Payroll for Remote Employees: Compliance & Best Practices

Running payroll for remote employees isn’t some niche HR task anymore—it’s a core operational challenge for any company looking to grow. The real key to success is ditching your domestic-only mindset from the get-go. You have to build a global-first strategy that can handle the tangled web of international labor laws, tax rules, and currency conversions.

The Reality of Managing Payroll Across Borders

The move to remote work is more than a passing trend; it’s a fundamental shift in how businesses grow and operate. This is especially true for companies tapping into the incredible talent pools in vibrant regions like Latin America. The opportunity is massive, but it comes with a whole new layer of complexity that your old payroll system was never built for. Honestly, traditional, single-country payroll software just crumbles under the weight of a distributed workforce.

This isn’t just a hunch; the data backs it up. We’re looking at a future where, by 2025, an estimated 36.2 million workers in the U.S. alone will be fully remote. That’s a staggering 87% jump from pre-pandemic levels. This explosion has forced companies to completely tear down and rebuild their payroll infrastructure to support employees not just in different states, but in different countries.

Moving Beyond Domestic Payroll

The first pill to swallow is accepting that what worked for your team down the hall won’t work for a team spread across Brazil, Mexico, and Colombia. Each country is its own universe of rules and regulations.

What does that look like on the ground?

• Varying Labor Laws: The severance pay you’re required to provide in Brazil looks nothing like the requirements in Argentina.
• Unique Tax Withholdings: Every country has its own mandatory social security contributions, often called cargas sociales, that you have to calculate and pay perfectly.
• Currency Fluctuation: Paying someone in Colombian Pesos when your company’s books are in USD creates a ton of financial risk and accounting headaches if you don’t manage it proactively.

Trying to ignore these details isn’t just sloppy—it’s a fast track to expensive legal battles and compliance nightmares. For a more detailed look, our guide on payroll for international employees breaks down these challenges even further.

The biggest mistake I see companies make is treating international payroll like a simple add-on to their domestic process. It’s a completely different beast that demands specialized expertise and the right tools. A proactive, compliant strategy isn’t just a nice-to-have; it’s essential for any kind of sustainable growth.

The True Cost of Non-Compliance

The fines for payroll mistakes in Latin America can be eye-watering, but the real damage goes much deeper. When payments are late or wrong, you instantly erode trust. Your reputation as a reliable employer takes a hit, making it that much harder to attract and keep top talent in these competitive markets.

When you’re managing payroll for remote employees in different countries, finding effective cross-border payment solutions is critical to streamlining the process and making sure your team gets paid accurately and on time, every single time. Think of this guide as your roadmap to building a payroll system that’s not just compliant, but a genuine strategic advantage.

Choosing Your Payroll Model in Latin America

Picking the right framework for your payroll for remote employees in Latin America is a big deal. This isn’t just some administrative checkbox; it’s a strategic decision that shapes how agile your company can be, what your costs look like, and whether you stay on the right side of the law. Your best approach really boils down to your specific goals, whether you’re hiring one star developer or building out an entire team.

Let’s get practical and look at the real-world situations you’ll likely run into. You essentially have three paths: using an Employer of Record (EOR), hiring international contractors, or going all-in and setting up your own local legal entity.

The choice you make has a huge impact on your remote team. This image really drives home the challenges and considerations at play.

As you can see, the right answer depends entirely on your company’s appetite for risk, the speed you need to move at, and how large you plan to scale your distributed team.

The Employer of Record (EOR) Model

Think of an EOR as your expert HR team on the ground. It’s a third-party company that officially employs your team members for you in their home country. They take care of all the tricky stuff—payroll, taxes, benefits, and navigating complex local labor laws—so you can focus on what you do best: managing your team’s actual work.

Let’s say… you’re a fast-moving SaaS startup and just found two incredible senior developers in Brazil. You have to get them working now to hit a critical product milestone before a competitor does.

In this situation, an EOR is a no-brainer. Trying to establish your own company in Brazil could take months and eat up tens of thousands of dollars. With an EOR like Deel or Remote, you can have those developers onboarded and fully compliant in just a few days. The EOR handles Brazil’s dense labor code (Consolidação das Leis do Trabalho or CLT), making sure all the right contributions for social security (INSS), severance funds (FGTS), and the required 13th-month salary are paid correctly.

An EOR gives you speed and compliance in a single package. It eliminates the massive administrative and legal headaches of entering a new country, making it the perfect choice for companies testing a new market or hiring just a few people.

