Located in a Central American rainforest, Costa Rica has a powerful economy, especially relative to its small population. Sectors like tourism, agriculture, and electronics continue to be important, as well as biomedicine and sustainable energy. The country is particularly open to foreign investment and trade opportunities.
In Costa Rica, foreign businesses have a few different options when setting up payroll. However, you will need to learn all of the laws regarding taxes and make sure that you are deducting the correct amount for both your business and your employees.
This article gives businesses that have Costa Rica on their global expansion roadmap an overview of their options for setting up Costa Rican payroll.
The standard payroll cycle in the country is monthly. Employers can make this payment through either direct deposit or with a hard copy check. You will also need to provide your employees with a record of how their payroll deductions come out of their paychecks.
The only way to set up your own payroll in Costa Rica is to establish an entity within the country, with its own management team. Setting up a business in Costa Rica is a lengthy process, so using a global PEO or EOR service will likely be a quicker option to get started with global expansion and payroll.
Employers are legally required to register all employees with the social security department, also known as the Caja, before adding them to payroll to ensure that they are contributing correctly to the Costa Rican social security fund.
Social Security in Costa Rica is called the Caja. The Caja gives employees healthcare, sick leave, disability, pension, and other compensation benefits.
Employers are required to register all employees with the Caja upon hiring. Employers contribute 26.5% to social security, while employees contribute 10.5%.
Employer contributions for payroll break down as follows:
Health and maternity at 9.25%
Basic pension at 5.25%
Banco Popular Employer at 0.25%
Family assignations at 5%
Social aid (IMAS) at .5%
INA at 1.5%
Contribution from Banco Popular Employer at .25%
Labor capitalization fund at 1.5%
Complementary pension fund at 2%
National insurance institute for 1%
Together, all of these contributions add up to the employer deduction of 26.5% towards the social security system.
For employee deductions, the rate breakdown is:
Medical and maternity at 5.5%
Disability, old age, and death at 4%
Workmen's savings bank at 1%
These contributions all equal to the 10.5% that employees pay into for their Caja.
In Costa Rica, corporate taxes are only applicable for incomes that are considered directly related to the economic system of the country. Any non-Costa Rican income that is made by the parent company is not taxed.
Companies use a progressive income scale for corporate income tax that varies based on profits. This is normally paid once a year, but can be deducted quarterly.
The corporate income tax is a flat 30% for companies with a gross income of over 112,120,000 CRC.
The standard VAT or sales tax in Costa Rica is 13%. For some goods, there is a reduced VAT rate.
The exceptions to the standard VAT rate of 13% are:
Wood at 5%
Residential electricity at 5%
“Basic basket” like groceries and other basic goods at 0%
Exports at 0%
Employers need to register employees to pay for their personal income tax. Costa Rica uses a progressive income tax scale that can go all the way up to 25% withholdings for employees
To clearly calculate employee income tax, use the Costa Rica Salary Calculator 2022/23.
To pay employees from a foreign country like the United States, there are a few options.
Foreign companies can use a payroll outsourcing company that runs out of the parent company. However, using this method means that there will be separate employment laws that govern each department.
For companies that have a commitment to opening an entity in the country, there is the option to run their own payroll. This option does require setting up an entity, and the process of setting up an entity can take a few months and there needs to be compliance with all tax laws, which means having ample internal and external HR resources.
In addition to managing compliance, you will need to hire an internal HR team to handle the management for the country's entity or subsidiary. This is a good option for larger companies that have a commitment to expanding in the country.
Another option is to use a PEO service that handles payroll and hiring, or to use an internal payroll processing company. Both of these services handle all of the payroll and make sure the right deductions are being made.
However, PEO services and internal processing companies do not take responsibility for legal compliance. So, if anything were to go wrong, the parent company would still be liable. This is also considered a co-employment model, so the parent company will still need to set up an entity within the country and know about how payroll works in Costa Rica.
Finally, you can hire employees using a global employer-of-record service like Via. EOR services handle payroll, benefits, and hiring in a legally compliant way while also taking on all responsibilities. An EOR service sets up an entity in Costa Rica and puts employees on payroll for your business.
Many companies want to hire employees in Costa Rica, but are unsure of how to navigate payroll within the country. Via makes hiring Costa Rican talent and building your global team seamless. Our easy-to-use platform helps you manage the local HR processes for benefits, payroll, background checks, and more. We have a local team of lawyers and on-the-ground experts that understand compliance as you expand abroad and help you draft strong employment contracts
As your employer-or-record/entity in Costa Rica, Via assumes full responsibility for employment liability, so that you can focus on what matters: recruiting and managing your team.
With Via’s transparent pricing, you can pay full-time employees or contractors in Costa Rica with no hidden set-up fees, no foreign exchange or transaction fees, and no minimums–start with 1 employee and scale up at your own pace.