Panama’s strategic location and strong economy make it a prime destination for hiring and paying independent contractors. In 2023, 38.9% of its workforce was self-employed — a strong indicator of the country’s growing freelance ecosystem. This skilled talent pool offers global business strengths in logistics, finance, IT, and construction.
But hiring and paying contractors in Panama requires careful compliance with local labor and tax laws. Misclassification and Permanent Establishment (PE) risks are common challenges. This guide outlines a step-by-step approach to minimizing these legal risks. It dives into processes and solutions for engaging contractors efficiently and effectively.
Legal framework and terminology for hiring contractors in Panama
If you are a global business engaging contractors in Panama, familiarize yourself with these key legal frameworks and terms:
Ministry of Labor (MITRADEL): Oversees labor regulations and contract registrations.
Dirección General de Ingresos (DGI): Enforces tax-related compliance, ensuring proper registration and reporting for independent contractors.
Panama Social Security Fund (CSS): Monitors contributions for both employees and registered contractors.
Civil Code of Panama: Establishes the basic principles for contract formation and enforcement.
Labor Code (Código de Trabajo): This code helps distinguish between employees and independent contractors. It is critical for proper classification.
RUC registration (Registro Único de Contribuyente): Ensure your independent contractor has an RUC to issue legal invoices.
Hiring contractors in Panama poses unique risks for foreign companies — especially misclassification, which is judged by how the work is performed, not just contract terms. Unlike the US or EU, Panama emphasizes real-world factors like control and dependence, making it easier to trigger employee obligations unintentionally.
Step 1: Classify your contractor correctly
Contractors in Panama typically fall into these categories:
- Personas naturales con actividad comercial: Individuals registered with DGI and CSS, required to issue invoices and file monthly taxes. Common for consultants and small business owners.
- Freelancers with RUC: Digital nomads and knowledge workers under simplified tax regimes with lighter compliance.
- Corporate service providers: Contractors operating as legal entities (e.g., S.A. or S.R.L.), often used for high-value or IP-related projects.
When hiring these contractors, strict invoice and registration rules apply. Hiring unregistered freelancers can lead to fines and tax issues, especially if you don’t report payments correctly to DGI.
Proper classification of workers is also crucial to avoid legal complications.
Employee misclassification occurs when a company hires a worker as a contractor, although the working relationship fits into an employee-employer relationship as per the Panama labor Law (CDT).
Risks and consequences of misclassification in Panama
- Legal liability: Courts may reclassify workers and require payment of unpaid benefits and social security contributions.
- Financial penalties: Fines from MITRADEL or DGI can range from $500 to $10,000, plus back taxes and interest.
- Lawsuits: Misclassified workers may file claims, resulting in litigation and compensation payouts.
- Tax issues: Improperly documented payments can trigger tax liabilities.
Reputational harm: Non-compliance can damage business credibility and partnerships.
To avoid these misclassification risks, thoroughly assess your new hires’ roles, working hours, and supervisory requirements. Key factors include:
- Control: While employees work under close supervision, contractors have autonomy over methods and schedules.
- Integration: Employees are core to business operations; contractors provide external or specialized services.
- Economic dependence: Employees rely on one employer; contractors typically have multiple clients and greater financial independence
Let’s closely examine the difference between employees and contractors as per Panama law:
Classification criteria | Full-time employee | Independent contractor |
Degree of supervision | High (Employer controls methods and schedules) | Low (Contractor works independently) |
Integration | Integral to business operations | Independent, works as per projects |
Economic dependence | High (Single employer) | Low (Can have multiple clients) |
Tax withholding | Employer’s responsibility | Contractor’s responsibility |
Benefits | Entitled (e.g., vacation, bonuses, social security) | Not Entitled |
Useful resource:
Are you hiring a contractor or employee? Find out by taking our employee misclassification quiz
Getting the classification right is just the first step. Next, let’s understand the legal frameworks that govern contractor engagements in Panama.
Step 2: Understand labor laws relevant to contractors in Panama
- Governing laws
Contractors in Panama are governed by the Civil Code and Tax Code, not the Labor Code. The labor law covers Misclassification risks, the Civil Code defines contract terms, and the Tax Code defines fiscal obligations. - Employer responsibilities
- Define scope, timelines, and payment to protect autonomy and avoid misclassification, preferably via written agreements.