Yes, EORs charge a monthly fee for each employee, but that cost is almost always a fraction of the legal fees, potential fines, and administrative drag you’d face trying to do it yourself.

The International Contractor Model

Bringing on talent as independent contractors is hands-down the most flexible option and often the fastest way to get someone started. You’re just paying invoices, not running a full payroll cycle, which on the surface seems much simpler. But be warned: this path comes with one major risk—employee misclassification.

Imagine this: your agency needs a graphic designer from Argentina and a writer from Colombia for a six-month project. Their work is clearly defined, they use their own tools, and they set their own schedules.

This is a great use case for the contractor model. The absolute key is to maintain a clear business-to-business relationship. Your contract must explicitly define their status as an independent contractor, the scope of work, and payment terms. You can’t give them a company email, tell them when to work, or treat them like a regular employee. That’s where you get into trouble.

• To lower your risk: Get your contractor agreements drafted or at least reviewed by a lawyer familiar with local regulations.
• For easy payments: Use a global payment platform to send funds in USD or their local currency.
• Keep in mind: Contractors don’t get benefits like paid vacation or health insurance. This can make it tougher to attract the best talent for roles that are more permanent in nature.

Establishing a Local Legal Entity

This is the heaviest lift and the most expensive path, but it gives you total control and often becomes the most affordable option once you reach a certain scale. When you set up a local entity, you’re officially incorporating a subsidiary of your company in that country. You hire employees directly, run your own payroll, and are responsible for every last compliance detail.

Here’s a final scenario: your tech company has found a fantastic market in Mexico and you’re planning to build a 20-person sales and support hub there over the next 18 months. You want to establish a strong local brand and offer employees things like stock options.

Setting up a local entity (like an S.A. de C.V. in Mexico) is the only move that makes sense for the long term. The initial setup is slow and costly, no doubt. But once your team grows to around 15-20 employees, the per-person cost of running your own payroll will be significantly lower than paying EOR fees. This model also lets you offer equity directly and build a real, on-the-ground company culture. It sends a powerful signal to the market that you’re there to stay.

Comparing Payroll Models for Remote Teams in Latin America

Choosing the right model can feel overwhelming, so let’s break it down. This table compares the three main approaches across the factors that matter most: how fast you can get started, the cost, your compliance risk, and how well it scales as you grow.

Ultimately, the EOR model offers a fantastic balance for most companies starting out, contractors are great for short-term projects, and a local entity is the gold standard for long-term commitment and scale. Review your specific business goals against this table to find the path that makes the most sense for you.

Staying on the Right Side of Tax and Labor Laws

Alright, you’ve decided how you’re going to hire your team. Now comes the real challenge: navigating the incredibly complex world of tax and labor laws across Latin America. This isn’t just about sending money; it’s about operating within entirely different legal frameworks for each country you enter.

Frankly, if you get this wrong, you’re looking at steep fines, legal headaches, and a reputation that’s hard to repair. Each country has its own labor code, often built on decades of unique legal precedent. Thinking you can apply a one-size-fits-all model based on your home country’s rules is a recipe for disaster. Local expertise isn’t just a nice-to-have—it’s essential for survival.

The Employee vs. Contractor Minefield

One of the first and most critical lines you have to draw is the one between an employee and an independent contractor. Misclassifying an employee as a contractor is, without a doubt, one of the most expensive mistakes you can make. It might seem like a simple way to avoid bureaucracy, but governments across the region are actively cracking down on this practice to protect workers’ rights and collect social contributions.

Think about it this way: if you hire a “contractor” in Mexico but you’re dictating their work hours, giving them a company laptop, and they’re attending all your internal team meetings, the authorities will almost certainly see them as a full-time employee.

When that happens, a whole host of problems comes your way:

• Back Payments for Social Security: You could be on the hook for years of unpaid contributions to IMSS (the Mexican Social Security Institute).
• Mandatory Benefits: Suddenly, you owe retroactive vacation pay, holiday bonuses, and even a cut of the company’s profits.
• Severance Costs: If you part ways, they can file a wrongful dismissal claim, and you could be facing a massive severance payment.

Your contractor agreements need to be absolutely solid. They must spell out the project scope, payment terms, and the contractor’s complete autonomy. The key is that the relationship must feel like a true business-to-business engagement, not just look like one on paper.

