Understanding Payroll in El Salvador: What Global Companies Need to Know About El Salvador’s Payroll
May 23, 2018
Known for its dramatic volcanoes, beautiful coastline, and friendly people, El Salvador holds a lot of promise for major corporations looking for a new home. The nation’s economy has remained relatively stable among Central American countries due to its policies and economic infrastructure. Producing a GDP of just under $27 billion and supporting 6.35 million citizens, El Salvador’s economy is largely dependent on agricultural products, such as rice and coffee.
While the corporate tax rate is set at 30%, the cost of living in El Salvador remains relatively low. Its official currency is the US dollar, which can affect the country based on fluctuations. Payroll regulations in El Salvador tend to be largely dependent on the industry and specific location of the company. International payroll can be complicated by a number of factors, particularly the steady push in recent years for additional pay and benefits for workers.
The two major types of business in El Salvador are General Partnership and Limited Liability, with LLCs being the most popular choice. Companies must sign a Deed of Incorporation with a Salvadoran Notary Public before registering at the Registry of Commerce. Whether the company is controlled by a board of directors or a sole administrator, leaders are not allowed to stay in their position for longer than seven years before having a formal reelection.
Companies also need to register with the local city hall and renew their license with the Registry of Commerce every year. Additional bureaus for company registration include the Internal Tax Office, Pension Fund Administrator, Ministry of Labor, and the Salvadoran Social Security Institute. A local corporate bank account is required to do business in El Salvador, which typically takes one to two weeks to open. Some banks will allow companies to establish their account from abroad.
Employment Law & Employment Rights
El Salvador operates on a 6-day work week of 44 hours. Overtime is paid at 100% of the base salary, and workers are allowed to structure their hours by working an extra hour on weekdays (when applicable) to get additional time off at the weekend. Written employee contracts stating the basic terms of work are required for all employees, though witnesses can be relied on in the absence of these contracts. For any company with more than 10 employees, leaders are required to document labor practices and register the documents with the Labour Ministry.
Trial periods are allowed for employees but may not last longer than 30 days. Although collective bargaining is practiced in El Salvador, unions’ powers appear to be rather limited and it can be difficult to unite workers to push for specific demands. However, unions continue to work at a slow but steady pace to achieve better conditions for workers.
Compensation & Services
Minimum wage is determined by industry in El Salvador. Recently, the minimum wage was raised for both rural and city workers. Those working in agricultural industries are to make around $200 per month, while those in commerce, industry, and service make at least $300 per month. El Salvador also requires Christmas bonuses, with the percentage based on how long the employee has been with the company. Employers may also set up profit sharing with their employees, though it is not required. In the case of an unfair dismissal, workers are generally paid 30 days of salary for every year of work.
Tax Requirements & Withholding
In addition to the required municipal taxes (which vary based on location), the corporate tax rate of El Salvador is 30%. Income is taxed at 30% as well, with taxes deducted directly from employee paychecks. Companies pay social security taxes at a rate of 7.5%, while employee rates are locked at 3%. Any deductions a company is planning to make must be reported when they are incurred as opposed to when they are paid for. All revenue obtained abroad is subject to a 1.75% tax, with VAT set at 13%.
Time Off & Unpaid Leave
El Salvador recognizes 11 official public holidays each year, on which employees are entitled to full pay. Additionally, workers who have been employed for more than one year receive 15 days of vacation time. For a serious illness, employers will cover the first three days of the illness, and social security will cover the rest of the medical leave at 75% of the salary. Disability for a period of one year or less is also covered by social security. New mothers are entitled to 12 weeks of maternity leave at 100% of their wages, paid by social security.
An Economy in Transition
While its economy remains stable, El Salvador is being pushed to make up for a gap in the minimum wage and the cost of living in the country. Much of the nation is being supported by money coming from relatives working abroad in the US. A good payroll solution can make it easier to account for the many expenses a company must manage in El Salvador, while allocating funds to be put toward the welfare of their workers. Between the accrual forms of accounting and the national and municipal tax laws, global payroll is easier to manage when larger companies have the right experts by their side.