Running payroll in Chile

Chile is widely considered to be one of the strongest and most stable economies in South America. This and the country’s strong trade links with the United States make it a perfect destination for international organizations looking to set up business in the region. However, foreign businesses should be aware of the many complexities that are linked to processing local payroll before establishing a legal entity and hiring employees in Chile. 

Calculating income tax could be considered more difficult than in other countries due to the fact that the tax system is based on a tax unit that frequently changes in value. What’s more, social security contributions have to be paid to different authorities and insurance providers, and businesses should be prepared to liaise with local institutions in Spanish.

Before hiring their first employees in Chile, businesses must complete a number of registration processes so they can fulfill all their obligations as an employer. In order to process payroll in Chile, employers must register for/with: 

• The Internal Revenue Service of Chile (SII) to obtain a tax ID

• The PreviRed system, which is the official online portal for declaring and paying pension fund and health insurance contributions

• The Unemployment Funds Administrator (AFC)

• The occupational accident insurance provider Mutual de Seguridad

New hires must be registered with the local authorities within 60 days. The latter includes registering the employment contract with the Dirección del Trabajo, which is the national employment authority. 

In addition, the employer is required to take out survival and disability insurance and set up health insurance coverage as well as a pension fund for every employee. It is further necessary to open a local bank account for paying salaries and wages and for making payments to local authorities. 

Processing payroll and calculating income tax and social security contributions in Chile can seem quite challenging in the beginning, especially since the local tax system uses a unified tax unit whose value changes frequently, which has a direct impact on payroll calculations. And the multitude of authorities and institutions involved in the administration of the country’s social security system does nothing to make the process easier. 

Tax considerations

Income earned from employment is taxed at progressive rates which go up to 40%. Unlike in other countries, the tax bands and thresholds in Chile are not fixed in the local currency. Instead, the Chilean tax system operates with a monthly tax unit, the so-called Unidad de Fomento (short: UF), whose value is adjusted on a daily basis. The UF-based tax bands and rates are shown in the table below. 

An employee’s taxable income consists of his or her basic wages/salary as well as of additional compensation such as bonuses, commissions and overtime pay. Certain employer-paid allowances are also taxable. Social security contributions, employment expenses and mortgage interest payments are deductible. There further is a personal tax credit available to employees with children, which is aimed at helping finance the child’s education.

Residents of Chile are taxed on their worldwide income, while non-residents only pay tax on income from Chilean sources. Foreign individuals who become residents of Chile continue to pay income tax on Chilean-sourced income only during the first three years of residency. The 183-days rule applies in order to determine residency, which means that individuals become residents for tax purposes after spending more than 183 days in Chile during any given 12-month period.

Tax withholding and reporting 

Employers must calculate and deduct income tax from employee salaries and wages during the payroll process and remit the withheld amounts to the Chilean Internal Revenue Service, the Servicio de Impuestos Internos (short: SII), on a monthly basis. In addition, they have to prepare and submit an annual income tax statement for each employee, which details the deductions made from the employee’s earnings throughout the year. This report is due in March of the following year. 

Employees whose only source of income is their employment are not required to file an annual tax return. In all other cases, the individual tax return must be completed in April of the following year. The tax year corresponds to the calendar year.

Social security contributions

Employees working in Chile must be enrolled in different social security schemes which provide protection against illness, unemployment, death, injury, disability and old age—foreign individuals temporarily working in Chile may be exempt from making contributions if they are enrolled in a foreign social security system offering a similar level of protection. 

The different social security schemes are: 

• Unemployment fund which is administered by the Sociedad Administradora de Fondos de Cesantía (AFC) 

• Occupational accident insurance which is administered by the Mutual de Seguridad 

• Pension fund which can be set up with one of the different pension fund providers known as Administradoras de Fondos de Pensiones (AFP)

• Health insurance which can be obtained either under the private system ISAPRE (Institución de Salud Previsional) or under the public system FONASA (Fondo Nacional de Salud)

• Survival and disability insurance, also known as Seguro de Invalidez y Sobrevivencia (SIS)

Contributions to the different schemes are shared between employee and employer. The employee pays the majority of the contributions (17.6%, which mainly go towards health insurance and pension fund), while the employer share of the contributions only amounts to around 5% of the employee’s monthly earnings.

A breakdown of the contributions paid by employees and employers is shown in the table below. It should be noted that social security contributions are subject to different caps and limits which are defined based on the UF and are therefore subject to variation.

All social security contributions need to be paid on a monthly basis; however, payments must be made separately to the different fund administrators and authorities using different systems. For instance, health and pension fund contributions must be reported and paid via the PreviRed online portal. Unemployment insurance contributions, on the other hand, must be remitted directly to the AFC.

Employers are responsible for calculating, deducting and remitting social security contributions on behalf of their employees. Contributions must be paid within the first ten days of the month following the payroll run. 

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

• Annual leave and public holidays: 15 days of paid annual leave after completing 1 year of service; the employee’s annual leave entitlement increases by 1 day every 3 years after 10 years of service; in some regions, the basic annual leave entitlement is 20 days; plus 16 public holidays 

• Maternity leave: 18 weeks of maternity leave, which is split into 6 weeks before and 12 weeks after birth (an extension of another 12 weeks is possible); the leave is fully paid by Social Security

• Paternity leave: 5 days of paid paternity leave

• Parental leave: fathers may share a part of the extended maternity leave; 10 days of parental care leave per year for mothers of children under 18

• Sick leave: 3 days are unpaid; thereafter, sickness benefits are paid by Social Security; in case the sick leave lasts longer than 10 days, sickness benefits are paid from the first day onwards

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

Chile has a national minimum wage which is currently (November 2022) set at CLP 400,000 per month (applicable to full-time employees aged between 18 and 65 who work a 45-hour week). An employee’s remuneration comprises his or her salary/wages as well as bonuses, commissions, benefits (e.g. meal and transportation allowances) and overtime pay.

The pay rate for overtime is 150% of the employee’s usual hourly wages. There is no legal obligation for employers to provide employees with an annual bonus; however, Chilean law mandates businesses to share a part of their profits with their employees.

Employees in Chile must be paid at least once a month—a shorter pay period can be stipulated in the individual employment agreement. Salaries and wages for employees in Chile must be paid from a local bank account. It is permitted to pay employees in foreign currency, but the payroll calculations must be made in Chilean Pesos—the amount payable to the employee is converted into the foreign currency at the end of the process. 

It is mandatory to provide employees with a payslip at the end of each pay period. The payslip should detail the different salary components as well as the deductions made from the employee’s net wages. Employers can provide payslips either electronically or in paper form. Payroll recordkeeping is a legal requirement. The retention period for payroll records is 5 years.