecondaryActionAPaymentOption = (item: PopoverMenuItem): item is Payment
  */
 function getActivePaymentType(paymentMethod: string | undefined, activeAdminPolicies: Policy[], latestBankItems: BankAccountMenuItem[] | undefined, policyID?: string | undefined) {
     const isPaymentMethod = Object.values(CONST.PAYMENT_METHODS).includes(paymentMethod as ValueOf<typeof CONST.PAYMENT_METHODS>);
-    const shouldSelectPaymentMethod = isPaymentMethod || !isEmpty(latestBankItems);
     // payment method is equal to policyID when user selects "Pay via workspace" option
     const selectedPolicy = activeAdminPolicies.find((activePolicy) => activePolicy.id === policyID || activePolicy.id === paymentMethod);
 
@@ -242,6 +241,9 @@ function getActivePaymentType(paymentMethod: string | undefined, activeAdminPoli
             break;
     }
 
+    // When user explicitly selects "Pay Elsewhere" / "Mark as Paid", don't require payment method selection since payment happens outside of Expensify
+    const shouldSelectPaymentMethod = paymentMethod !== CONST.IOU.PAYMENT_TYPE.ELSEWHERE && (isPaymentMethod || !isEmpty(latestBankItems));
+
     return {
         paymentType,
         selectedPolicy,
diff --git a/tests/unit/PaymentUtilsTest.ts b/tests/unit/PaymentUtilsTest.ts
index cf59236bccdc..038c29e5c484 100644
--- a/tests/unit/PaymentUtilsTest.ts
+++ b/tests/unit/PaymentUtilsTest.ts
@@ -110,6 +110,13 @@ describe('PaymentUtils', () => {
             expect(result.shouldSelectPaymentMethod).toBe(true);
         });
 
+        it('should set shouldSelectPaymentMethod to false when paymentMethod is explicitly ELSEWHERE (Mark as Paid)', () => {
+            const result = getActivePaymentType(CONST.IOU.PAYMENT_TYPE.ELSEWHERE, [], [bankItem]);
+
+            expect(result.paymentType).toBe(CONST.IOU.PAYMENT_TYPE.ELSEWHERE);
+            expect(result.shouldSelectPaymentMethod).toBe(false);
+        });
+
         it('should find selectedPolicy by policyID', () => {
             const result = getActivePaymentType(undefined, [randomPolicyA, randomPolicyB], undefined, randomPolicyA.id);