Brazil is renowned for its large consumer base and skilled talent pool. As a result, many foreign companies readily supplement their workforce from the local labor market.
If you’re a US company interested in hiring from the local market, it’s crucial to stay aware of payroll tax regulations and how they may affect you. You should also find out any associated fees or penalties for non-compliance
What are the Mandatory Payroll Contributions for Employers?
The mandatory payroll contributions for Brazilian employers include Social Security (INSS), work accident insurance (RAT), pension fund (FGTS), and social assistance.
Other mandatory payroll contributions include a 13th month salary for those who have worked with their employers for at least 12 months, and a vacation bonus equivalent to ⅓ of the employee’s monthly salary. There may be other mandated contributions, such as life insurance or meal vouchers.
Now let’s discuss each mandatory payroll contribution in detail.
Social Security (INSS)
Brazil’s Social Security Fund, also known as Instituto Nacional do Seguro Social (INSS), is a source of income for disabled, ill and retired individuals. INSS also caters for dependents of disabled employees who have passed away.
Employers are meant to contribute 20% to this fund. However, certain sectors like textile and clothing, require employers to contribute 1% or 2% more. On the other hand, IT employers calculate the social security fund contribution based on employee net revenue.
Pension Fund (FGTS)
The Pension Fund is an employer-only contribution that settles severance payments to employees who are terminated without cause. This severance payment is equal to 40% of the funds accumulated in the FGTS. The funds in this account are also a retirement benefit for those who qualify.
Employers are expected to contribute 8% of the base monthly salaries, including vacation bonus, overtime, 13th-month salary and holiday pay when applicable.
Work Accident Insurance (RAT)
Work Accident Insurance, also known as Riscos Ambientais do Trabalho (RAT), is an employer-only contribution meant to cater for those who get injured at work or become ill as a result of a workplace incident. The employer contribution for RAT ranges between 1 – 3% depending on the risk level of its business activities. However, employers in high-risk sectors like chemical, electrical and manufacturing sectors, may contribute up to 12% to this fund.
Social Assistance
Brazil has a social assistance scheme known as System S and it focuses on multiple programs aimed at improving employee skills and qualifications while reducing employment and providing more opportunities in the country. System S is responsible for several tech centers, laboratories and schools in different parts of Brazil. They also offer low-cost education in critical sectors in Brazil.
The Employee Side of Payroll Taxes
The employee side of Brazil’s payroll taxes is income tax. Employees are also expected to remit income taxes. Employers in Brazil must deduct income taxes from their employees’ gross earnings and pay them on behalf of the employee.
Like payroll taxes, income taxes are also used to finance public services. While payroll taxes are used to fund healthcare and pensions, income taxes are responsible for financing education, fire services and road maintenance.
Brazil operates a progressive tax system that ranges between 0% – 27.5% for all employees. The tax rate will increase as the employee’s taxable income increases.
| Taxable Income (Per month) | Tax Rate |
| USD 0 – USD 362 | 0% |
| USD 362 – USD 538.41 | 7.5% |
| USD 538.41 – USD 714.5 | 15% |
| USD 714.5 – USD 888.51 | 22.5% |
| USD 888.51 and more | 27.5% |
Further reading: Employee and Contractor Termination in Brazil
Comparative Analysis of Full-time Employee vs. Contractor Expenses
Like many countries, Brazil classifies employees and contractors differently. It’s essential to understand the differences to avoid falling victim to legal sanctions and penalties.
An employee is an individual who is formally part of an organization and works under its supervision and control in exchange for some form of remuneration. Brazilian labor law stipulates that employees are entitled to the following benefits:
- Maximum working hours
- Minimum wage
- Severance pay
- Vacation pay
- Overtime pay
- Sick leave
- 13th-month salary
- Social security benefits
On the other hand, contractors are individuals that only work for organizations based on contractual terms. It’s crucial to note that independent contractors are not the same as employees. As such, they are not eligible for the same benefits. Brazil labor law stipulates that the relationship between an employer and an independent contractor is determined by the terms of their contractual agreement.
The contract between both parties should specify the scope of services requested, agreed payment terms and any other relevant contract conditions. Contractors are responsible for paying their own taxes and do not usually receive benefits such as vacation time, overtime, minimum wage or sick leave.
As an independent contractor, you’re subject to the Simples Nacional Tax Regime. This one-form tax system is usually used for small-business owners. According to this tax regime, contractors pay a tax rate between 4 – 33% depending on the nature of the business and income level.
Payroll tax on employees and contractors is another expense organizations need to be wary about. The payroll tax for employees and contractors is calculated based on their gross monthly earnings. Next, the employee and contractor liability is determined based on income level. However, take note of the different tax rates affecting employees and contractors and their related income level.
If you’re struggling to calculate payroll tax for your employees and independent contractors, it’s a good idea to rely on software support. You can use tools like Employee Cost Calculator to calculate these expenses with increased accuracy.
