Local Employment and Tax Laws
Payroll processing in Colombia requires compliance with local regulations, which can be challenging for companies used to doing business in other countries. That's because Colombia has unique payroll and employment laws that can be difficult for foreign employers to navigate.
If you're thinking about expanding your business into Colombia, it's important to be aware of the payroll and employment laws in the country. Here's an overview of what you need to know about the Colombia payroll service, including various local employment and tax laws.
How Does Colombia Payroll Processing Work
The Colombian labor code is supplemented by several decrees and resolutions, including Decree 2375, that provides specific guidance on payroll taxes and employment issues.
In Colombia, payroll taxes are levied on both the employer and employee. The employer's tax liability is determined as a percentage of the employee's salary, and the employee's tax liability is deducted from their paycheck.
Employees and employers both contribute to the social security system in Colombia. The employer's contribution is calculated as a percentage of the employee's salary, and the employee's contribution is deducted from their paycheck.
The Colombian government has also enacted a number of measures to incentivize employment and reduce the burden of payroll taxes on businesses. For example, a ten-year corporate income tax exemption is applicable for companies that invest in the Colombian agricultural sector. To qualify, such companies must hire at least ten employees and invest approximately US$16,000 in six years.
Local Tax Regulations
The Colombian payroll system is different from other countries, in that, employers are required to withhold taxes from their employees' salaries. The tax withheld from each paycheck is called the retención en la fuente, and it goes toward the employee's income tax liability.
The amount of tax withheld from an employee's salary depends on their income and tax bracket. The highest tax bracket in Colombia is 39%, and the lowest is 0%. However, non-residents such as American ex-pats are liable for income tax at the flat rate of 35%. Non-residents are only taxed on their Colombia-source income.
While payroll taxes in Colombia are relatively high, they are offset by a number of tax incentives and deductions. For example, employers are allowed to deduct the cost of health insurance premiums paid for their employees from their taxable income.
Local Pension Regulations
Employers are also responsible for making monthly pension contributions on behalf of their employees. The pension contribution is a percentage of the employee's salary, and it goes into a government-administered pension fund.
The monthly pension contribution for employees in Colombia is pegged at 4% of their monthly salary, while contractors (self-employed individuals) pay 16% towards their pension. Employees who accumulate four or more minimum monthly salaries must contribute 1–2% more of their base income to the solidarity fund.
On their part, employers are required to pay 12% of their employees' monthly wages into the pension. Together with the employee contribution, it becomes a 16% contribution to the employee’s pension fund.
The maximum wage for contribution calculation requirements is the equivalent of 25 minimum monthly salaries. Membership in the pension scheme is mandatory for all public and private employees, as well as the self-employed, according to Colombian law.
What You Need to Know When Employing Workers in Colombia
In addition to the social security and pension contributions required by law, employers in Colombia must also comply with a number of other payroll and employment regulations. These include:
- Paying employees a mandatory 13th-month salary
- Providing employees with a written contract of employment
- Withholding taxes from employees' salaries
- Making monthly pension contributions on behalf of employees
Expert Tip: While there are no statutory requirements about language requirements in Colombia, Spanish is recommended. Colombian authorities require the translation to or the use of Spanish in any employment documents.
There are a few other things you should keep in mind when considering issues related to payroll in Colombia.
Payroll Cycle in Colombia
The payroll cycle in Colombia is usually monthly. This means that employees are paid once per month, on the last working day of the month.
However, there are some exceptions to this rule. For example, employees who work in the agricultural sector are typically paid twice a month, on the 15th and the last working day of the month.
Additionally, Colombian employers are obligated to pay a 13th-month salary. Employers must pay the first half of this salary within the first 15 days of June while the remaining half is due within the first 20 days of December.
Minimum Wage in Colombia
The minimum wage in Colombia is set by the government and is updated annually. As of 2022, the minimum wage in Colombia is 1,000,000 pesos per month. Any employee working in Colombia must be paid at least this amount per month, regardless of their position or job duties. Employers who fail to pay this minimum wage may be subjected to punishment by the Colombian government.
Work Permits for Foreigners in Colombia
If you're interested in hiring foreign workers in Colombia, you'll need to obtain a work permit for each employee. The process of obtaining a work permit can be lengthy and complicated as foreigners also require visas. The most commonly used one is the Colombian Migrant (M) visa, which is valid for five years.
To obtain a work permit, the employer must first submit a request to the Colombian Ministry of Labor. Once the request is approved, the employer will need to submit a number of additional documents, including the employee's passport, CV, and diploma. The entire process can take several months to complete.
Working Hours in Colombia
The legal working week in Colombia is up to 48 hours, and employees are entitled to one paid day of rest per week. The maximum number of working hours per day is 8, and employees are entitled to overtime pay for any hours worked beyond that. However, some jobs may be exempt from these regulations, such as jobs that require 24-hour coverage or jobs in the transportation industry. Typically, the Colombian working week is Monday to Friday or Monday to Saturday.
