Payroll in Costa Rica

What is payroll in Costa Rica?

Payroll in Costa Rica encompasses payments, onboarding, benefits and bonuses, 13th-month pay, deductions, compliance, and taxes for all employees.

Companies who want to onboard Costa Rican employees can either open an entity and partner with a PEO service provider, or skip the process of opening an entity and partner with a global hiring EOR solution like Via 

This article gives businesses that have Costa Rica on their global expansion roadmap an overview of their options for setting up Costa Rican payroll.

Pay cycle

The standard pay 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.

Tax cycle

The fiscal year in Costa Rica runs from the 1st of January to the 31st of December.

Minimum wage

There is no mandatory minimum wage in Costa Rica. Employee salary must be agreed upon in the employment contract before the employee's start date.

The general minimum wage in Costa Rica ranges from $10,875 CRC for unskilled employees to $14,205 for skilled employees per day.

Payroll taxes in Costa Rica

Social Security

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%.

Corporate tax

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.

VAT

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%

Income tax

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

Employee income tax rates

13th-month pay

13th-month salaries are mandatory in Costa Rica. Employers must make the payment by the 20th of December each year.

Working hours

Employees can work a maximum of 48 hours in 1 week. Nighttime workers between 7pm and 5am can only work 36 hours per week. The working week can be Monday-Friday or Monday-Saturday depending on the employment agreement.

Overtime

Any work over 48 hours needs to be paid overtime at 1.5x the employees regular wages. Working on a holiday is paid at 200% the employees regular wages. Employees may only work 4 hours of overtime per day.

Paid time off

Paid time off in Costa Rica is determined by the amount of service an employee has given a company.

Standard paid time off is 14 days for employees who have worked 50 continuous weeks. If an employee isn't offered 50 weeks of employment, they are entitled to 1 paid day off per month.

There are 11 public holidays employees are entitled to have off each year.

Sick days

Costa Rican employees are entitled to 3 paid sick days. The employer pays half of the employees salary while social security pays the other half. After the 4th day, social security pays 60% of the employees salary.

Employees must submit proof of their illness through a doctor's note within 48 hours of their illness to receive payment from the social security department.

Maternity leave

Pregnant employees are entitled to receive 4 months of paid maternity leave. This leave should be taken 1 month before the due date and 3 months after. Payment is split between the employer and social security.

Paternity leave

Public sector fathers are entitled to 8 days of paid paternity leave. Private sector employees are not guaranteed any leave and should agree upon leave with their employer.

Options for setting up payroll in Costa Rica internally vs. externally

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.

Setting up internal payroll

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.

Setup a PEO/have another company run payroll

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.

Fully outsource payroll and benefits with an EOR like Via

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.