Payroll Taxes & Expenses in Chile: Employees vs. Contractors (2024)

The Republic of Chile is a region renowned for its beautiful coastlines, rich biodiversity and cultural heritage. Despite its considerably smaller population, Chile has one of the best-performing economies in South America. This country has the fourth-largest GDP and highest human development index in Latin America. This region also has the second-highest per capita income, one of the lowest crime rates, and a relatively low corruption level. According to the World Economic Forum, Chile is among the most competitive LATAM countries. Hence, several foreign companies are eager to operate from this region. 

If you’re a US-based tech company looking to hire the best talent in Latin America, look towards Chile. This country is renowned for its vibrant tech ecosystem supporting small and medium enterprises. While the country has a large workforce of 20 million, payroll and tax regulations are upheld for local and foreign employers. Without adequate knowledge of payroll in Chile, you’ll fall on the wrong side of the law and risk costly sanctions. 

Overview of Mandatory Payroll Contributions for Employers

Payroll contributions are split into employer and employee payments. Here’s a breakdown of Chile employer payroll taxes: 

Social Insurance

While the bulk of social insurance payments is covered by workers, employers are also expected to remit a payment worth 3% of employee salary. Employers are also tasked with directly deducting employees’ share of the contributions and remitting it to the relevant authorities. These are the social insurance payments handled by employers: 

• Work-related Accident Insurance: 0.93% of employee remuneration with a limit determined by the UF.
• Life and Disability Insurance (SIS): 1.85%

Unemployment Insurance

All enterprises with employees are expected to settle unemployment insurance and this payment is mandatory for every worker. The unemployment fund is paid by employers and employees. However, employers bear most of the burden by paying 2.4% of employee salary. If the employee has a fixed-term contract, employers bear the entire contribution of 3%. 

Professional Illness Insurance

Every company is expected to contribute to professional illness insurance to compensate for the risk of their daily operations. The amount of professional illness insurance paid for each employee depends on the risk of your business model, with a maximum rate of 3.4%. 

The Employee Side of Payroll Taxes

In Chile, workers are expected to pay taxes on all income generated from local and foreign employers. However, non-residents (or employees outside Chile) are only expected to pay taxes on all income earned in the country for the first three years, while taxes are levied on worldwide income by the fourth year. 

Resident companies and workers must file their annual income tax with Form 22. This tax filing form must be submitted by April following the year the income was generated. This form should contain financial information about the income generated between January 1 and December 31 of the year you wish to declare the income for. To be considered a resident for a financial period, the company or individual must have lived more than 183 days in Chile during a calendar year or at least 183 days during any 12-month period. 

Income Tax

Workers in Chile are expected to pay their income tax at a progressive rate of 0%—40%, which means that the amount of tax levied will increase as employee earnings increase. Employers deduct income tax directly during remuneration. Any other income individuals earn must be declared during the annual income tax report. 

It’s crucial to note that social security contributions are deducted before the tax rate is determined. While joint tax filing is prohibited, spouses with at least one community property must file their taxes together. The following table highlights the income tax rate and respective income levels of workers:

Social Insurance

Employers and employees are expected to both contribute to social insurance payments. However, employees will be responsible for the bulk of these payments—about 17.6%. Employers directly deduct these payments during remuneration. Social security contributions are deducted after tax has been paid. 

Here’s a breakdown of social security contributions by employees in Chile: 

• Pension fund – 10% with a 1,876,049 CLP limit.
• Health insurance – 7% with a 1,876,049 CLP limit.
• Unemployment Insurance – 0.6% with a 1,876,049 CLP limit. However, fixed-term employees are not expected to make unemployment insurance payments. In this scenario, this contribution is only paid by employers. 

Comparative Analysis of Full-Time Employee vs. Contractor Expenses

Let’s break down what it’ll cost an employer to hire a full-time employee compared to an independent contractor. 

Full-time Employees

Any company interested in creating a team of full-time employees should prepare for the following costs: 

• Basic salary: This is the agreed amount of compensation between employer and employee. Depending on the agreement between both parties, the basic salary could be cash only or include other benefits, such as gym membership, transport vouchers, and meal vouchers. 
• Bonuses: While the 13th month salary is not mandatory, employers can offer several bonuses to motivate workers. 
• Social Security Insurance
• Professional Illness Insurance
• Unemployment Insurance

Independent Contractors

The cost of hiring an independent contractor depends mainly on the agreement between both parties. Most contractors receive one-off payments and are expected to submit an invoice when done with their tasks. Employers are not expected to offer independent contractors any statutory benefits. Contractors are also responsible for handling their taxes personally. 

Read more: Employee and Contractor Termination in Chile

Strategic Considerations for Payroll Setup

To accurately compensate your workers and ensure tax compliance, setting up an effective payroll system is crucial. Here’s a list of steps to help you set up a seamless payroll system: 

• Register the company and apply for incorporation with the Registrar of Companies. You’ll need your incorporation certificate before you can begin handling employee remuneration. 
• Open a bank account in any of the local banks in Chile.
• After creating your bank account, register your company with the federal and state tax companies. You’ll be required to submit a list of documents and choose a specific tax timeline. 
• Calculate your employees’ gross pay. However, ensure you calculate overtime for any additional hours worked. 
• Deduct employer and employee contributions. Deduct tax on gross pay and determine net pay. 
• Decide on a payroll timeline to compensate each employee category in your organization. 
• Decide a date to settle all Chile payroll tax payments and social security contributions to government authorities. 

The process to set up an effective payroll system is relatively lengthy and may even get more complicated depending on the scale of your operations. That’s where outsourcing comes in. You can outsource Chile payroll to a third-party service provider if you don’t have the required resources to handle such activities yourself. Globy is a hiring agency that can recommend an EOR that’ll handle your payroll while also ensuring tax compliance. 

Read more: Employer of Record in Chile

Employer Obligations: A Comprehensive Overview

To hire workers in Chile, you must learn about payroll tax obligations and social security contributions. Workers in Chile pay income tax at a tax rate of 0% – 40%, depending on income level. Employers and employees are expected to settle social security contributions. While employees settle the bulk of social insurance payments (at 17.6% of employee salary), employees are also expected to pay a small fee (about 3%). On the other hand, employers are also expected to settle the bulk of unemployment insurance at 2.4% and 3% for fixed-contract payments.

Further reading: Employee Leave Policies in Chile and Work Hours in Chile

FAQs

Article author

Vit Koval

Co-founder at Globy

A top Global Hiring voice on LinkedIn, co-founder of Globy, and host of Default Global. Using deep expertise in global hiring, remote work, and global business expansion to help companies excel worldwide with innovative strategies.