As one of the most successful economies in Latin America, Chile has a workforce of 20 million people, each skilled in different fields, especially software development and programming. This region also boasts a valuable IT outsourcing market, projected to reach 1 billion dollars by 2029. Hence, many US-based tech companies interested in supplementing their workforce often look towards hiring from the talent pool in this region.
If you’re interested in hiring from this region, you’d do well to note that you have two main options: working with independent contractors or hiring employees. While most companies quickly hire employees, others prefer independent contractors because they require fewer commitments and are ideally suited to short-term projects. However, if you’ve never hired an independent contractor from this region, you’ll need to learn about proper employee classification, payroll and any tax laws related to them.
An Overview of Chile’s Contractor Landscape
Independent contractors are a unique category of workers comprising self-employed individuals or entities whose role is to perform specific duties and services to another entity – the employer. Unlike employees whose working hours, tasks, and benefits are entirely under the control of an employer, contractors enjoy a unique form of autonomy. They are free to decide when they wish to work and how they wish to perform their tasks as long as they get it done. The role of an independent contractor as a non-employee is usually based on contractual terms, and their time with the employer is generally shorter. However, it’s not uncommon to find contractors hired with lengthy contracts.
Working with independent contractors is an incredibly flexible arrangement for most employers. Due to the nature of this working relationship, you won’t have to worry about paying for social security and other employment benefits or even reporting taxes.
The Appeal of Hiring Independent Contractors in Chile
There’s been a global shift towards employing independent contractors. Perhaps to cope with the raging global recession, many companies are looking for alternatives to the traditional business structure while maintaining the same level of efficiency and productivity. In recent times, many companies have drawn towards adding independent contractors from Chile to their workforce because of the benefits they offer.
The first noteworthy benefit of hiring a contractor is that they potentially help you save costs. Unlike employees, independent contractors are responsible for paying their social security contributions and filing their taxes. While these non-employee experts may charge a sizable fee for their services, it’s nothing compared to employers’ recurrent payment to cater for their employee benefits. You’ll also spend less on training, onboarding, and equipment purchases.
Another exciting benefit of hiring independent contractors, especially for small and medium-sized enterprises, is that they require less administrative supervision. When dealing with employees, you must monitor and ensure they carry out their tasks when due. On the other hand, contractors are bound by the details of their contracts. If they do not complete the tasks or activities you hired them for, you’re inclined not to pay them. Hence, many independent contractors aim to deliver satisfactory service before submitting their invoices for payment. You’ll have less supervision and can spend time on other aspects of the business.
Many US-based tech companies also choose to hire independent contractors because they offer them access to global tech talent. Instead of sticking to the limitations of their workforce, these organizations want to tap the abundance of tech professionals in Chile. Chile’s IT industry grew exponentially and was valued at 15.9 million dollars in 2022. The value of this industry is also projected to grow to 25.1 million dollars by 2029, with an annual growth rate of 9.61%. This region has also proven itself as a hub for small and medium-sized companies, with its capital containing more than 290 startups.
Read more: Employee Benefits in Chile and Employee Leave Policies
Legal Framework for Contractors in Chile
So, how do you distinguish Chilean workers from contractors? The Court will assess the level of integration, degree of worker subordination, and other factors. The following table establishes a clear distinction between both categories of workers:
| Contractors | Employees | |
| Level of Autonomy | Independent contractors are offered more autonomy to operate based on their discretion. They are free to choose when, where, and how to perform their tasks. | Employees are directly controlled by their employers. As a result, employers are responsible for issuing directives and making decisions on behalf of employees. For instance, an employer may choose to increase or reduce the remuneration paid to employees. |
| Provision of Equipment | All the tools and equipment used to carry out operations are provided or owned by the contractor. | Employers are responsible for providing tools and equipment used by their employees. They may also offer additional training on how these tools are used. |
| Level of Integration | Independent contractors have little or no integration with your business structure. They can operate outside regular working hours and may or may not attend meetings. | All employees are highly integrated into the employer’s business structure. They are expected to work on the company property, comply with working hours and participate in any other company activities. |
| Access to Benefits | Chilean independent contractors are entitled to benefits like pension and social security protection. However, they are responsible for setting up these benefits for themselves. They are also not guaranteed the same statutory benefits as employees. | Employees are entitled to all statutory benefits listed by Chile’s labor code, including social security, health insurance, parental leave, paid annual leave, termination notice, overtime, and health insurance. Employers are responsible for paying for these contributions on behalf of their workers. |
| Level of Engagement | The engagement between an employer and an independent contractor is only going to exist for a fixed period of time. | The relationship between employer and employee is based on an indefinite agreement. However, both parties may decide to terminate the contractual agreement between them. |
| Personal Liability | Independent contractors are going to assume risk and liability for their work. | Employees are protected from any work-related losses which are borne by the employer. |
| Level of Responsibility | Independent contractors are allowed to turn down any work any responsibilities that were not specified in the contractual agreement. | Employees are not allowed to turn down any work assigned by a supervisor. However, certain exceptions may be stipulated in the contract. |
Read more: Work Hours in Chile
Independent Contractor Contractual Limitations
There are no limits to how an employer may use an independent contractor as long as the terms are specified in the contractual agreement between both parties. However, a service contract signifying an employer-contractor relationship can be changed to an employment contract if it contains elements of an employment contract.
Fixed-term contracts between contractor and employer are limited to one year and can only be renewed once. The duration of a fixed-term contract may be less than 12 months but can not be more than one year. Specific fixed-term contracts, such as those of technical staff, managers, and highly qualified professionals, can be once for two years. Any contracts renewed beyond this point will become indefinite permanent contracts.