Discover how Globy’s tailored hiring strategies can help you build a top-quality workforce for your business.
Strategic Considerations for Payroll Setup
There are three payroll options for employers: internal payroll, local payroll outsourcing and global payroll outsourcing.
Internal Payroll
In this system, you’re responsible for creating the payroll system. This type of patrol setup can be relatively stressful for business owners. Here’s a list of steps you can follow to create an effective internal payroll setup:
- Register your business as a local entity with the required documents in the local state where it’s located, and register with Social Security.
- Register with the eSocial system to allow you to send employee and employer data electronically to the federal government, file taxes, and report social security payments.
- Create a local bank account which serves as a source of payment for employees, contractors and authorities.
- Set up a payment schedule and collate the payment details of your employees. Ensure your payroll procedures comply with local regulations.
- Determine the salaries of each of your employees and payments to contractors. Ensure your work contracts and payments comply with local regulations.
- Determine your tax liabilities based on your gross earnings. Make any deductions and submit any employer contributions to the authorities.
Local Payroll Outsourcing
Another effective way to pay employees and employers is to outsource it to local companies. If you employ a local service provider, they are familiar with local laws and are relatively cheaper than foreign alternatives.
Global Payroll Outsourcing
Organizations struggling with payroll internal management can also opt to outsource this responsibility to foreign companies. Despite their foreign jurisdiction, these companies are usually equipped with top-notch equipment to ensure your payroll matches global trends. However, Brazilian companies must ensure this service provider is aware of local laws. By working with recruitment companies like Globy, you’ll discover an extensive network of payroll managers that will reduce your administrative burden.
Simplifying Compliance: Strategy for Employers
Brazil has one of the most complex labor laws for employers and it can be a hassle to navigate. However, it’s crucial to never let the complexities of setting up your payroll and tax liabilities in Brazil stop you from hiring the best talent in the country. The best way to do this is to outsource some of this burden. When you hire the right partner, payroll and tax management will be simpler.
Globy is a recruitment partner that allows you access to the best talent in the world. This platform will connect you to service providers equipped to help you pay your employees and manage taxes while staying compliant to Brazil labor law.
Let Globy simplify your hiring process with tailored recruitment services for the Brazilian market.
Employer Obligations: A Comprehensive Overview
If you wish to become an employer in Brazil, you must stay aware of different employer obligations to stay compliant to local labor laws. These laws state that employers are responsible for payroll contributions such as Social Security Fund, Pension Fund, Work Accident Insurance and Social Assistance. Employers must also pay 13th-month salary for those who have worked 12 months as well as a vacation bonus.
Navigating Tax-Free Allowance and Deductions
In the final quarter of 2023, the Brazilian federal government passed a law that exempts 17 sectors from the payment of payroll tax until 2027. These sectors include construction, animal protein, apparel and clothing, communication, call centers, etc. This exemption was introduced in 2012 and has been extended extensively to benefit more companies. The payroll tax exemption replaces the 20% social security contribution with burden rates ranging between 1 – 4.5%.
When building a Brazil workforce, it’s crucial to determine payroll taxes and contributions. To calculate Brazil payroll taxes, the first thing to do is to determine the gross monthly salary of your employees. Next, calculate all your contributions towards INSS, FGTS, RAT and social assistance based on these gross monthly earnings. Then, add income taxes as a percentage of employee gross monthly earnings.
Further reading: Employee Benefits in Brazil, Leave Policies in Brazil and Work Hours in Brazil
FAQs
Brazil operates with a varying payroll tax rate that’s dependent on several factors including the nature of the business, its industry and location. If you’re a Brazil employer, you will pay between 28 – 34% of employee salary as payroll taxes. These payments will include contributions to social security, health insurance, etc.
Brazil operates a progressive income tax system with rates varying from 0 – 27.5% depending on the income of the individual. This tax system means that the tax rate will rise proportionally to the salary of the employee. The income tax of employees is deducted by employers and remitted directly to tax authorities. You’d do well to note that income tax amojnt depends on factors including income level, exemptions and deductions.
Compared to other countries, Brazil has a relatively high tax rate. The federal government imposes a high income and payroll tax rate. However, this rate varies depending on factors such as residency status, nature of business and income level.
Brazil’s federal government charges withholding tax on different types of income, such as interest, royalties, dividends and salaries. Income tax is remitted by employers and pay to the authorities on behalf of employees. Withholding tax can also be charged on payments to service providers, suppliers and contractors.
You can apply several strategies to minimize your income tax liability in Brazil, including taking advantage of deductions, credits, and exemptions available under the tax law. Some of the common deductions you’ll be forced to pay include expenses related to education, health care, mortgage interest, and charitable contributions.
Expats living and working in Brazil must pay Brazilian income tax on their worldwide income. In certain instances, tax treaties and bilateral agreements may provide expats with exemptions or reduce their overall tax liability for expatriates. However, these treaties and agreements depend on their country of origin and the nature of the expat’s employment.
