Like most countries, Panama requires foreigners employed by companies or households to have a work permit issued by the Ministry of Labor. International companies can contract with foreigners to pay them once a week or monthly or at any time agreed upon by the parties. However, Panama companies must pay all their employees according to the law which is every 15th and 30th day of each month unless they fall on a Saturday, Sunday, or national holiday; then paychecks are distributed on the last business day before the day.
Paychecks issued by a local bank are the typical way to pay employees. Paychecks will have deductions taken out which includes social security, education tax, and income tax withholding. A Panama bank account can accept deposits of the paychecks or the employee can go to the bank which issued the check to convert into cash.
There are no W-2 (U.S. IRS form) forms or similar ones used to calculate Panama taxes. No statements are issued by the government at the end of the tax year. The employee files the income tax forms and indicates the total withholding held and determines the income tax owed being credited by the withheld funds which if in excess can be credited towards the next tax year or paid as a refund by the government.
The Panama Income Tax Rates are:
• Individuals who earn less than $11,000 per year will pay no income taxes;
• Those earning between $11,000 and $50,000 are taxed at a 15% tax rate; and
• Those earning $50,000 or more are taxed at a 25% rate.
Various Panama Income Tax Deductions are Allowed Including:
• Married couples have an $800 deduction with their joint tax return.
• Mortgage interest paid on the primary home can be deducted up to $15,000 a year.
• Student loans interest payments for the taxpayer’s or dependents’ education in Panama is fully deductible.
• Health insurance premiums are deductible.
• Contributions to private pension plans not exceeding 10% of the individual’s gross yearly income to a maximum of $15,000 per year are deductible.
Foreign Residents: Foreigners who reside in Panama for more than 183 days per year and earn income in Panama will be taxed at the same rate as nationals.
Annual Returns: Individuals must file their annual income tax return before March 15th. Individuals whose sole source of income is a single salary are exempt from having to file an income tax return as the employer withholds part of each payment for taxes.
Panama Social Security Tax: Employers and employees pay social security taxes when the employee is paid. Currently, employers pay 12.25% and the employee pays 9.75%.
Employers are required to withhold a percentage from each employee’s pay for income tax and for social security tax. Failure to withhold and make payments to the Social Security Office will result in surcharges, fines, and even criminal prosecution. There is also a professional risk premium paid to the Social Security Office corresponding to a perceived risk the work entails which is withheld from an employee’s salary.
Educational Tax: An additional 1.25% of an employee’s wages are withheld as an “educational tax” while the employer pays 1.5%.
Non-Residents: Employers are required to withhold income taxes from non-residents who earn Panama source income. However, if the non-resident earns income outside of Panama, but the Panama employer wants to deduct these wages from his income tax, the non-resident will only have 50% of the total amount paid subject to the withholding tax. The employer is required to pay the withheld amounts within 10 days following the payment to the Panama tax authorities.