Overtime in Colombia
Colombian employees may not work more than 12 hours of overtime per week, and daytime overtime must be paid at 125% of the employee's regular rate.
Night-time overtime hours, on the other hand, are paid at 175% of the employer's standard pay rate. Meanwhile, employees who ordinarily work at night (10PM to 6AM) must be paid 35% of the regular rate.
Employees who work on their day (or night) of rest (Sundays or during holidays) are entitled to 175% of the regular rate.
Certain employees are exempted from receiving overtime. These include those earning more than ten times the minimum wage, or those in trust positions, such as directors or management personnel.
Leave Entitlement in Colombia
Colombian law requires employers to provide a number of employee benefits, including paid vacation days, sick days, and parental leave.
Employees are entitled to 15 days of paid vacation per year. Paid leave follows the completion of a year's service.
All Colombian employees are also entitled to paid sick leave. The employer pays 100% of their salary for the first two days. From the third day onwards, the social security apparatus assumes all payments.
From day three to day 90, paid leave is at two-thirds the regular pay rate. From day 91 to day 180, the rate drops to 50% of the salary. Employees who're injured on the job are, however, entitled to fully paid leave for the duration of their absence and/or up to 180 days. The social security system takes care of these payments.
To qualify for paid sick leave, employees must get medical authorization from a Colombian Social Security entity.
Parental leave in Colombia is generous by international standards. Mothers are entitled to up to 18 weeks of paid maternity leave, and fathers are entitled to 8 days of paid paternity leave. Adoptive mothers and fathers are also entitled to parental leave.
Mourning leave in the Colombia payroll system can be granted in the event of the death of an immediate family member. In such cases, or for the marriage of an employee, five days leave is granted. Employees are also entitled to paid compassionate leave, though the length of this leave is left to the employers to decide on a case-by-case basis.
Other leaves include trade union leave, which is paid and allows unionized employees to attend union meetings and activities during working days. There is also voting leave and burial leave.
Holidays and Vacations in Colombia
Colombia has 18 public holidays, 12 of which are religious-based, while the rest are civic.
Colombian employees are entitled to a number of paid holidays, including New Year's Day, Good Friday, Labor Day, and Christmas. When an employee takes a vacation, they are entitled to their regular salary for those days. However, if an employee takes a vacation on a holiday, they are only entitled to their regular salary for the days they would have worked, if it were not a holiday.
Healthcare in Colombia
Healthcare insurance is provided by either the public sector or private medical plans in Colombia.
The public healthcare system consists of the Contributive System, financed by employers' and employees' taxes, and the Subsidized System, for those unable to pay for their healthcare.
Whether you choose to go with public or private sector medical plans, healthcare insurance in Colombia is compulsory. Indeed, employee payroll contributions to a medical plan are pegged at 4% of their salaries.
In addition to the benefits required by law, employers in Colombia often offer their employees a number of voluntary benefits, such as supplemental health insurance, employee perks like birthday holidays and educational support, and transportation subsidies.
Termination and Severance Pay in Colombia
The termination process in Colombia differs depending on the presence or absence of a just cause.
In the case of a just cause, an employer can immediately terminate an employee, without notice or severance pay. Some examples of just cause include:
- Serious breaches of company rules
- Absenteeism
- Theft
- Fraud
- Violence
- Serious misconduct
If an employee is terminated without a just cause, they are entitled to notice and severance pay. The sum of the severance payout varies depending on numerous factors, including employee seniority, contract type, and salary grade.
- Employees earning less than 10 minimum legal monthly wages are compensated 30 days of salary for their first year of service, then 20 days of salary for each additional year of service.
- Employees earning 10 minimum legal monthly wages or more are compensated 20 days of salary for their first year of service, then 15 days for each additional year of service.
- Employees who have entered into agreements for a project's duration are given severance pay that's the estimated salary owed to them till the project's conclusion (but in no case can severance be less than 15 days of salary).
How to Streamline Payroll in Colombia
If you're expanding your business into Colombia, it's important to be aware of the payroll and employment laws in the country.
One way to streamline payroll in Colombia is to outsource the process to a professional payroll provider. Payroll providers can help you comply with all of the relevant laws and regulations, and they can also help you take advantage of the tax incentives and deductions available to businesses in Colombia.
Payroll outsourcing is a popular option for businesses in Colombia because it can save you time and money. It can also help you avoid the hassle of dealing with the Colombian government's bureaucracy.
If you're expanding your business into Colombia, payroll outsourcing is a smart solution with which Revelo can help. Our talent marketplace has proven invaluable in connecting U.S. and other tech companies with pre-vetted remote Latin American software engineers.
We’ve already outlined various considerations you should keep in mind when going about payroll processing in Colombia. Reach out to Revelo today to learn more about how to set up and comply with Colombian and other Latin American payroll and employment laws.
