How to pay international contractors in Nicaragua
If you operate a global company, you may consider tapping into Nicaragua’s workforce using Nicaraguan contractors. The capital of Managua is one of the largest cities in Central America and a major economic hub, offering many opportunities to find highly-skilled contractors. Nevertheless, before hiring in the country, you must grasp Nicaraguan laws and tax regulations to ensure you can pay your contractors appropriately.
This guide will take you through the step-by-step process of correctly classifying, onboarding, and managing payroll for Nicaraguan contractors.
Step #1: Classify your workers in Nicaragua
Complying with Nicaragua's labor laws requires correct worker classification. Misclassifying employees as freelancers could result in penalties such as fines, back pay, and, potentially, bans from operating in the country. To determine the appropriate classification, consider the following criteria:
Contractors
Employees
High level of worker control. Contractors have a high level of control over their work, deciding how and where to complete their tasks.
More direction from the employer. Employees receive more direction from the employer, who provides guidance on performing the work and may set specific work days and hours.
Equipment and tools are owned by the worker.
Equipment and tools are typically provided by the company.
Less integrated. Contractors are less integrated into the organization, often working independently and remotely with their own tools.
Highly integrated. Employees are highly integrated into the organization, possibly working on-site and using company-provided resources.
No entitlement to benefits. Contractors are not entitled to the same benefits and protections enjoyed by employees, and they are responsible for handling their taxes and social security insurance.
Entitled to benefits. On the other hand, employees are entitled to various employment benefits and protections, such as minimum wage, overtime pay, paid time off, public holidays, and parental leave (maternity and paternity).
Time-bound engagement. Contractors are engaged for specific projects or a predetermined period of time.
Indefinite engagement. Employees are usually hired for an indefinite period.
Risk of loss. Contractors are more likely to be found liable for any work-related issues.
No risk of loss. Employees are generally protected from liability for work-related problems.
Subcontracting. Contractors can delegate work to another person or business.
No subcontracting. Employees complete their work themselves. They can’t delegate tasks without company approval.
Step #2: Determine the best way to pay your contractors in Nicaragua
As you put together your contract for professional services—an agreement for self-employed workers in Nicaragua—consider what the best payment method is for you and the freelancer. Thanks to an increase in global and remote work, there are more options than ever for paying Nicaraguan contractors:
- Bank wires: You can open a Nicaraguan bank account and deposit funds into contractors' accounts or use your bank for global wire transfers.
- Digital wallets or payment platforms. Not all payment platforms are available in Nicaragua. For example, Venmo is not available outside of the US. Some options in Nicaragua include PayPal, SmartMoney (from Banco Lafise Bancentro in Nicaragua), and IPSIPay. Exchange rates may vary.
- International money orders. This method is longstanding but can be slow and inconvenient, often involving fees and unfavorable exchange rates. The employer must purchase the money order in person, and the contractor needs to deposit it physically.
- Global payroll services. Usually, contractors aren't included in payroll because they aren't subject to withholdings. Instead, freelancers send invoices to be processed by accounts payable. However, with Rippling, you can easily pay Nicaraguan employees and contractors—and any other global workers—in a single pay run.
Step #3: Use global payroll software to process payments for Nicaraguan contractors
If you want to simplify and expedite payments to Nicaraguan contractors, opt for global payroll software. Rippling facilitates seamless payroll management for all employees and contractors worldwide.
Learn more about how Rippling’s global payroll system works:
Step #4: Ensure your Nicaraguan contractors have the right tax information
Nicaraguan contractors are responsible for their own taxes, and employers should not withhold taxes on their behalf. Residents pay a progressive income tax rate ranging from 10% to 30%, while nonresidents pay a flat 20% withholding tax.
Compliance with the Internal Revenue Service (IRS) is crucial for US-based employers. Gather essential information from contractors, including their legal name, date of birth, contact details, bank account information (or other payment information), and tax identification number (or TIN). The IRS requires foreign independent contractors, including those in Nicaragua, to fill out a Form W-8BEN. Employers then complete a 1096 Form, providing details about their foreign contractors.
Tax compliance can be complex, with potential repercussions from your country's tax revenue services and Nicaragua's. However, a global payroll system like Rippling simplifies the process by handling paperwork, submitting the correct documents, performing calculations, and filing taxes on your behalf.
Frequently asked questions about running payroll for contractors in Nicaragua
Do you need to withhold taxes when paying contractors in Nicaragua?
No, Nicaraguan contractors are responsible for their own taxes.
Does the Nicaraguan minimum wage apply to independent contractors in Nicaragua?
No, contractors negotiate their own rates and are not held to minimum wage laws.
Nicaraguan minimum wage varies depending on the industry. For example, manufacturing jobs have a minimum wage of 6,987 NIO per month, while construction, financial institutions, and insurance have a minimum wage of 11,628 NIO per month.
Do Nicaraguan contractors get benefits?
No. Unlike full-time employees, Nicaraguan contractors are not entitled to employee benefits.
Can you pay contractors in Nicaragua in your home currency?
The official currency in Nicaragua is the Nicaraguan Córdoba (NIO). You should pay international contractors in their local currency unless they agree in writing to accept a different currency.
Can you manually pay contractors in Nicaragua?
Employers do have the option to pay Nicaraguan contractors manually. While this is a common practice among small business owners to reduce costs, it can become time-consuming, particularly as your business engages with multiple foreign contractors. Manual payment processing also entails certain risks:
- Compliance. Manual payroll processing increases the risk of human errors and omissions, potentially leading to non-compliance. The risk increases when you have foreign workers. Rippling, on the other hand, ensures automatic compliance by enforcing all relevant regulations.
- Security. Using spreadsheets or paper records for manual processing poses security risks. Sensitive employee or contractor information could be lost, stolen, or otherwise misused.
Rippling offers an automatic solution to streamline and optimize payroll management. By synchronizing your business's HR data with payroll, Rippling eliminates the need for manual data entry. This enables swift and compliant payments to your global contractors and employees, all with a single pay run.
How do you turn a contractor into an employee in Nicaragua?
There are many reasons to consider converting a contractor into an employee, including avoiding misclassification or safeguarding your intellectual property. The onboarding process will largely be the same as hiring any other employee.
If you don't already have Nicaraguan employees, decide between establishing a legal entity or utilizing an Employer of Record service (EOR ) to kick off the hiring process. Learn more about EORs here.
Once you establish an entity or choose an EOR that operates in Nicaragua, you’ll want to establish an employment contract, which is required under the Nicaraguan Labour Code. The employment contract should be written in Spanish, the official language of the country.
Make sure the employment agreement details the new hire’s job title, duties, remuneration, workplace, work hours, contract duration, notice periods for termination, and payment intervals/payroll frequency.
The agreement should comply with minimum wage laws, statutory employee benefits, legal working hours, public holidays, severance pay laws, and other local regulations. For example, in Nicaragua, employees are entitled to 15 days of paid leave every six months, 24 hours of consecutive rest per week, and can only have a probation period of 30 days for a new job.
Once both parties sign the contract, submit it to the Ministry of Labour for certification. Verify essential information, such as the employee's name (matching the account for depositing pay), nationality, date of birth, date of hire, contact details, identity certificate number, and payment details. Upon running payroll, you’ll need to withhold income tax and social security contributions. Employers are expected to pay for pension and disability, health insurance, labor healthcare, and war victims. If you use a global payroll system like Rippling, withholdings are done on your behalf.
Rippling and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any related activities or transactions.