- Ensure the contractor has an RUC and is registered with the DGI.
- Pay on time and respect contractor independence.
- Contractor rights
- Contractors are responsible for their actions, taxes, and insurance.
- Contractors are responsible for managing their own social security (13.5%) and insurance.
- IP and data privacy
- Under Law No. 35 (1996), IP created by contractors must be contractually assigned to the client to avoid disputes.
- Law No. 81 (2019) requires consent, data security, and clear rights for individuals. Contracts should include compliance clauses if contractors handle personal data.
To stay compliant with Panamanian law, companies should use detailed written agreements that clearly define the scope of work, payment terms, IP ownership, and data protection obligations.
It’s essential to verify that contractors are registered with both the DGI for tax purposes and the CSS for social security. Engaging local legal experts — or an Agent of Record (AOR) — can help navigate these requirements and reduce misclassification risks, especially as laws and enforcement continue to evolve.
Step 3: AOR or in-house? Choose how to hire and manage your Panama contractors
Foreign companies can choose from several hiring models to hire and pay contractors in Panama.
- Via foreign entity: Hire individuals or legal entities directly. Ensure contracts align with Panama’s Civil and Tax Codes to avoid misclassification.
- Via local entity: Use a registered subsidiary in Panama to hire contractors.
- Through a staffing agency: Quickly hire contractors (although it may be costly)
- Through an Agent of Record (AOR): When you partner with an AOR/COR, it will handle contracts, payments, tax, and CSS contributions
- Via an Employer of Record (EOR): You can also convert contractors to employees and hire them remotely with an EOR. You do not need a local entity, yet can ensure 100% compliance.
How to hire contractors in Panama: Quick decision guide
Select the approach that best suits your hiring needs in Panama, considering your business objectives and risk tolerance. Here is a side-by-side comparison of how the methods stack up:
Hiring through the contractor’s legal entity is also an option in Panama, providing flexibility and compliance benefits. This and an AOR/COR are the most hassle – free ways of hiring in Panama.
Once you have decided how to hire your contractor, it’s time to find the right candidate for the job.
Step 4: Find the right contractor
Panama City and Colon are key freelance hubs in Panama with talent specializing in IT, creative services, business consulting, construction, and engineering.
Tap into local and global platforms to find the right talent.
- Local platforms:
- Workana: IT, design, marketing.
- Computrabajo: IT, consulting roles.
- Global platforms:
- Upwork: IT, creative, consulting.
- Freelancer.com: Project-based work.
- LinkedIn: Networking, sourcing.
- Guru: Technical, design, business.
The hiring culture in Panama still favors personal connections and referrals. Many companies source talent through local agencies or professional events, often coordinated by groups like the Panama Chamber of Commerce. These channels are particularly useful for roles requiring certifications or industry-specific credentials.
“When sourcing contractors in Panama, make sure to:
- Always confirm that your contractors have an active RUC, as payments to unregistered individuals may not be deductible and could raise compliance concerns.
- For certain regulated professions, you’ll need to make sure your contractor has the right certifications.
- IT: Cisco, CompTIA, AWS.
- Engineering: Junta Técnica licenses.
- Creative: Portfolios; Adobe/marketing certs.
- Consulting: CPA, CFA, PMP.
- If you hire non-residents, they must hold a valid business visa or work permit if working in Panama.
Watch for red flags: missing tax ID, inability to issue invoices, or unclear work authorization may signal compliance risks.
Once you’ve identified qualified, compliant talent, the next step is to formalize the relationship. A well-drafted service agreement is essential for setting clear expectations and protecting your business from legal and tax risks.
Step 5: Draft a compliant service agreement
In Panama, a written service agreement is not legally required when hiring independent contractors, but it is strongly recommended to ensure clarity, enforceability, and protection against misclassification risks.
To create an enforceable contract and minimize risks, include the following clauses:
- Parties: Legal names, contact info, and Tax ID (RUC).
- Scope: Clear description of services, deliverables, and contractor’s autonomy to distinguish from an employee relationship.
