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Pay your team in Colombia
Setting up payroll in Colombia
Income tax and social security in Colombia
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International organizations looking to establish a presence in the Americas often find Colombia an attractive business location because of its low wages and its strategic position in the Northwest of South America, granting them easy access to all major countries in both South and Central America.
Although Colombia is not the most politically or economically stable country in the region, there are plenty of investment opportunities, and the government is taking steps to lead the country into the digital age. One example of the country’s recent digitization efforts is the 2021 introduction of a new electronic payroll reporting system, which has also paved the way for digital payslips.
Foreign businesses must set up a local legal entity to hire employees and process payroll in Colombia. The three most commonly chosen corporate structures are limited liability company (LTDA), corporation (SA) and simplified stock company (SAS). During the respective incorporation process, the organization will receive a unique business ID from the Colombian Chamber of Commerce. This business ID is needed to complete the following mandatory registration processes:
Registration with the National Tax and Customs Office (DIAN) for the Single Tax Register (RUT)
Registration with healthcare and pension plan providers (known as EPS and AFP registration)
Registration with the Family Subsidy Fund
Registration with the ARL (Professional Risk Administrator) for professional risks coverage
Severance fund set-up
In addition to the mandatory employer registration, the organization must also register all its employees with the social security system for health, pension and labor insurance purposes. Since employees are free to choose which pension and healthcare provider they want to affiliate with, the business may have to register with different insurance providers.
The employee registration for all of the above-mentioned insurance schemes must be completed on the employee’s first day of work. It is further necessary to open a local bank account to make payments to local authorities and employees.
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Before calculating income tax and social insurance contributions, employers need to understand the difference between an ordinary salary and an integral salary, which are the two different salary schemes in Colombia.
Under the ordinary salary scheme, employees receive a fixed monthly remuneration plus several fringe benefits and additional payments, including (but not limited to) severance pay, interest on severance pay, overtime pay and service premiums.
When choosing the integral salary scheme (possible in case of employees earning more than ten times the national minimum wage), the employee receives an integrated salary in which additional salary components such as severance pay, overtime pay and other statutory social benefits are already included via an additional 30%-factor. Integral salaries can therefore not be lower than 13 times the national minimum wage.
Employment income is subject to progressive tax rates ranging from 0% to 39%. No income tax is levied on income up to 1,090 UVT. The UVT (Unidad de Valor Tributario in Spanish) is the Colombian tax value unit which is used as a reference for many tax-related calculations to measure different limits and thresholds. In 2022, the value of the UVT stands at COP 38,004.
Taxable income from employment includes salaries and wages, fringe benefits, allowances, benefits in kind, commissions as well as other bonuses and payments earned from employment. Up to 25% of the employee’s total annual income can be treated as exempt from income tax – capped at COP 9,121,000 per month in the 2022 financial year.
Employee contributions to the mandatory pension fund are generally exempt from income tax. The same applies to voluntary pension fund contributions as well as to contributions towards special savings accounts linked to investment in housing (so-called AFC accounts) – subject to certain caps and regulations. Other personal deductions include charitable contributions, mortgage interest payments as well as certain healthcare expenses.
There also is a special dependant deduction of up to 10% of the employee’s gross employment income (subject to certain caps and limits), which is applicable to employees with children under 18 (or under 23, depending on the child’s educational status) or who have spouses, siblings, parents or other relatives depending on them in a psychological, physical or economic manner.
Colombian residents are taxed on their worldwide income. Nonresidents, on the other hand, only pay tax on Colombia-source income. Income earned by nonresidents is taxed at a 20% standard rate, with no deductions available.
Individuals are considered as Colombian tax residents if they are physically present in Colombia for more than 183 days in any given 365-day period. Colombian nationals are subject to additional criteria to determine their tax residency status.
It should be noted that employers in Colombia are required to pay local as well as national payroll taxes. Local payroll taxes vary depending on the area. National payroll tax rates range between 4% and 9%. For more information on payroll taxes in Colombia, refer to the section on social security contributions below.
2022 Tax Bands
Corresponding Tax Rates
Tax on employment income is calculated, withheld and submitted by the employer on a monthly basis. The competent authority is the National Tax and Customs Office (DIAN). In 2021, the DIAN introduced changes to the payroll and tax reporting process. Employers are now required to submit their payroll information electronically via two separate documents, one being the so-called electronic payroll support document (i.e. an electronic payslip) and the other one being an adjustment note which is used for rectification of false information.
The electronic payroll report must be submitted on a monthly basis, regardless of the company’s payroll frequency. After having processed payroll and issued the electronic payslip, employers have ten days to submit the electronic payroll support document to the DINA. In addition, employers have to prepare an annual income and withholdings certificate which is due no later than March of the following year.
The tax year is the calendar year. Individuals are required to file an annual tax return if they fulfill certain criteria. Joint filing is not permitted. The exact deadline for submitting the tax return is determined by the last two digits of the individual’s tax ID (NIT), with remittance dates starting in August and ending in October.
