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El Salvador 1

Payroll in El Salvador

El Salvador, known for its majestic volcanoes, stunning coastline, and hospitable people, has much to offer large enterprises searching for a new location. The country’s economy has stayed relatively stable compared to other Central American nations. El Salvador’s economy, which has a GDP of just under $27 billion and employs 6.35 million people, heavily relies on agricultural products like rice and coffee.

El Salvador continues to have a low cost of living even if the corporate tax rate is set at 30%. The US dollar, used as its national currency, might impact the nation. Hence, companies establishing their business presence and hiring here can take advantage of its benefits. 

Payroll rules and regulations El Salvador laws frequently vary heavily on the sector and geographical location of the business. With the help of this El Salvador payroll guide, you can find your way around the specifics of managing payroll in El Salvador. 

How is Payroll Calculated in El Salvador?

In El Salvador, payroll is usually calculated by withholding deductions from the gross pay. The components of basic pay, house rent allowance, leave travel allowance, performance bonuses, professional taxes, and others are all included in gross pay. Net pay is the amount that remains after taxes and other components are deducted from gross pay.

Payroll in El Salvador = Gross Salary – Gross Deduction

Where,

  • Gross salary is addition of basic salary, dearness allowance, house rent allowance and incentives. 
  • Gross deduction is the addition of employer and employee contributions to the payroll. 

Important Elements of Salary Structure in El Salvador

The many parts that make up an employee’s payroll in El Salvador are listed below:

  • Basic salary: The monthly income is referred to as the basic salary. It is the fixed portion of total compensation and is determined by the employee’s title and the sector in which they are employed. Overtime pay and additional compensation are not included in the basic salary.
  • Gross pay: It is the income gained by increasing the basic salary with allowances while leaving out taxes and other deductions.
  • Net pay: The total amount an employee receives after deducting taxes and other expenses is known as net pay. After all the deductions are made, employees receive their net pay directly in their bank account.
  • Allowances: Employees receive allowances to help with some of the expenses related to their employment. Examples of allowances in El Salvador include travel allowance, home rent allowance, and dearness allowance.
  • Overtime: If an employee consents to work overtime, the employer is required to pay 200% of the average hourly wage. 

How to Set Up a Payroll in El Salvador

Here are the steps to set up payroll in El Salvador: 

  1. For setting up El Salvador payroll requirements, you need to understand the various state and local laws such as employment tax rates, minimum wage laws, and others. 
  2. Next, decide on a payroll schedule. Some companies prefer to send direct payments to their employees weekly or biweekly, while others do so monthly or semi-monthly. 
  3. Create a payroll policy or employee handbook for your company after deciding on a payment date. A formal employee handbook outlines the various policies for managing company payroll, including the payment schedule and employee benefits. 
  4. You need an Employer Identification Number (EIN) for El Salvador payroll requirements. 
  5. Lastly, it is important for employers to obtain certain information from new employees and update the payroll data for current employees to complete the payroll El Salvador setup.

A Step-by-Step Process of Payroll Processing in El Salvador

Below is a detailed explanation of the El Salvador payroll process: 

1. Specify your payroll policy 

To achieve regular payroll execution, companies should develop their policies in this step and receive management approval. These regulations cover topics such as compensation, leave, attendance and employee benefits.

2. Get employee information

Payroll processing depends on employee inputs such as an address, bank account information, etc. These inputs are typically gathered from employees when they first join the relevant teams.

3. Confirm Employee Inputs

Once the inputs are received, verify that the information is accurate in light of payroll policies and procedures in El Salvador. Ensure that no previous employees are included in salary and compliance payments and that all currently employed individuals are considered.

4. Payroll calculation

The approved inputs are now loaded into the payroll processing system. Make necessary payroll taxes deductions to calculate the net pays. The use of spreadsheets is made for these calculations. As a result, it is challenging to compare and check the data for accuracy. Yet, the possibility of clerical or mathematical errors may have been reduced with the use of automated payroll software.

5. Pay employees’ salaries

Companies must ensure enough funds are in their bank account to send salaries. Then, a salary bank advice statement instructing the bank to disburse salaries is issued to the relevant bank. Automated payroll software’s one-click salary disbursement capability can prevent all these time-consuming activities.