Simplify your contractor hiring in Chile with Globy’s expertise.
Effective Strategies for Hiring Chilean Contractors
We’ve highlighted the benefits and contractual obligations involved in hiring independent contractors. Let’s say you’ve decided to hire an independent contractor. The following steps will help you get it done without any hassle:
- Classify Your Workers: The first thing to do is to classify the contractor you’ve chosen to work with correctly. The purpose of contractor classification is to ensure that you properly settle all employment benefits and don’t fall on the wrong side of the labor law.
- Create a Detailed Contract: Next, create a contract containing details about the responsibilities and remuneration of your contractor. Ensure you inform and negotiate all contract terms with the workers involved before documenting them. If you plan to offer additional benefits or task-based incentives, include them in the contract.
- Determine How You Wish To Pay Contractors: Before paying independent contractors in Chile, it’s crucial to set up your legal entity. Afterward, you may choose to pay these workers through several alternatives, such as bank transfers, digital wallets, and international money orders.
- Ensure your Contractors Maintain Tax Compliance: Unlike employees, Chilean independent contractors are responsible for filing taxes and paying social security contributions. So, ensure they make necessary payments as at when due.
Tax and Compliance Considerations
Independent contractors are expected to pay between 4% and 35.5% personal income tax. They are expected to pay social security funds to the Pension Fund Administrator (AFP) and remit their taxes to Chile’s Revenue Service (SII) in monthly or annual installments. It’s crucial to note that men older than 55 and women older than 50 are exempt from social security contributions. Additionally, contractors with an incorporated business are expected to pay a 19% VAT monthly.
Independent contractors are expected to submit the following documents when filing their taxes:
- Form 4415 on the Chile Revenue Service website
- Taxpayer ID number (RUT)
- Chile Revenue Service income declaration form
- Form 29 and Form 50 for contractors that’ll be making VAT payments.
- Social security registration
Risks of Misclassification and How to Avoid Them
When hiring independent contractors, it’s crucial to classify them correctly. The Chilean labor code recognizes distinct differences between employer-employee and employer-contractor relationships. Failure to correctly classify both types of working relationships will result in a misclassification fine ranging between 4,227,360 CLP and 26,421,000 CLP. Depending on the extent of the misclassification, employers may be charged an additional 1,585,260 CLP per miscategorized employee.
If you’re struggling to classify your employee, you can hire a legal adviser to help you out. Another alternative is to contact an Employer of Record (EOR).
Read more: Employer of Record in Chile
Payment Solutions for Chilean Contractors
Before hiring an independent contractor, you must figure out how to pay them. It’s a good idea to plan your payment solution before the contractor finishes their work because you’ll only have two to four weeks to pay them after they fill out an invoice. Here’s a list of standard payment methods that you can use to pay Chilean contractors:
- Bank Transfer: If you create a Chilean bank account, you can send money directly to your independent contractor. However, you can use a foreign bank account to process an international wire transfer via the SWIFT network. However, this type of transfer may result in additional charges and service fees.
- International Money Orders: This method involves mailing a payment directly to your contractor. However, it would be best to visit Western Union, Post Office, or Bank to process this request. The receiver must also visit their bank to deposit the amount received into their account. A significant downside of International Money Orders is that this process is slow, and you’ll have to pay for a wire transfer. It’s also crucial to note that money orders are subject to fluctuating exchange rates.
- Digital Wallets: Another alternative to try out is the digital wallet. However, specific payment platforms may be unavailable in Chile (like Venmo). Digital wallets that are native to Chile include WebPay and ServiPag. Before opting for digital wallets, consider the exchange rate and any vendor fees associated with the transfer.
- Employer of Record (EOR): EORs are an efficient alternative to handle your payroll, especially if you don’t have a legal entity. These service providers are familiar with local laws and can help you process payment in the local currency.
Leveraging Recruitment Agencies for Streamlined Contractor Hiring
Hiring independent contractors can be relatively complex, especially if it’s your first time. There are several details to cover, and it’s easy to get overwhelmed while trying to organize your business’s affairs. That’s where a hiring agency comes in.
Globy is a reliable hiring agency capable of connecting you with a tech talent pool in Chile. We will help you vet and shortlist the best candidates for your business needs. Furthermore, we can connect you with a network of EORs that’ll serve as your legal entity and help you handle the legal aspects of hiring an independent contractor. Our EORs can simplify payroll and tax reporting responsibilities for tech businesses.
Partner with Globy’s expertise for a smooth hiring experience.
Read more: Payroll Taxes & Expenses in Chile
FAQs
No, employers are not expected to deduct taxes when paying their contractors. Independent contractors are responsible for paying their own and filing their taxes. These workers are also the sole contributors to their social security coverage.
Chilean independent contractors are entitled to social security protection if they make payments. However, these experts are not entitled to statutory benefits such as sick leave, maternity leave, paternity leave, severance pay, and public holidays.
In Chile, independent contractors must have a formal agreement specifying the scope of work, payment terms, and duration. Contractors are responsible for their own taxes and social security contributions. Employers must ensure the relationship remains strictly independent to avoid misclassification and potential legal issues.
Hiring independent contractors in Chile offers flexibility and cost savings for businesses. Contractors can be hired for specific projects without the long-term commitment of full-time employment. This allows companies to scale their workforce according to demand while avoiding payroll taxes and benefits associated with regular employees.
