Outsourcing Payroll
in Latin America

The B2B model differs in that your team member, i.e. a contractor, is responsible for payroll and taxes. As a rule, personal taxes are levied on the income and are not mandatory for compensation by the company. Still, here’s the breakdown of the main percentages across the regions.

The effective tax rate for an IT specialist from the capital with a monthly remuneration of $5,000 would amount to approximately:

• 2% of their gross income (including PIT only) in Mexico.
• 12.03% of their gross income (including PIT and SSC) in Argentina.
• 17.28% of their gross income (including PIT and SSC) in Colombia.
• 18.02% of their gross income (including PIT and SSC) in Chile.

In Latin America, the employer’s budget should include country specific payments, such as:

• Mexico: 15 days of salary per year (aguinaldo), an additional premium of 25% during vacation days (prima vacacional), and 10% of annual taxable profits (profit-sharing).
• Argentina: an equivalent of one month of salary per year paid in 2 installments (aguinaldo). Additionally, consider the strong influence of unions on salary increases, benefits, and working conditions.
• Colombia: an equivalent of one month of salary per year worked (cesantía payment), a 12% interest (cesantía interest), and a 13-month salary (prima).
• Chile: gratificación—either 30% of taxable profits or 25% added as a benefit to the employee’s monthly salary.

Latin America actively incentivizes research and development and high-tech sectors with the following bonuses:

• Mexico: immediate tax deductions of 56% to 89% on fixed asset investments for R&D and high-tech sectors, a deduction of 50% to 75% on incremental spending for all companies training workers through educational partnerships, and reduced bureaucratic barriers. 
• Argentina: a 70% non-transferable 24-month tax credit vouchers for the employer’s social security contributions and income tax reduction, ranging from 20% to 60%.
• Colombia: 30% tax credit for officially approved investments in R&D or technological innovation, VAT-free equipment and materials import for Science, Technology, and Innovation projects, and deductions for hiring Ph.D.-level researchers for R&D activities.
• Chile: 35% tax credit on R&D expenditures, a 65% deduction of R&D expenses as necessary, import tax exemptions from tariffs and VAT on machinery and equipment for R&D projects, and co-financing and scholarships in IT and creative industries.

Payroll outsourcing services in Latin America cover key day-to-day tasks, such as:

• Payroll tax planning, calculation, and consultation
• Preparation and allocation of statements
• Preparation and submission of payroll returns to local authorities
• Statutory payroll reporting
• Team benefits administration
• Processing payments for the tech industry

• It saves costs & time. Managing payroll internally requires your accountants to cover salary calculations of both in-house and outsourced development teams. Extra workload means additional hiring and staff training, not to mention that your payroll experts would have to learn the specifics of the foreign payroll management rules, labor laws, statutory regulations, tax systems, etc., to stay compliant. Thus, outsourcing payroll solutions can help you cut costs on payroll management for new team members. Plus, it frees up time for your internal team to prioritize core financial activities.

• It mitigates compliance risks. When hiring developers abroad, your tech business should follow all the local laws, especially regarding payroll and taxes. Cooperation with a local payroll provider can shield your company from legal issues and fines, as they know the ins and outs of the local tax laws, wage regulations, terminations, and compliance requirements and stay updated on changes.

• It’s safe for your data. Payroll deals with sensitive employees’ information like social security numbers, salaries, and bank details, which can make tech entrepreneurs reluctant to use payroll outsourcing services in Latin America. However, a trusted payroll firm prioritizes security, investing in cloud-based servers, data centers, and cyber security software. The result? Maximum protection from embezzlement, identity theft, and other risks.
• It allows for scalability. The tech companies looking to rapidly expand their development team abroad often have complex payroll needs. Using outsourced payroll services can help them handle fluctuations in employee numbers, benefit plans, and tax requirements, providing scalability without the need for extra internal resources or infrastructure. This approach has been embraced by notable tech companies like People.ai, BigCommerce, ThredUP, Sift, and Dotmatics when expanding development teams abroad.

• Qualification & experience. Choose a vendor with experienced payroll and legal professionals in the tech industry. Also, check out their case studies, client reviews, and testimonials for social security.
• Pricing structure. Consider a payroll outsourcing provider in Latin America with predictable pricing and detailed invoices to avoid hidden fees and, therefore, eliminate the risk of overpayment. 
• Technology & security. Check if your payroll outsourcing company in Latin America uses modern payroll processing software that is reliable and capable of handling your payroll requirements. Additionally, make sure they apply data security protocols and encryption standards and comply with data privacy regulations to safeguard employee information.
• Guarantees. If your payroll outsourcing solutions company provides compensation for mistakes or missed deadlines, has outlined timeframes, and offers pricing transparency, this is a green flag to outsource payroll service in Latin America with them.

Employer of Record (EoR) allows tech businesses to employ talented in-country experts without setting up a legal entity and receive all the needed operational support in one place.

This is the most viable way to legally employ A-players for your global expansion plans for the following reasons:

• You delegate the management of all the business functions, like employment, payroll, tax payments, and compliance, and don’t have to establish a legal entity.
• It saves you the hassle of outsourcing these operations to multiple vendors.