How to Pay Contractors in Latin America [Detailed Guide]

If your business is on the lookout for international contractors, have you considered expanding your search to Latin America? If not, now is the time to take a closer look at this region. LATAM is rapidly gaining popularity as a place to hire contractors due to its expanding talent pool, lower labor costs, and favorable time zone overlap with North America. 

However, paying contractors in LATAM can be tricky. You've got to stay on top of local labor laws, tax rules, currency differences, and payment preferences to ensure your company is compliant.

Key takeaways:

• LATAM consists of 33 countries, each with unique contractor laws and preferred payment methods.
• Ensuring proper contracts and local compliance is essential to avoid misclassification.
• Bank transfers, digital wallets, and digital payment platforms are common payment methods, but vary by country.

What Countries Are Considered Part of LATAM?

Latin America is comprised of 33 countries and encompasses parts of North America, Central America, South America, and the Caribbean. 

These regions share historical, cultural, and linguistic ties, primarily through their shared usage of Spanish and Portuguese, and include:

North America

• Mexico
  

Central America

• Belize
• Costa Rica
• El Salvador
• Guatemala
• Honduras
• Nicaragua
• Panama

South America

• Argentina
• Bolivia
• Brazil
• Chile
• Colombia
• Ecuador
• Guyana
• Paraguay
• Peru
• Suriname
• Uruguay
• Venezuela

Caribbean

• Antigua and Barbuda
• Bahamas
• Barbados
• Cuba
• Dominica
• Dominican Republic
• Grenada
• Haiti
• Jamaica
• Saint Kitts and Nevis
• Saint Lucia
• Saint Vincent and the Grenadines
• Trinidad and Tobago

While Puerto Rico is sometimes culturally associated with LATAM, it's a U.S. territory — not an independent country.

Regulations Governing Contractor Payments in LATAM

Understanding regional differences in contractor payments is essential to ensure you’re paying your freelancers on time, and in compliance with local laws. 

Unlike employees, contractors in LATAM operate under civil or commercial contracts rather than employment laws. However, some countries impose strict classification rules to prevent misclassification and ensure fair working conditions.

• Mexico: The Federal Labor Law, or Ley Federal del Trabajo (LFT), prohibits companies from working with contractors who technically should be classified as employees. Misclassification can result in back pay of benefits and fines.
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• Brazil: Contractors must be truly autonomous under the Consolidation of Labor Laws, or Consolidação das Leis do Trabalho (CLT). If they work exclusively for one company, authorities may reclassify them as employees.
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• Argentina: The Labor Contract Law provides clear distinctions between employees and contractors. If a contractor's role resembles employment, they may be entitled to unpaid benefits.

The penalties for worker misclassification can differ, depending on the country, but often include the payment of back benefits and fines.

Taxation and Withholding Laws

Businesses must comply with local taxation and withholding laws when paying independent contractors in LATAM, which, no surprise, vary significantly by country. 

While contractors are generally responsible for handling their own taxes, some countries require companies to withhold taxes at the source — especially for foreign payments.

Here are some key taxation and withholding regulations to be aware of in select LATAM countries:

• Mexico
  
  • Withholding Tax: Companies paying non-resident contractors may be required to withhold income tax, Impuesto Sobre la Renta (ISR), of 25%.
  • Value-Added Tax: If a contractor provides services within Mexico, they may need to charge 16% VAT, Impuesto al Valor Agregado (IVA), and issue a factura (official invoice).
• Brazil
  
  • Service Tax (ISS): Contractors must pay a 2-5% municipal service tax, depending on the city where they operate.
  • Income Tax (IRRF): For international payments, businesses may need to withhold 15-25% in taxes if the contractor is not a resident.
  • Nota Fiscal (Invoice): Required for contractor payments to be tax-deductible.
    

• Argentina
  
  • VAT (IVA): Contractors typically charge 21% VAT for services.
  • Gross Income Tax (IIBB): Varies by province but usually between 3-5%.
  • Foreign Payments: International businesses may face restrictions on sending USD due to strict capital controls.
    