6. File payroll taxes and contributions

The required payroll taxes and social security contributions must be delivered on time to the appropriate authorities. Also, maintain accurate records of all payroll transactions, including details on the employee, the pay date, the gross pay, deductions, and the net pay.

Payroll Contributions

Both the employer and the employee are required to contribute as per payroll rules and regulations in El Salvador. The contributions also include payroll tax in El Salvador. Let’s now go over El Salvador’s employer and employee payroll contributions.

Employer contribution

The employer’s payroll contribution in El Salvador is listed in the table below:

Particulars

Employer Payroll Contribution 

Social Security

7.50%

AEP -Pension Fund

7.75%

INESAFORP

1.00%

Total Employment Cost

15.25% – 16.25%

Employee contribution

The employee’s payroll contribution in El Salvador is listed in the table below:

Particulars 

Employee Payroll Contribution 

Social Security

3.00%

AEP (Pension Fund)

7.25%

Total Employee Cost

10.25%

Payroll Cycle

Payroll in El Salvador runs either biweekly or monthly. For employees who are paid biweekly, the employer must pay them on the 15th and the 30th of the month.

El Salvador Payroll Options for Companies

There are four distinct alternatives available for payroll in El Salvador, including:

Internal payroll

If you run a sizable subsidiary that will be present for years, you can employ an internal payroll in El Salvador. To manage your payroll, you’ll require a labor law and compliance specialist and a full HR team.

Remote payroll

You can add your employees to the parent company’s remote payroll if you lack the capacity to conduct an internal payroll. Yet, each employee from a different nation will have various tax obligations.

Outsourcing of payroll

Outsourcing payroll in El Salvador is the most practical and affordable solution. Multiplier EOR Solutions is your last remaining choice. You won’t need to be concerned about payroll or compliance if you hire them.

Entitlement and Termination Terms

The Labor Code, which establishes the legal foundation for labor relations in El Salvador, governs employee rights and termination terms. 

Before you engage an employee, you should incorporate entitlement and termination terms in all employment contracts. Following are some key considerations:

Conditions of Entitlement

Working hours

El Salvador’s standard workweek is 44 hours long, and workers are entitled to one day off per week. Normally, 8 hours per day are spread out over five and a half days. Any work done after normal hours must be compensated with overtime

Public holidays

El Salvador has 11 public holidays. 

Sick leaves

In El Salvador, an employee’s right to sick leave is based on the number of years of service:
1. The employee is entitled to 75% of the base salary for 20 days after one to five months of service.
2. An employee who has worked for five months to a year is entitled to 75% of their basic pay for 40 days.
3. The employee is entitled to 75% of the base salary for 60 days after one year of employment or more.

Maternity and paternity Leave

Female employees are entitled to up to 16 weeks of paid maternity leave in El Salvador, computed at 75% of their usual pay. A medical document stating the employee’s pregnant status and anticipated delivery date is required.

Conditions of Termination

Notice period

Depending on the duration of service, employers must give an employee a certain amount of notice before terminating their employment.

Severance pay

Employees who are let go without cause are eligible for severance pay, depending on their service history.

Employee disputes 

In an employee dispute, the employer or the employee may request mediation or arbitration to the labor courts.

El Salvador Payroll Processing Company

Processing payroll rules and regulations in El Salvador can be complex. Also, it requires compliance with local regulations. In such situations, a payroll processing company can guarantee that all computations are correct, payments are sent out on time, and records are kept in good order. They have experience in all payroll-related matters, including social security contributions, tax compliance, and labor laws. 

Thus, using a payroll processing company in El Salvador can assist your company in saving time and money, assure compliance, and optimize your payroll process.

How Multiplier Can Help With Global Payroll?

At Multiplier, we offer payroll solutions to over 150+ countries. You can process the payments to your employees in local currency using our simple and seamless one-click payroll option. We provide an option to raise a single invoice for all your employees, which helps you streamline payments.

Frequently Asked Questions

In El Salvador, not paying income tax can have a variety of penalties and potential harm.

Pay As You Earn, sometimes known as PAYE, is a system of withholding income taxes practiced in several nations, including El Salvador. Employers are responsible for withholding income tax from their employee’s paychecks and remitting it to the appropriate taxing authorities on their behalf under the PAYE system.

Employers must pay 7.5% of social security taxes, while employees are only responsible for 3%. Your overseas income is subject to a 1.75% tax, and the VAT rate is fixed at 13%.

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