Decoding Local Payroll Obligations

Beyond the employee-contractor distinction, every country has its own mandatory payroll deductions and contributions, often called cargas sociales (social charges). These are non-negotiable costs that fund public healthcare, pensions, and unemployment insurance.

In Colombia, for example, employers are legally required to contribute to health insurance (EPS), a pension fund (AFP), and professional risk insurance (ARL). These aren’t optional perks; they are baked directly into the payroll process. A simple miscalculation can lead to serious penalties.

The same goes for other key markets. For companies looking to how to hire in Peru, you have to master contributions to EsSalud (health) and ONP/AFP (pension systems). It’s a different set of rules with its own complexities.

The Aguinaldo and Other Mandatory Bonuses

Something that often catches foreign companies off guard is the mandatory 13th-month salary, widely known as aguinaldo or prima. This is a legally required annual bonus, typically equal to one full month’s pay. Don’t mistake this for a discretionary holiday gift—it’s a fundamental part of an employee’s total compensation package.

Here’s a real-world example: Say you’re running payroll for your team in Argentina. Their 13th-month salary, called Sueldo Anual Complementario (SAC), has to be paid in two halves—one by the end of June, the other by mid-December. Miss those deadlines or get the numbers wrong, and you’re facing automatic fines and interest penalties from the labor ministry.

This is exactly why just dividing an annual salary by 12 is a fundamentally flawed way to budget. You absolutely must plan for a 13-month (and in some countries, even a 14-month) payroll year to understand your true labor costs.

The Role of Severance and Termination Laws

In Latin America, termination laws are significantly more protective of employees than what you might be used to in places like the United States. The idea of “at-will” employment is virtually nonexistent. Firing an employee without a legally valid and well-documented reason, like gross misconduct, can be an incredibly expensive process.

If you let an employee go without just cause in Brazil, for instance, you could be liable for:

• Notice period pay (aviso prévio).
• A hefty penalty of 40% of their accumulated balance in their severance fund (FGTS).
• Prorated 13th-month salary and vacation pay.

These costs can quickly add up to several months’ salary. This makes it absolutely critical to follow proper legal procedures and meticulously document any performance issues. This is an area where modern payroll platforms and EOR services really prove their worth, offering built-in compliance checks to guide you through these sensitive and high-stakes situations.

Global legislative trends are also pushing for greater pay transparency and equity, which directly impacts how you manage payroll for remote employees. Compensation benchmarks vary wildly across regions, influenced by local economies and labor laws. For instance, data from the U.S. often shows remote workers earning slightly more than their office-based counterparts, but this doesn’t always translate to other markets. Effective payroll management requires calibrating compensation to be competitive while adhering to all region-specific social benefit and tax laws. You can find more details about these global shifts in this mid-year analysis of hiring trends.

Building Your Global Payroll Tech Stack

Alright, you’ve decided on a payroll model. That’s a huge step, but now comes the equally critical part: assembling the right technology to actually make it work. When you’re managing payroll for remote employees, your “tech stack” is more than just a trendy term. It’s the engine that keeps you compliant, your numbers accurate, and your team in Latin America happy.

Get this right, and your operations will feel seamless. Get it wrong, and you’re in for a world of logistical headaches. The key is to build a cohesive system where every tool has a clear purpose, from navigating tricky legal rules to getting money across borders without a hitch.

Deconstructing the Ideal Payroll Stack

Forget about finding one magical tool that does everything. It doesn’t exist. Instead, think of your tech stack like a specialized team, with each member playing a crucial role. Your setup will likely pull from a few key categories.

• All-in-One EOR Platforms: These are the heavy hitters of global payroll. Think of platforms like Deel or Remote. They act as your legal Employer of Record, tackling everything from local contracts and benefits to tax withholding. Frankly, this is your safest and most comprehensive option.
• Multi-Currency Payment Services: Tools like Wise are fantastic at one thing: sending money internationally with transparent fees. They are perfect for paying international contractors when you don’t need the full HR and compliance wrapper of an EOR.
• Specialized Local Payroll Providers: In some countries, you might end up working directly with a local accounting firm. This can work if you already have a legal entity on the ground, but it requires a lot more hands-on effort to stitch together with your main financial systems.

For most businesses jumping into Latin America, a top-tier EOR platform is the smartest place to start. It handles the gnarliest parts of the process, giving you a solid foundation.

Must-Have Features for Your Payroll Tools

When you’re comparing platforms, it’s easy to get sidetracked by a slick user interface. Don’t. You need to zero in on the core features that solve the real-world challenges of remote payroll.