Contributions to the social security system are mandatory for both employees and employers and cover health, pension and labor risks insurance. There are different public and private companies providing healthcare and pension insurance plans and it’s up to the employee to decide with which provider they want to affiliate. Health insurance providers are commonly known as EPS entities. Pension fund administrators are usually referred to as AFPs.
While employees only contribute to health and pension insurance as well as to a solidarity pension fund, employers make contributions to health, pension and occupational accident insurance. Foreign employees may be exempt from enrolling in the Colombian social security system if they are still covered under their home country’s social security system.
The employer share of the health and pension insurance contributions amounts to 20.5% of the employee’s salary. Contributions to occupational accident insurance (known as ARL contribution) vary between 0.348% and 8.7%, depending on the company’s risk classification. Employees pay up to 10% of their wages in social security contributions.
The calculation basis for pension, health and professional risks insurance contributions is the employee’s ordinary monthly salary. In case the employee is paid an integral salary, the contribution base is 70% of this salary. No contributions are levied on the part of an employee’s income which exceeds 25 times the national minimum wage (also applies in case of employees earning an integral salary).
Employee contributions to the solidarity pension fund are calculated based on the same rules. The contribution rate ranges from from 1% to 2%, depending on the employee’s income level. Employees earning more than four times but less than 16 times the national minimum wage contribute at a rate of 1%. Thereafter, the contribution rate increases progressively until the maximum contribution rate of 2% is reached. The latter applies to employees earning between 20 and 25 times the minimum wage. The contribution base is capped at 25 times the national minimum wage. Employees earning less than four times the minimum wage are exempt from paying into the solidarity pension fund.
In addition, employers are required to pay payroll taxes which go towards the National Apprenticeship Service (SENA), the Institute of Family Welfare (ICBF) and the Family Subsidy Fund. SENA and ICBF contributions must be paid for employees earning more than ten times the national minimum wage only. For employees who receive an integrated salary, contributions are calculated based on 70% of the integrated salary.
It is the employer’s obligation to withhold the employee’s share of the social security contributions and pay them to the respective social security authorities on a monthly basis along with the employer share of the contributions.
* Employers only pay health insurance for employees earning more than ten times the national minimum wage.
** Payroll taxes are split into SENA contributions (2%), ICBF contributions (3%) and Family Subsidy Fund contributions (4%). SENA and ICBF contributions only have to be paid for employees earning less than ten times the minimum wage.
Employees in Colombia are entitled to various benefits. These include:
Annual leave and public holidays: 15 paid vacation days, 18 public holidays
Maternity leave: 18 weeks of fully paid maternity leave; the last 6 weeks are transferable to the child’s father
Paternity leave: 2 weeks of paid paternity leave
Parental leave: no legal provisions for additional parental leave
Sick leave: first two days paid by the employer; thereafter, sick pay is covered by Social Security for a duration of up to 180 days; sick pay amounts to two-thirds of the employee’s usual salary
For more information on employee benefits and other employment requirements in Colombia (including severance pay and termination procedures), check out our Global Hiring Guide.
After a historic 10% increase, Colombia's national minimum wage currently (as of 2022) stands at COP 1 million per month. It should be noted that the national minimum wage is revised annually to adapt it to the changing Consumer Price Index (IPC).
Employees who earn less than twice the national minimum wage are further entitled to a transportation or connectivity allowance equal to COP 117,172 (valid for 2022). Overtime pay is set at 125% of the employee’s normal wages for additional hours worked during daytime. For night work, the overtime pay rate is 175%.
All employees who receive an ordinary salary are further entitled to an annual service premium (prima de servicios) which equals a 13th month salary and is paid out in two instalments, one due in June and the other one due in December. Employers should also keep in mind that they are obligated to make annual contributions equal to one monthly salary to a separate severance fund (known as cesantías) for employees who are paid under the ordinary salary scheme – plus interest on severance pay.
Payroll in Colombia is typically processed on a monthly basis, with payments to employees being issued at the end of each month. However, it is also possible to process payroll and pay employees on a bi-weekly basis, in which case one payment is due by mid-month and the other one at the end of the month.
Employees can be paid in cash, by check or via direct deposit. All payments must be made in local currency (Colombian Peso, CPO), since Colombian residents are not allowed to hold foreign currency in their checkings or savings accounts.
At the end of each pay period, employees should be provided with a payslip. Payslips can be issued either in paper form or electronically. Under the new electronic payroll reporting requirements, electronic payslips must contain at east the following information:
Employee personal information
Unique document ID
Internal reference number
Itemized payroll amount
Difference between accrued payroll value and deductions
Date and time when the document has been issued
Chosen payment method
Information on the respective technology provider
Learn about tax reporting, compensation laws, registration requirements and more in our free Payroll Guide for Colombia.
This country guide is for informational purposes only and should not be construed as legal advice. The content of this guide contains general information, and although we update this guide regularly, it may not reflect current legal developments. Lano Software GmbH disclaims any liability for any actions you take or refrain from taking based on the content contained in this country guide.
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