Many global companies are choosing to hire talented independent contractors in Costa Rica. Finding a Costa Rican contractor is just the first step of the process, though. Before they start their work, you need to figure out what steps to take to comply with Costa Rica’s labor laws. And learn how it differs from planning to hire employees or offer benefits in Costa Rica.
Learn what you need to know to classify independent contractors correctly, how to manage them, and pay them according to Costa Rica's employment laws.
Step by step: How to run payroll for contractors in Costa Rica
Step #1: Classify your workers in Costa Rica
Costa Rican independent contractors must be classified correctly. Understand the difference between empleado (employees) and contratista independiente (independent contractor). In Costa Rica, contractors fall under the Código Civil (Civil Code), the legal entity that oversees and governs the legal system surrounding contracts.
According to Costa Rican Labor Code, employees are those with individual employment contracts and show a permanent relationship with their employer. An existing employment contract shows that the worker is not an independent contractor. Misclassifying a worker can result in legal, financial, and other penalties from the country.
But what constitutes an independent contractor in Costa Rica?
Similar to other countries, a contractor does not have fixed working hours. Contractors set their working days, pay their own taxes, perform the work on their own time, and have little to no control from the hiring company. There are also no required notice periods for the end of a contract unless clearly stated in the agreement.
In Costa Rica, benefits are only mandatory for employees. Independent contractors aren’t entitled to benefits like contributions to social security administration or Caja Costarricense de Seguro Social.
Any additional parameters would be negotiated as part of the contractor agreement. The contractor agreement will also show if the contractor wants to be paid in Costa Rican Colón or another currency.
Contractors in Costa Rica are responsible for paying their own taxes and social security contributions. Any details, including pricing, payment frequency, method, and extra benefits, must be discussed in terms of the contractor agreement. The contractor agreement can be in Spanish or English and Spanish. Both parties must sign it before onboarding.
Classify your workers now with Rippling’s Worker Classification Analyzer.
Step #2: Determine the best way to pay your contractors in Costa Rica
Once you select your next independent contractor in Costa Rica, you have to figure out how to pay them. Put together an agreement outlining the project's payment amount, payment method, currency, and timeline for payment (e.g. net 30).
In the era of remote, distributed workforces, global companies have more choices than ever to pay their contractors in Costa Rica.
Bank transfer. You can easily do an international wire transfer from your company’s US bank account to a Costa Rican bank account. Or, you can open a local account in Costa Rica to transfer funds, which may take longer without a legal entity in the country.
Digital payment platforms. Companies like PayPal and Wise are widely used as payment platforms worldwide and are available in Costa Rica. The exchange rate changes if you pay in Costa Rica Colón (CRC). While accepted by many contractors, watch for the fees and whether you can cover them.
International money orders. Money order companies like Western Union have come very far since the days of picking up a piece of paper and mailing it. You can now send a money order online. The independent contractor can pick up the cash at a location or receive funds directly in their bank account. It is subject to fees and exchange rates too.
Global payroll services. In Costa Rica, contractors must not be part of the full-time employee payroll. There needs to be a clear separation between the two to avoid penalties from the government.
Step #3: Use global payroll software to process payments for Costa Rica contractors
Many options exist to pay your independent contractors in Costa Rica, but many are manual. They don't allow you to grow your company as fast as needed. As you scale your global team, you need efficient systems that give you a high view of your payroll.
That’s where global payroll processor software like Rippling comes in. With Rippling, you can pay contractors across the world, quickly and compliantly.
Step #4: Withholding taxes with contractors
With a distributed, remote company, you need a global payroll system that can handle payroll, employer taxes, and compliance for your workforce.
An Employer of Record helps companies hire in other countries without creating a legal business entity. EORs run payroll, manage employee benefits, and help your company comply with local laws and regulations.
In Costa Rica, employers do not need to withhold and pay taxes on the contractor’s behalf. Contractors are responsible for processing and paying their own taxes. A Costa Rican contractor operating self-employed has a personal income tax rate of 10-25%, depending on income.
Frequently asked questions about running payroll for contractors in Costa Rica
Does Costa Rica minimum wage apply to independent contractors in Costa Rica?
No, minimum wage laws don't apply to independent contractors in Costa Rica.
Do Costa Rican contractors get benefits?
No, independent contractors in Costa Rica are not entitled to benefits. Benefits include paid public holidays, maternity leave, severance pay, and sick leave.
Offering benefits to independent contractors can blur the separation between employees and contractors. Your company risks penalties and more payroll taxes due to the misclassification of the contractor. If needed, convert the contractor to an employee if you'd like to formalize the employer-employee relationship.
Can you pay contractors in Costa Rica in your home currency?
Yes, you can pay contractors in Costa Rica with CRC, their local currency. Since USD is accepted in Costa Rica, the contractor may request to get paid in USD. After a discussion, add a clause in the contractor agreement about their preference.
With Rippling, you can pay contractors in their local currency, in minutes, without waiting on transfers or conversion.
Can you manually pay contractors in Costa Rica?
Businesses may choose to process contractor payments manually. Sometimes choose cash as an option to avoid fees. But this is time-consuming and can get overwhelming quickly as the business grows and the number of contractors in Costa Rica grows. Manual processing can also:
Introduces human error. Manual payment processing can lead to inaccuracies. This includes payment records, missed invoices, and issues in compliance with the Costa Rica government.
Add security risks to your company. Since payment information is not handled in a secure, confidential manner, it can leave the company at risk for fraud and data breaches.
Automating your payroll for contractors can reduce any manual inputs. By syncing your HR data, both employees and contractors, you can push payments in a single pay run using an EOR.
How do you turn a contractor into an employee in Costa Rica?
Sometimes a stellar contractor can make the perfect addition to your team as a new employee. But before you add them to your team, you must comply with Costa Rica's legal requirements. There are more details to worry about in the transition from contractor to full-time employee, including the addition of benefits.
Effortlessly manage contractors, no matter where they are
You can pay international contractors directly through Rippling, meaning you need just one system to pay all types of employees—wherever they are. See Rippling today.
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.