Hire in Costa Rica with Confidence

Any business hiring in Costa Rica should understand the important legal distinction between who classifies as an independent contractor and who can be hired as an employee. Fines or penalties may be issued to businesses hiring independent contractors under the guise of employment. 

Understanding the distinctions between employees (empleado) and independent contractors (contratista independiente) is critical to be compliant in Costa Rica. It is important to work with a partner like Worksuite to ensure you put in place an engagement framework that accurately classifies freelancers as independent contractors for you and lets you know when freelance talent must be engaged as an independent contractor or employed directly. This is critical to avoid legal, financial, and other penalties.

The Costa Rican Labor Code defines the existence of an employee-employer relationship as involving an “individual labor contract” between the parties. Under Section 18 of the Labor Code, an individual labor contract is defined as a contract “in which a person commits to give another person or entity his services or to undertake a piece of work, under permanent dependency and immediate or delegated direction of such other entity or person, and in exchange for a payment of any kind or form.” 

As in many other countries, the degree of subordination (i.e., “permanent dependency and immediate or delegated direction”) is the key criterion when determining if the relationship is an employment relationship (involving a labor contract) or a non-labor relationship between an independent contractor and a hiring company.

Additionally, under the principle of contrato realidad (reality contract), if what purports to be a non-labor contract is proven to effectively be a labor/employment relationship, the employer company may suffer legal and financial penalties (including payroll taxes). It is therefore important to leverage an employment service partner like Worksuite when hiring in Costa Rica to ensure that independent contractors fall under the correct working relationship with your business.

Who is an Independent Contractor?

The factors that differentiate an independent contractor from an employee are largely the same as in other countries. In essence, individuals are generally considered to be independent contractors if they:

• Are subject to relatively little control by the hiring company, which means they are free to decide when, where, and how they complete their tasks.
• Perform the work at their own risk, meaning they may incur personal costs (time and/or financial expenses) for re-doing the work that was performed poorly.
• Do not have fixed hours of work determined by the hiring company.
• Can choose the location from which to work.
• Can delegate the work to another person (i.e., a subordinate).
• Provide their own equipment rather than receive it from the hiring company.
• Pay their own social security, and file and pay their own income taxes. 
• Can be (or are expected to be) dismissed once the contracted work is complete. 
• Are not integrated into the hiring company’s organizational structure.
• Are paid for a specific project or task rather than on a recurring basis.
• Can refuse to perform a task (unless that task is part of their contract).
• Are not entitled to a minimum amount of work or a minimum amount of pay.
• Are not listed on the hiring company’s normal payroll.

There are three main categories under which independent contractors operate in Costa Rica: 

• Sole proprietorship (empresa individual de responsabilidad limitada): Sole proprietorships can be formed by a single person. Liability extends to the owner’s personal capital and assets. 
• Limited Liability Company (Sociedad de Responsabilidad Limitada, or SRL): The SRL requires the appointment of one director and at least two shareholders. The SRL is similar to the LLC found in other countries. 
• Corporation (Sociedad Anónima, or S.A.): Corporations require at least three directors and at least two shareholders. Liability is limited to the capital contributions of the shareholders. The corporation is similar to the PLCs found in other countries.

There are two main types of contracting model for working with independent contractors in Costa Rica.

A. Direct engagement of the contractor as a self-employed sole trader or registered via their own company. Under this model, the hiring company engages directly with the independent contractor and establishes a contract for services. The hiring company then pays the contractor directly, following the terms of the contract.

B. Third party. These companies come in two forms, and both are specially designed to vet and engage freelancers compliantly as either contract employees or independent contractors on your behalf.

• Temp agency: Here, the hiring company engages with a staffing agency, which in turn supplies one of its own independent contractors to deliver the contracted services. The hiring company pays the staffing agency directly in accordance with the terms of the contract. The contract is, therefore, between the hiring company and the staffing agency, while the agency pays the independent contractor through a separate contractual arrangement.
• Umbrella company: Independent contractors can also work through an umbrella company. This turns a ‘self-employed’ individual into a legal ‘employee’ of the umbrella company itself. The contractual relationship is between the umbrella company and the client, with the umbrella company running payroll and administration for the independent contractor. The umbrella company invoices the client directly while paying the contractor via PAYE as a standard employee. Umbrella companies levy a fee on the contractor to cover their costs.
• Hiring partner: The hiring company can also work with a hiring partner who helps them vet potential independent contractors, set up contracts, ensure the contractor is properly classified, onboard and manage contractors, and make payments to them.

Companies hiring independent contractors in Costa Rica should avoid making payments directly through their payroll system. Beyond these guidelines, there are no specific legal requirements related to paying contractors in Costa Rica. The contract should stipulate the preferred payment method agreed upon by both parties.

The tax year currently runs from 1 October to 30 September. Employees are not required to submit any tax filing documents, as they are subject to income tax which is withheld at source by the employer and is paid directly to the Ministry of Finance on a monthly basis. The national personal income tax rate is progressive and ranges from 10% (annual taxable income of CRC 10.4 million to 15.2 million) to 25% (income of CRC 53.3 million and above). There are no local income taxes for employees.

Independent contractors file and pay their own income taxes and social security contributions. For contractors operating on a self-employed basis, the personal income tax rate ranges from 10% (annual taxable income of CRC 3.8 million to 5.7 million) to 25% (income of CRC 19.1 million and above). Taxes are paid in installments using estimated projections based on the average of the past three years. There are no local income taxes for self-employed individuals. 

Contractors operating as a business (i.e., a limited liability company or a corporation) are subject to a progressive corporate tax rate, which ranges from 5% (on the first CRC 5.3 million) up to 30% on income of CRC 112.2 million and above. There may also be additional municipal taxes applied as a percentage of net income or net sales. Tax returns must typically be filed by mid-December for the preceding tax year, while taxes are typically paid in June, September, and December. As a business, contractors are subject to VAT at 13%. 

Employers must register with the Social Security Administration (Caja Costariciense de Seguridad Social, or CCSS), which manages all social security. For each employee, the employer pays around 27% of gross wages towards social security contributions, and the employee pays around 10%. Self-employed contractors must also contribute to the CCSS regime, paying between 10.5% to 18.6% of their income. There is no specific tax levied on commercial transactions when paying contractors.