• Chile
  
  • Withholding Tax: Payments to foreign contractors may require 15-35% tax withholding.
  • VAT (IVA): Standard 19% VAT applies to services provided in Chile.
  • Honorarios (Independent Contractor Payments): Contractors must contribute 10-17% of earnings toward social security and pensions.

• Colombia
  
  • Withholding Tax (Retefuente): Companies must withhold 10-11% of contractor payments for local service providers.
  • VAT (IVA): Contractors providing services in Colombia may need to charge 19% VAT.
  • Foreign Payments: International payments may require registration with DIAN (local tax authority).
    
• Peru
  
  • Income Tax (Impuesto a la Renta): Businesses paying Peruvian contractors must withhold 8-10% in taxes.
  • VAT (IGV): The standard VAT rate for services is 18%.

To recap:

• Some countries require businesses to withhold income tax on contractor payments (e.g., Mexico, Brazil, Chile).
• VAT (IVA) applies to most services provided within LATAM countries.
• Invoices (facturas or notas fiscales) are often required for tax compliance.
• International payments can be subject to additional restrictions or reporting.

Cross-Border Tax Treaties

Many Latin American countries have cross-border tax treaties to prevent double taxation and promote international trade and investment. 

These treaties help businesses and individuals avoid being taxed twice on the same income in two different countries.

• Mexico has more than 60 tax treaties, including agreements with the U.S., Canada, Spain, Brazil, and Argentina to prevent double taxation for individuals and businesses operating in both countries.
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• Brazil has over 30 double taxation treaties, including with Germany, Japan, and France. Notably, Brazil does NOT have a tax treaty with the U.S., which can create tax challenges for U.S. companies hiring Brazilian workers.
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• Argentina has tax treaties with more than 20 countries, including Spain, Germany, France,  the U.K., and Chile. These agreements help foreign companies avoid withholding high tax rates when paying Argentinian contractors.
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• Chile has double taxation agreements with over 30 countries, including the U.S., Canada, and China.
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• Colombia has tax treaties with several countries, like Mexico, Spain, Portugal, and the U.K. These agreements help foreign contractors avoid high withholding tax rates on international payments.
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• Peru maintains tax agreements with just over 10 countries, including Chile, Mexico, France, and Brazil.

Tax & Social Security Obligations and Misclassification Risks

Companies typically don't have to contribute to social security programs when hiring independent contractors in LATAM, a requirement for full-time employees. 

However, each country has different rules, and misclassifying a contractor as an employee can lead to penalties, back payments, and legal issues.

Mexico

Contractors are responsible for their own social security contributions and can enroll in the Instituto Mexicano del Seguro Social (IMSS) under the "Continuación Voluntaria" (Voluntary Continuation) or "Régimen Obligatorio para Trabajadores Independientes" (Mandatory Regime for Independent Workers).  

If a contractor is misclassified as an employee, the hiring company may be liable for back payments to the IMSS.

Companies must be careful under Mexico's outsourcing laws, which restrict the use of contractors for core business functions.

Brazil

Contractors are required to contribute 5% to 20% of their income to INSS (National Institute of Social Security).

If a contractor is deemed an employee, the hiring company must pay an additional 20% to INSS plus other labor-related costs.

Brazil has strict labor laws, and companies hiring long-term contractors should assess the reclassification risk.

Argentina

Independent contractors (monotributistas or autónomos) must enroll in the AFIP tax system and contribute to social security.

However, if a contractor works exclusively for one company, courts may reclassify them as employees, requiring the employer to pay retroactive social security contributions.

Chile

Contractors are required to contribute 17-20% of their income to pension and health insurance funds.

All contractors working for companies must contribute to social security unless they opt out under specific conditions.

Companies hiring long-term contractors should ensure they do not exert employer-like control over their work to avoid misclassification risks.

Colombia

Contractors must register with the General System of Social Security (SGSS) and contribute 28.5% of their income toward pensions and health insurance.

Companies hiring contractors do not have to contribute unless the contractor is later reclassified as an employee.

Peru

Contractors are responsible for making monthly contributions (around 13%) to the National Pension System (SNP) or Private Pension System (SPP).

If a contractor economically depends on one company, authorities may determine they should receive employment benefits, including social security contributions.

