Running payroll in Brazil

As the biggest country in South America, Brazil is a popular business location for multinationals looking to establish a presence in the region. However, setting up and running payroll in Brazil can be challenging. Not only because of the ever-changing laws and regulations governing the payroll process, but also because of the complexity of the mandatory registration and reporting processes.

Although the government has introduced a new, unified platform for tax and social security reporting (eSocial) and reduced the number of declarations that need to be filed, the system remains far from being simple. The strong influence of trade unions on industry-specific employment regulations and compensation requirements is another factor which complicates payroll processing in Brazil. 

Foreign employers intending to hire employees and process payroll in Brazil must establish a legal entity to do so. Setting up payroll involves several registration processes, including: 

• Obtaining a tax ID (first step and necessary requirement for all other registration processes)

• Registration with the Brazilian Internal Revenue Service (IRS), which will then issue a digital certificate needed to set up an account with the social security authority INSS

• Registration for the eSocial system, which is the new unified platform to transmit employee and employer-related data to the Brazilian government - also used for tax and social security reporting

Employees are usually registered for social security purposes when they first start working in Brazil. If the individual has not been employed in Brazil before, it is necessary to file for a PIS number, which is the social security number for individuals living in Brazil. 

In any case, employers must file an electronic hiring notification via the eSocial system. It is further necessary to register employees with the Ministry of Labor and the IRS, as well as with the respective labor union - there is a mandatory annual contribution to be paid by the employer). 

Companies should set up a local bank account to issue payments to employees and authorities.

Income tax and social security contributions are withheld and submitted by the employer on a monthly basis. The system used for filing both tax and social security declarations is the eSocial platform. 

Tax considerations

In Brazil, income tax on employment income is referred to as IRS. IRS rates are progressive and range from 7.5% to 27.5%. Annual income of up to BRL 22,848 is exempt from tax. Non-residents earning income in Brazil are taxed at a 25% flat rate. 

An employee’s taxable income consists of their wages/ salary, bonuses, premiums, allowances paid by the employer, shared business profits and any other direct or indirect payment connected to the employment.

However, there are several deductions, exemptions and allowances that need to be taken into account when calculating income tax in Brazil. These deductions, exemptions and allowances include (but are not limited to): 

• Mandatory social security contributions

• Meal and transportation allowances as well as costs for work uniforms

• Contributions to private pension plans

• Deductions for dependent children or relatives

• Educational expenses

• Certain medical expenses

• Certain types of donations and investments

It is possible to apply a standard deduction rate of 20% to an employee’s annual income if the latter wishes to do so - instead of itemizing the different deductions. The standard annual deduction is limited to BRL 16,754. 

Residents are taxed on their worldwide income, while non-residents are only subject to income tax on income from Brazilian sources. In addition to citizenship, the following criteria are taken into account when determining tax residency in Brazil: 

• Permanent residence in Brazil

• Permanent visa

• Temporary visa combined with local employment contract

• Stays of more than 183 days within a 12-month period on a temporary visa (even without local employment contract)

Naturalized foreigners living in Brazil are also considered tax residents.

Tax withholding and reporting 

Employers are responsible for withholding income tax from employee salaries and wages on a monthly basis. Withheld income tax must be submitted by the 20th of the following month along with a monthly income tax statement (Documento de Arrecadação de Receitas Federais, DARF).

The competent authority is the Brazilian Revenue Service. At the end of each year, companies must further prepare an annual income tax statement (Declaração do Imposto de Renda Retido na Fonte, DIRF). The DIRF must include information on withheld income tax and social security contributions as well as payments to additional healthcare plans offered by the company. The submission date changes every year, but is usually the end of February. 

Individuals are required to file an annual tax return. The due date is the last business day of April of the following year. Married couples may file a joint return. The tax year corresponds to the calendar year. 

Social security contributions

Brazil’s social security system is administered by the National Institute of Social Security (Instituto Nacional do Seguro Social), INSS for short. Social security contributions are levied on both employee and employer and are used to fund pension, workers’ compensation, sick pay, unemployment and other initiatives aimed at employee welfare. 

Employers make payments to the INSS and to the Employee Severance Indemnity Fund (FGTS), as well as to several minor funds such as the work accident insurance fund (RAT). The FGTS rate is set at 8% of the employee’s income, including overtime pay, 13th month salary, holiday bonuses and more. 

INSS is generally levied at a rate of 20% on the company’s payroll - 22.5% in certain industries. Alternatively, companies in certain industries and sectors can pay INSS at a lower rate of between 1% and 4.5% applied to the business’s gross revenue. The total employer share in social security contributions (including FGTS) is around 36% - uncapped.  

Employees, on the other hand, only contribute to the INSS. Following Brazil’s Social Security Reform from November 2019, social security contributions for employees are now calculated at progressive rates from 7.5% to 14%. The respective monthly income brackets according to which social security is calculated are shown in the table below.

Social security contributions paid by employees are capped at BRL 828.38 per month. 

INSS contributions must be withheld from employee wages and salaries every month as part of the payroll process. The withheld amounts must be paid to the competent authorities by the 20th of the month following the payroll run, together with the employer share of the social taxes. FGTS payments are due earlier, by the 7th of the month. 

Contributions must be reported and submitted via the eSocial system - mandatory since July 2018. The monthly report on social security contributions is called GPS and is also due by the 20th of each month. An annual overview of paid social taxes is submitted as part of the DIRF (see section on tax withholding and reporting).

Employees in Brazil are entitled to various benefits. These include:

• Annual leave and public holidays: 30 days of annual leave (entitlement starts after the employee has completed one year of service with the company) paid at normal wages, plus a holiday bonus equal to one third of the employee’s monthly earnings; 13 public holidays

• Maternity leave: 120 days paid by Social Security through the employer; 60-day extension possible

• Paternity leave: 5 days of paid paternity leave, 15-day extension possible at the discretion of the employer

• Parental leave: no legal provisions for parental leave, but employees with children under 6 can claim an additional day off per year for medical appointments

• Sick leave: 15 days of sick leave paid by the employer upon presentation of a medical certificate; thereafter, sick pay is provided by Social Security

For more information on employee benefits and other employment requirements in Brazil (including severance pay and termination procedures), check out our Global Hiring Guide.

In August 2022, the national minimum wage stands at BRL 1,212 per month, but minimum pay requirements may be higher in certain industries under a collective agreement. Pay rates for overtime are usually also set by collective agreement, with the minimum rate being 150% of the employee’s usual wages. 

It is mandatory to pay employees a year-end bonus in the form of a 13th salary or Christmas bonus. For employees who have worked the full year for the employer, the payment equals a full month’s salary. In all other cases, the bonus is calculated on a pro-rated basis. The bonus is paid out in two installments, one in November and the other one in December. It should be noted that the two installments are treated differently with regard to INSS and FGTS levies.

Payroll in Brazil is typically processed on a monthly basis - but it is also possible to pay employees twice a month. Salaries and wages should be paid by the 30th of each month or by the 5th working day of the following month. If offered, advances are paid between the 15th and the 20th of the month.

Payments to employees in Brazil are made via bank transfer. It is mandatory to issue payments in local currency, which is the Brazilian Real (BRL). Employees should receive a payslip at the end of each payroll cycle. Payslips can be provided either electronically or in paper. 

Businesses are required to maintain a record of all their payroll processes, including paperwork and receipts. The period for which records must be kept is 5 years.