Ecuador uses a pay-as-you-earn (PAYE) system for all income taxes. Employers are responsible for withholding the right amount for taxes from each employee’s pay every month based on their salary. Companies also need to report the employee’s taxes and deductions on a 107 Form at the end of each year.
Both employees and employers contribute to Social Security every month. Employees put in 9.45% of their gross salary, while employers must give 12.15%. However, after the professional completes 1 year of employment, employers have to contribute to the “reserved fund” (fondo de reserva) on a monthly basis, which is an additional 8.33%.
Ecuador payroll options for companies
Every company has different needs, which is why you have several Ecuador payroll options, including:
- Internal: Running an internal payroll is usually a good option for large subsidiaries with a commitment to Ecuador and a robust HR team.
- Ecuador payroll processing company: Using an Ecuador payroll processing company is great for businesses that want to outsource with a local company. You will, however, still be liable for all compliance matters.
- G-P: The easiest way to run payroll in Ecuador and stay compliant is partnering with an Employer of Record (EOR) like G-P. With us, you can rest assured that all employees will be paid on time, freeing you to focus on other important aspects of your business.
How to set up a payroll in Ecuador
Companies can’t set up an Ecuador payroll immediately. You will have to spend time establishing a subsidiary before you can choose an Ecuador payroll option.
However, G-P eliminates this requirement. By leveraging our existing subsidiary, you won’t have to go through the lengthy process and can begin hiring in minutes, not months.
Entitlement/termination terms
In Ecuador, termination of employment is complex. The concept of advance notice of termination by the employer does not exist. If an employer terminates the employment without cause (which is considered a wrongful dismissal or a sudden termination) or for cause but does not follow the required process, the employee is entitled to a severance payment.
Severance pay is equal to 1 month’s salary for each year of service (or a part thereof), but no less than 3 months (or more than 25 months) of pay. Employers must pay an additional severance equal to 25% of the last salary earned multiplied by the years of service.
Termination with cause requires employers to follow a specific procedure including notification and approval from the labor inspector. If the labor inspector concludes that the termination is justified, the employment may be terminated, and the employee is entitled to pay until the date of resolution by the labor inspector.
Streamline global payroll management with G-P.
G-P streamlines each step of the payroll management process with our market-leading global employment platform. Pay your team with confidence anywhere in the world in 150 currencies with our 99% on-time automated payroll system — all with just a few clicks. Our products also integrate with leading HCM solutions, syncing employee payroll data across platforms automatically to create one reliable, convenient source of truth for HR teams.
Contact us to learn more about how we can support you.