Here’s what should be on your non-negotiable checklist:

• Automated Tax & Contribution Calculations: The platform absolutely must calculate and withhold all mandatory social security, pension, and health contributions for each specific country. This is the cornerstone of compliance.
• Localized Compliance Updates: Labor laws in places like Brazil and Argentina are constantly evolving. Your tool needs to provide real-time alerts and automatically update its systems to reflect any new legal requirements.
• Seamless System Integrations: Your payroll tool cannot be an island. It needs to communicate effortlessly with your accounting software (like QuickBooks or Xero) and HRIS to eliminate soul-crushing manual data entry.

I’ve seen companies pick a tool based on price, only to find out it can’t handle a 13th-month salary in Colombia or proper severance calculations in Peru. Trust me, a platform that prevents even a single compliance fine is worth its weight in gold.

Efficiency is everything. Integrating systems with automated payout features drastically cuts down on human error and frees up your time. The less you have to touch the process manually, the lower your risk of making a very expensive mistake.

When to Use Which Tool

The right tool is completely dependent on the situation. A simple payment service might look tempting because it’s cheap, but it can open you up to massive compliance risks if you’re not careful.

Let’s look at a couple of real-world scenarios.

Scenario 1: You’ve hired two developers in Chile as full-time employees.

• Your Best Bet: A full-service EOR platform.
• Why: You aren’t just paying them; you’re employing them. This means you need to provide full, compliant employment with local benefits. A simple payment tool won’t handle the mandatory cotizaciones previsionales (social security contributions) or ensure their contracts are legally sound. The EOR takes on all that complexity for you.

Scenario 2: You’re hiring a freelance designer in Argentina for a 3-month project.

• Your Best Bet: A multi-currency payment service.
• Why: This is a clear-cut contractor relationship. Your main job is to pay them reliably and affordably. A service like Wise is built for this exact purpose, making sure your designer gets their money in Argentine Pesos without losing a big chunk to surprise fees.

Ultimately, your tech stack should be able to grow with you. Start with the tools that give you the most protection and automation. This ensures your payroll for remote employees is built on a solid, compliant foundation from the very beginning.

How to Craft a Fair and Competitive Compensation Strategy

Once you’ve got the legal side sorted, it’s time to talk about what you’ll actually pay people. This isn’t just a numbers game; your approach to compensation sends a powerful message about your company’s culture and values.

How you decide to pay a developer in Colombia versus one in Chile will make or break your ability to attract and keep the best people. A smart payroll strategy for remote teams is about more than just compliance—it’s about creating a structure that feels fair and keeps your team motivated.

The first step is deciding on a core pay philosophy. You have a few paths you can go down, and each one comes with its own set of trade-offs.

Picking Your Pay Philosophy

You’ll generally encounter three main models when building out a compensation plan for a distributed team.

One approach is to offer a single global rate for each role, no matter where the employee is based. This champions pay equity, guaranteeing that two people with the same job get the same base salary. It’s straightforward and broadcasts a strong message of fairness. The downside? It can price you out of high-cost markets or lead you to overpay in more affordable ones.

A more common method is to benchmark salaries against local market rates. There’s a reason this is the go-to for most companies: it makes your offers competitive in the specific talent pool you’re targeting. A software engineer in São Paulo gets paid based on what other tech firms in São Paulo are offering, not what someone in San Francisco makes. It’s cost-effective and helps you land great local talent.

Lastly, some companies opt for a cost-of-living model, adjusting pay based on an employee’s expenses in their city. While it sounds fair, it can get incredibly complicated to manage. It can also feel like a penalty if an employee decides to move to a cheaper city and has to accept a pay cut.

Our Take: The right philosophy really boils down to your company’s culture and budget. From what we’ve seen, most businesses find that a local market rate approach—maybe with some flexibility for experience—offers the best mix of fairness, competitiveness, and cost control for managing payroll for remote employees.

The Benefits That Really Move the Needle in Latin America

Compensation is so much more than just a salary. In Latin America, certain benefits carry a lot of weight and can easily be the tiebreaker when a top candidate is weighing multiple offers. You have to provide the legally required benefits, of course, but going the extra mile is what separates a good employer from a great one.

