Running payroll in Estonia

The e-Residency program which enables foreing individuals to set up a paperless legal entity registered in Estonia and gain access to the EU market is only one example of the strong digitization strategy Estonia is pursuing. Payroll processing is no exception to that. As foreign companies will soon notice, payroll-related processes in Estonia are mainly carried out electronically. This includes tax filing, employee registration and more.

Setting up payroll in Estonia entails several registration processes with local authorities. Foreign companies planning to sell goods or offer services in Estonia on a permanent basis are required to set up a legal entity or a local branch. Local entities as well as branches of foreign entities should be registered with the Estonian Commercial Register. By doing so, they are automatically registered as tax withholding agents with the Estonian Tax and Customs Board.

Companies without permanent establishment in Estonia that want to hire Estonian residents need to register as a non-resident employer with the Tax and Customs Board for tax withholding purposes. The registration must be completed no later than 10 days after the start of the employment arrangement. The same applies to foreign employers hiring non-residents to perform work in Estonia.

In any case, new employees must be registered with the Estonian Employment Register which is administered by the Estonian Tax and Customs Board. Employees need to be registered before they start working for their new employer. Electronic registration is possible via the e-Tax system. A separate registration process is necessary for non-resident employees who are hired to work in Estonia. 

To facilitate tax filing and payments, companies should register for e-Tax which is the electronic tax filing system. Non-resident employers can name a representative to operate their e-Tax account on their behalf. Setting up a local bank account is not mandatory as payments to employees and authorities can be issued from foreing bank accounts. 

Calculating tax and social security contributions in Estonia is a lot easier than in other European countries. There is one universal tax rate applicable to all types of employment income, regardless of the amounts earned. As for social security contributions, rates for employees and employers are clearly defined, which makes it easy to calculate the appropriate amount of the contributions.

Tax considerations

Income tax in Estonia is calculated based on a 20% flat rate applicable to all types of employment-related income. This includes wages and salaries as well as additional payments, bonuses and holiday pay. Employees are not taxed on fringe benefits provided by the employer. 

There is a basic tax exemption available for employment income. The tax-exempt amount is EUR 500 per month (maximum) and EUR 6,000 per year . However, the tax allowance decreases with rising income levels. The tax exemption for income exceeding EUR 25,200 per year is nil. Other possible deductions include compulsory unemployment insurance and pension fund contributions as well as certain other personal expenses such as education fees. 

Estonian tax residents are liable for income tax on their worldwide income while non-residents are only taxed on income sourced in Estonia. Residency in Estonia is determined via any of the following criteria:

• Individual has a permanent residence in Estonia

• Individual spends more than 183 days in Estonia in any given 12-month period

There neither are additional local taxes nor special taxation rules applicable to expatriates coming to work in Estonia. 

Tax withholding and reporting 

Employers are responsible for withholding income tax at source and submit the withheld amounts to the authorities on a monthly basis. For this purpose, employers have to file a monthly tax return which combines both information on corporate income and withheld payroll tax. This monthly return is called TSD and can be accessed and filed via the e-filing system. Both payments and tax return are due on the 10th of the month following the payroll run. Fringe benefits must be reported in a separate form annexed to the TSD. 

The tax year is the calendar year. Individuals file an annual tax return which can be submitted between 15 February and 30 April of the following year via the e-Tax system. 

Social security contributions

In Estonia, social security contributions are mainly borne by the employer who pays 33% social tax plus 0.8% unemployment insurance. Social tax comprises payments towards state pensions (20%) and the public health system (13%). It is worth noting that employers are obligated to pay a monthly minimum social tax contribution of EUR 192.72 even if the employee’s income of that particular month was zero. 

The employee is only required to pay 1.6% towards unemployment insurance. There further is a mandatory 2% “funded pension” contribution which applies to employees born after 1983. Employees also have the option to contribute to a supplementary pension scheme which must be set up by the employer on the employee’s request. 

It is the employer’s obligation to withhold the employee’s mandatory pension and unemployment fund contributions from their salary and pay them to the Tax and Customs Boards together with their own social security contributions. The deadline is the same as for withheld income tax payments.

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

• Annual leave and public holidays: 28 calendar days, 12 public holidays

• Maternity leave: 140 days (starting between 30 and 70 days before birth) fully paid by the Health Insurance Fund

• Paternity leave: 30 calendar days which can be taken until the child turns 3 and which is paid by the Health Insurance Fund

• Parental leave: both parents are eligible for parental leave until the child’s 3rd birthday (but only one parent at the time); family benefits are paid for up to 435 days

• Sick leave: first three days unpaid; days 4 to 8 paid by employer; from day 9 onwards, Health Insurance Fund pays sickness benefits at a rate of 70%

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

In the beginning of 2022, the national minimum wage of Estonia rose to EUR 654 per month (up from EUR 584 per month in 2021). This equals an hourly minimum wage of EUR 3.86. Depending on the collective bargaining agreements, minimum wages can be higher for certain industries and sectors.

Overtime work is allowed but must be compensated through either additional paid time off or a higher pay rate of 150% of the employee’s usual wages. There are no legal provisions for a 13th month salary or a similar annual bonus. 

Estonian law stipulates that employees must be paid at least once a month. Salaries and wages are usually paid via bank transfer, but cash payments are also possible. The pay day is to be agreed in the individual employment contract. Employers are obligated to provide employees with a payslip at the end of each payroll run. Payslips can be distributed in paper form or electronically.