- Payment: Specify compensation (fixed or hourly), invoicing process, and payment schedule. Clarify that the contractor is responsible for their own taxes and social security contributions (13.5% to Caja de Seguro Social).
- Term/Termination: Define contract duration, renewal terms, and termination conditions (e.g., notice period, breach of contract).
- IP: Explicitly assign ownership of work product to the client per Law No. 35 of 1996 to avoid disputes.
- Confidentiality: Include a non-disclosure clause to protect sensitive business information.
- Disputes: Outline mediation or arbitration processes for conflicts, specifying jurisdiction in Panama.
- Governing law: State that the agreement is governed by Panamanian law (Civil Code).
- Status: Explicitly state that the contractor is not an employee, has no entitlement to employee benefits, and is responsible for their own tax and social security obligations.
Language and e-signature:
- Use Spanish for legal validity (with optional English copy).
- E-signatures are valid under Law No. 51 of 2008 if authenticated (e.g., DocuSign).
With a compliant service agreement in place, the next step is setting up secure and traceable payment systems. In Panama, proper invoicing, currency handling, and contractor tax status all impact how — and how safely — you can pay your freelancers. Let’s walk through the key requirements and options for compliant contractor payments.
Step 6: Set up systems to pay contractors compliantly
To pay contractors securely and compliantly in Panama, you must establish appropriate payment terms, documentation, and payment channels. Three key steps include clarifying contractor type, agreeing on payment terms, and setting up a system for compliant, regular payments.
Confirm contractor type
Your invoicing, tax obligations, and document requirements will depend on the type of contractor you hire.
- Independent individuals (with RUC): Must issue invoices and pay their own CSS and taxes.
- Legal entities (e.g., S.A., S.R.L.): Handle their own tax filings and typically issue structured invoices.
- Digital freelancers (under simplified regimes): Still need RUC and valid invoice practices.
Agree on currency, payment method, and terms
Panama uses the Panamanian balboa (PAB) and the U.S. dollar (USD) interchangeably at a 1:1 fixed exchange rate. Most commercial transactions, including contractor payments, are made in USD. Panama does not impose foreign exchange restrictions, making cross-border payments more flexible than in many Latin American countries.
Align with your contractor on currency and payment terms that suit you both
- Set your payment currency: PAB or USD
- Define payment method: Local bank transfer, SWIFT, Wise, or Payoneer. Remember, payments may incur SWIFT fees, bank intermediary charges, or delays in cross-border payments. Align on who will incur these fees.
- Align on frequency: Decide whether it will be monthly or as per milestone. Decide due dates.
Note: While Panama has a fixed USD – PAB rate, paying from abroad in another currency (e.g., EUR, GBP) can lead to unfavorable exchange rates, hidden platform fees, or delayed contractor receipt due to cross-border processing.
Avoid conversion issues and payment delays with an AOR
An Agent of Record (AOR) simplifies international payouts by:
- Accepting payments in your local currency
- Converting funds into USD or PAB
- Disbursing payments via local channels at favorable rates and
- Ensuring full compliance with Anti-Money Laundering (AML) regulations
It also centralizes invoice collection, validates each contractor’s RUC and invoice format, and stores all records for easy retrieval — making your business fully audit-ready for DGI or local tax reviews.
Understand tax obligations and set up compliant payment systems
For compliantly paying contractors in Panama, here is what you must know
- Contractors must issue valid invoices with RUC, service details, and agreed fees.
- You are not required to withhold taxes, but must verify that the contractor is properly classified and registered.
- Panamanian tax authorities require you to maintain a record of all invoices and payment confirmations for at least five years.
Even though you don’t withhold taxes, you still need to report contractor payments accurately in your accounting records. These expenses must be documented with valid invoices and may be reviewed during DGI audits or income tax filings. Your legal and documentation obligations will vary depending on whether you’re paying directly, via a local entity, or through an AOR.