Invoice Requirements

Many countries in Latin America require contractors to issue electronic invoices (facturas electrónicas) through government-regulated tax systems. These invoices must include specific details such as tax identification numbers, VAT, and payment terms.

Countries with Mandatory E-invoicing for Contractors

• Mexico: Must issue CFDI (Comprobante Fiscal Digital por Internet) via the SAT tax authority.
• Brazil: Requires Nota Fiscal Eletrônica (NF-e) through SEFAZ.
• Argentina: Contractors must generate Factura Electrónica via AFIP.
• Chile: All invoices must be issued through the Servicio de Impuestos Internos (SII).
• Colombia: Contractors must use the DIAN e-invoicing system.

Failure to issue an official e-invoice may result in tax penalties or fines.

Required Information on Contractor Invoices

While the specific requirements vary by country, most LATAM invoices must include:

• Contractor's tax ID (e.g., RFC in Mexico, RUT in Chile, CUIT in Argentina, CPF/CNPJ in Brazil)
• Client's tax ID (if applicable)
• Invoice number and date
• Detailed service description
• Total amount and breakdown of taxes (VAT, withholding tax, etc.)
• Currency used for payment

Value-Added Tax (VAT) May Apply to Contractor Invoices

VAT rules differ across LATAM, but some countries require contractors to charge VAT on invoices unless exemptions apply.

For example:

• Mexico: Contractors must apply 16% VAT unless exempt.
• Argentina: Contractors typically need to charge 21% VAT, depending on the service.
• Colombia: Most professional services require 19% VAT.

Tax Withholding on Contractor Payments

Some LATAM countries require companies to withhold a percentage of contractor payments for income tax purposes.

For example:

• Mexico: Businesses may need to withhold 10% of contractor payments for income tax.
• Colombia: Companies often withhold 4% to 11% from independent contractor payments.
• Brazil: Withholding rates are based on contractor classification and services provided.

Not complying with withholding rules can lead to fines and back taxes.

LATAM Currency Considerations

LATAM countries use different currencies, which can fluctuate significantly. Common ones include:

• Mexican Peso (MXN)
• Brazilian Real (BRL)
• Argentine Peso (ARS)
• Chilean Peso (CLP)
• Colombian Peso (COP)
• Peruvian Sol (PEN)

Currency exchange rates in LATAM can be volatile, affecting the final payment contractors receive. Businesses paying in USD should consider local currency depreciation to ensure fair compensation.

Common Payment Options for LATAM Contractors

Each country has preferred contractor payment methods, some of which are unique to the region:

‍Bank Transfers

• Brazil: PIX (instant, free transactions)
• Mexico: SPEI (real-time interbank transfers)
• Argentina: CBU/ALIAS for local transfers

Digital Payment Platforms

• PayPal and Wise are frequently used for international payments.
• Contractors in Venezuela prefer cryptocurrency payments due to currency instability.

Local Digital Wallets

• Brazil: PicPay, Mercado Pago
• Mexico: Mercado Pago, OXXO Pay
• Chile: WebPay, TransferWise, Khipu
• Argentina: Ualá, Naranja X

Country-Specific Payment Regulations

Some LATAM countries have strict laws regulating contractor payments:

• Brazil: Contractors must issue an invoice (Nota Fiscal) for tax compliance.
• Mexico: Payments over  MXN 2,000 must be processed through banks (cash payments are restricted).
• Argentina: Strict capital controls limit USD withdrawals, sometimes making crypto or stablecoin payments more common.
• Colombia: Foreign businesses must register with DIAN (tax authority) if making frequent payments.

You can learn more specifics about contractor payment methods in our article How to Pay International Contractors in 2025.

Employ and Pay Your LATAM Contractors with RemoFirst

Partnering with an Employer of Record (EOR) like RemoFirst ensures your contractors are correctly classified and paid (on time) in their local currency.

RemoFirst takes care of creating compliant contracts, and manages any legally required tax withholdings and social security contributions. We also ensure your contractors don't get shortchanged due to fluctuation in currency exchange rates, and comply with all local banking requirements.

‍Book a demo to learn how RemoFirst can help you pay your contractors in Latin America (and around the globe).