Here are the perks that make the biggest impact:

• Private Health Insurance: Public healthcare is available, but it can be slow and under-resourced. Offering supplemental private health insurance is a huge plus for professionals and their families.
• Food Vouchers: In countries like Brazil, the vale-refeição (meal voucher) is a standard and deeply appreciated benefit. It’s a monthly stipend for groceries or restaurants and is a major part of the total compensation package.
• Wellness Stipends: A flexible allowance for gym memberships, mental health apps, or even home office gear shows you’re invested in your team’s well-being beyond their work output.

A thoughtful compensation strategy isn’t just for attracting talent; it’s a powerful tool for keeping it. The growth of remote work has made this even more critical. In fact, a 2025 survey found that companies with well-defined remote work policies experience a 25% lower employee turnover rate. That’s a direct saving on recruitment and training costs. You can discover more about the state of remote work in 2025 and how these trends are shaping the modern workforce.

Common Questions on LATAM Remote Payroll

Even with a solid plan, you’re going to have questions once you start managing payroll for remote employees in Latin America. The nitty-gritty details are what make or break your success. Getting them right isn’t just about compliance; it’s about building trust with your team.

Let’s dive into some of the most common hurdles I see companies face.

How Should I Handle Currency Fluctuations?

Currency volatility is a fact of life in many LATAM economies. Your biggest challenge is making sure your team gets a predictable paycheck while you manage your budget effectively. My best advice? Settle this upfront in the employment contract.

You really have two paths forward: pay in USD or pay in the local currency.

• Paying in USD is often preferred by employees because it shields them from local inflation. It gives them stability. The trade-off for you is more complex accounting, as you’ll constantly be dealing with shifting exchange rates.
• Paying in local currency is usually simpler from a legal and compliance perspective, and it’s what local authorities expect. The trick here is to find a payment partner that gives you competitive, transparent exchange rates without hidden fees.

A non-negotiable feature I always recommend looking for in a global payroll partner is the ability to lock in an exchange rate on payday. This takes the guesswork out of the equation for everyone. It ensures the amount you send is the amount they actually get, minus any standard bank fees.

What Are the Biggest Mistakes When Hiring Contractors?

The single biggest—and most expensive—mistake is employee misclassification. It happens all the time. You start treating a contractor like an employee without even realizing the risk you’re creating.

If you set their work hours, give them a company laptop, or slot them into your internal org chart, you’re crossing a line. This can expose your company to massive liabilities, from back taxes and mandatory benefit payments to some truly eye-watering fines.

To stay in the clear, here’s what you need to do:

1. Draft an Ironclad Agreement: Your contract has to spell out that this is a business-to-business relationship. Define the specific scope of the project and make their autonomy crystal clear.
2. Give Them Real Autonomy: Focus on the outcome, not the process. Don’t dictate how or when they work; focus on the deliverable.
3. Respect Local Laws: Don’t ever assume that US contractor rules apply abroad. Many countries have laws that give independent contractors specific protections.

Another common slip-up is simply not getting the cultural and professional norms right. A contractor in Argentina may have very different payment expectations than one in Mexico. Building a strong working relationship is just as vital as the legal paperwork.

Do I Have to Offer Benefits Like Health Insurance?

This all comes down to your hiring model. If you hire someone as a direct employee—either through your own local entity or an Employer of Record (EOR)—then yes, absolutely. You are legally on the hook for all statutory benefits in that country. This always includes things like public health contributions, pension funds, and paid time off.

But to really compete for top talent, most companies go a step further and offer supplemental private health insurance. In many LATAM countries, the public healthcare system can be slow and overburdened. A private plan is a hugely valuable perk that will make your offer much more attractive.

For independent contractors, you aren’t legally required to provide benefits. But in a hot market, offering a stipend for health insurance or a wellness allowance can be a game-changer for attracting and keeping the best freelance talent.

What Is a 13th-Month Salary and Is It Mandatory?

The 13th-month salary, known locally as Aguinaldo, is a legally required annual bonus across most of Latin America. Let me be clear: this is not a discretionary holiday gift. It is a mandatory, core part of an employee’s total compensation, and they expect it.

It’s typically equal to one month’s salary and is often paid in one or two chunks during the year, like in June and December.

Failing to pay the Aguinaldo correctly and on time will get you into legal trouble fast, with immediate penalties and fines. When you’re budgeting for your team in the region, you must account for a 13-month payroll year. This is a non-negotiable reality of compliant payroll for remote employees in Latin America.

Navigating the complexities of hiring in Latin America requires a partner who understands the local landscape. Nearshore Business Solutions specializes in helping US companies like yours build and manage compliant, high-performing remote teams across the region. Learn how we can simplify your expansion.