Hiring method | Directly from foreign entity | Via local Panama entity | Via Agent of Record (AOR) |
How you pay | Pay in foreign currency via SWIFT, Wise, or Payoneer. | Use local bank transfers in USD or PAB. | Pay AOR in your local currency. |
Tax compliance | Contractor is responsible for taxes and CSS. | Verify contractor registration with DGI and CSS. | AOR ensures contractor is properly classified, registered, and tax compliant. |
Other Considerations | Risk of AML flags, exchange loss, and audit exposure. | Requires local accounting systems and ongoing compliance tracking. | AOR reduces risk, automates payments, and ensures compliance with AML and labor rules. |
Using an AOR is typically the most seamless and low-risk option for foreign companies hiring in Panama. It ensures compliance with tax, invoicing, and labor laws — while also reducing delays, manual record-keeping, and legal exposure.
Compliance checklist: Hiring and paying contractors in Panama
You are all set to onboard your contractor in Panama. Before you do, here is a quick recap of what all you must do
Legal and classification
- Define the role correctly. The worker you’re hiring must classify as a contractor as per Panama’s laws.
- Draft a compliant service agreement defining scope, deliverables, and termination.
- Ensure that your contractor has a valid RUC (Taxpayer Identification Number).
Payment and taxes
- Agree on currency, terms, and payment method.
- Ensure your contractor expenses are deductible and audit-ready.
- Keep proper records and ensure all invoices meet DGI standards.
Data and IP compliance
- Include clauses for data protection compliance.
- Sign confidentiality and IP assignment agreements.
That’s it. Now with your compliance checklist and payment set up in place, it’s time to onboard your contractor.
Step 7: Onboard your contractors
A streamlined onboarding process boosts alignment and productivity and sets the tone for a productive, and pleasant, contractor experience.
Sign the contract
Onboarding begins the moment your contractor signs the service agreement. Use this point to reinforce expectations and gather the required documents to meet internal compliance and ensure payment setup:
- Signed service agreement
- RUC (Registro Único de Contribuyente – Panama tax ID)
- National ID (cédula) or valid passport
- Licenses or certifications, if applicable
- Bank account details for payment
While not always required by local law, collecting ID and proof of RUC is considered best practice—especially for foreign companies working cross-border.
Align on time zone and availability
Panama is on UTC−5 year-round. Set clear expectations for working hours and communication, especially across time zones. Clarify the need for async versus real-time collaboration.
Clarify expectations for real-time meetings vs. asynchronous updates. If your team is in different time zones, establish a 2–3 hour window for overlapping availability to streamline communication.
Share communication tools
Decide what communication tools you’ll prefer. Zoom (meetings), WhatsApp (quick updates), Email (formal), Trello/Asana/Slack (project tracking).
But managing contractor relationships isn’t a one-time task—it requires ongoing oversight, legal vigilance, and administrative consistency across contracts, payments, taxes, and compliance. For global teams, the day-to-day work of managing contractor compliance, local tax rules, payment logistics, and document tracking can become a major operational burden over time.
That’s where Multiplier steps in.
Confidently hire and pay contractors in Panama with Multiplier
Whether you’re hiring one freelancer or scaling a team, Multiplier helps you onboard, pay, and manage contractors in full compliance with Panamanian laws — without needing a local entity or legal experts on staff.
Watertight contracts
Multiplier helps you draft fully compliant contracts available in Spanish or bilingual format, within minutes. These agreements align perfectly with Panama’s civil code requirements and provide robust protection against employment misclassification and IP risks.
Streamlined payments
Automate and schedule payments as per agreed terms. Multiplier collects, validates, and securely stores all legal invoices, maintaining comprehensive documentation that eliminates risks associated with non-compliant paperwork.
Efficient management
With Multiplier’s unified platform, everything is in one place. You track documents, payment history, and timesheets — across borders, time zones, and currencies — on a shared platform. No spreadsheets and back and forth via email. Just one powerful dashboard to manage your entire contractor workforce with confidence.
Whether you’re rapidly scaling your technical team with specialized freelance developers, hiring virtual assistants for administrative support, or engaging consultants for specific project deliverables, Multiplier enables you to expand legally and efficiently, without operational stress.
Our Contractor of Record handles all compliance complexities so you can focus on growth. Book a demo today to explore how Multiplier makes hiring in Panama seamless, efficient, and risk-free.
