The purpose of this article is to examine the various methods in which a business ought to prosper in Colombia by looking at the tax and payroll environments.
Global Payroll Options
There is a good number of payroll solutions in Colombia that are readily available to you and your company. Apart from comprehending the structure of each payroll system, it is critical to assess its advantages and disadvantages. This enables you to readily determine which payroll plan is best for your business.
A non-resident employer in Colombia may pay a resident employee via remote payroll. However, a foreign company ought to weigh the benefits and drawbacks of operating a remote payroll in advance, especially because specific employment and compliance rules greatly impact the system's flow.
- Having a shadow payroll allows a company to run a remote payroll without incorporating locally.
- Companies are allowed to pay employees in the home country currency.
- Since you no longer need to have a registered and fully compliant local payroll, you can save up your money by not hiring extra workers to staff your local entity. More importantly, you can alot of your time focusing on the growth of your business rather than spending it on running a local payroll.
- As an employer, you are still mandated to comply with Colombia’s required withholding policies.
- As mentioned above, the need to understand and research Colombia’s regulations remains necessary.
- If you fail to comply with the local laws and policies, it could result in more liabilities and penalties.
- There are countries that prohibit remote payrolls like China.
If you prefer a more traditional method of payroll processing, an independent in-country payroll provider is your best option. The following are the pros and cons of administering an in-country payroll system:
- You have a variety of local services from which to choose and rely.
- Payroll providers are permitted to manage payroll computations, payments, and filings.
- There are no quick fixes for collecting and merging data across multiple nations for reporting and analytics purposes.
- A legal entity must be established in Colombia, which can be costly and time-consuming.
- If you intend to extend your firm into other nations, you must designate a payroll manager to each country, as one individual cannot manage all data from numerous countries.
In some cases, foreign employers rely on International Professional Employment organizations (PEOs) to handle their payroll. This eliminates the need for them to establish a new legal corporation in each country. International PEOs provide services to assist organizations in lowering the cost of operating a payroll system in foreign countries. You can rapidly monitor and manage all of your global staff using a single dashboard with an International PEO.
- Having an International PEO can help you expand your business globally and hire employees anywhere in the world.
- International PEOs offer comprehensive capabilities for conducting company reporting and analysis.
- The majority of international PEOs include global consulting services as part of their package to assist firms in determining how and where to expand.
- Companies that have established large operations in a country will not benefit in the long run, since they put up their own legal entity already.
- International PEOs might be prohibitively expensive, depending on the supplier.
Required Documents For New Employees
Colombia's labor market places a premium on the preservation of workers' rights. For a foreign corporation to hire staff, the state must provide critical paperwork. These include the following:
- Employees' insurance or professional risk under a contract of employment
- Enrollment in a severance fund
- Enrollment in public health insurance
- Registration with the Social Security Administration
This is in addition to the needed employee information such as the personal data (name, birth date, postal address, and other pertinent employee facts), passport, bank statements, and proof of health insurance coverage.
Social Security Registration
All foreign enterprises operating in Colombia are required to register with the pension system and must submit a document that indicates employee affiliation to the pension system.
The Labor Code states that there must be a uniform form for assessment and payment of social security and payroll contributions. This form must be electronically submitted to the Servicio Nacional de Aprendizaje, a government-run educational institution, or to the Instituto Colombiano de Bienestar Familiar (the Colombian Family Institute), and the Caja de Compensación Familiar (the Family Compensation Fund).
Tax Registration Requirements
Individual taxation is determined by the employee's source of income, nationality, and residency status in Colombia. As defined in Law 1607 of 2012, residency is defined as the physical presence in Colombia for a period of more than 183 days in a calendar year.
Foreign residents in Colombia are taxed on their domestic and foreign sources of income beginning on the first day of their continuous or discontinuous presence in Colombia. The filing date for an individual income tax return is determined by the last two (2) digits of the taxpayer's Taxpayer Identification Number (TIN).
When an employee is terminated, the cause for termination must be given to him or her in writing. If the employer initiates the termination, the employer is not required to provide a reason for the termination unless there is an accusation of an unjust cause. Employers must get special clearance to fire pregnant or handicapped employees. To dismiss a unionized employee, the employer must obtain approval from a labor judge. If an employee's employment contract is terminated owing to an employer violation, the employee is entitled to severance compensation.
Notice and Probation Period
Employers must provide a maximum of 15 days' notice when terminating an employee for unsatisfactory performance. The employee is entitled to at least 24 hours to review and reply to the dismissal notice. No notice is required in the event of misconduct or dismissal for just cause. Written notification is required at least 30 days prior to the expiration of an employee's fixed-term agreement.
For indefinite contracts, the probation period is 2 months. For fixed-term contracts, the probation period cannot exceed more than 1/5 of the initially agreed employment term.
When employees are terminated without cause, employers are compelled to provide severance. Severance pay shall be calculated in the following manner for employees on an indefinite term contract.
- Employees earning less than the legal minimum monthly wage of ten dollars are entitled to thirty days of compensation during their first year of employment and twenty days during each following year.
- Employees earning ten times the legal minimum wage or more are entitled to twenty days of salary during their first year of employment and fifteen days during each succeeding year.
Severance compensation for employees covered by a fixed-term contract would be equal to the employee's wage during the contract's duration.
Read More: Guide to employment, payroll, and benefits in Colombia
Why should you rely on Rivermate as your Employer of Record?
One of the important advantages of outsourcing the employment and payroll of your staff in Colombia is its efficiency and convenience. Rivermate can properly handle and manage all aspects of payroll, which covers tax compliance, local laws, regulations, directives, and others requirements.
Rivermate allows you to hire anyone in the world through its top-notch HR tools and solutions. You no longer need to worry about the salary and invoices of your employees since Rivermate does those exact tasks for you.
You can hire employees in Colombia effectively, conveniently, and in full compliance with all relevant labor laws using Rivermate's global employment solution. We handle the responsibilities and legal risks associated with foreign employment so you can concentrate on growing your company.
Growing your team and expanding your business in Colombia requires thorough research, human capital, and money. However, having an Employer of Record that could back you up and help you overcome the challenges of payroll and compliance can surely drive success for your business.