Running payroll in Lithuania

Running payroll in Lithuania may not be as complex as payroll processing in France, Spain or Germany, but companies should still be aware of local laws and regulations in order to ensure compliance. Payroll compliance starts with the completion of the necessary registration processes and ends with the delivery of a payslip containing all the necessary payroll-related information. 

Employees in Lithuania can be hired by a foreign company, but the employer still needs to register for payroll tax and social security contributions. The competent authorities are the State Tax Inspectorate (STI) and the State Social Insurance Fund Board (SODRA). Foreign businesses who decide to set up a local entity in Lithuania are automatically registered for tax and social security upon registration with the commercial register. 

For every new employee, the employer must submit an electronic hiring declaration (1-SD form) to SODRA. The form must be submitted one day prior to the employee’s first working day at the company - at the latest. 

While there is no formal requirement to set up a local bank account for payment purposes, businesses usually need to open a local account when establishing a legal entity in Lithuania.

With only two different tax rates and a limited amount of tax allowances and deductions, Lithuania does not rank among the countries with the most difficult tax systems. Still, reporting and payment deadlines should be observed in order to stay compliant.  

Tax considerations

Lithuania’s tax system comprises two different rates. The standard tax rate for employment income is 20%. Income exceeding the threshold of 60 average salaries per year is taxed at a rate of 32%. In 2022, this threshold is fixed at EUR 90,246. Please note that the higher tax rate of 32% only applies to the part of income which exceeds the set threshold. 

Taxable income is defined as salary, wages, allowances, bonuses and other types of compensation provided by the employer either in kind or in cash - certain exceptions apply. There is an annual tax-free amount of EUR 5,520. However, this tax allowance is only available to employees whose annual income (including but not limited to employment income) does not exceed EUR 34,370. Contributions to life insurance and private pension schemes as well as certain education expenses are deductible for income tax purposes - up to a limit of 25% of the employee’s taxable income.

For Lithuanian residents, the taxation basis is their worldwide income. Non-residents, on the other hand, only pay tax on income sourced in Lithuania and on income earned via professional activities carried out from a fixed base within Lithuania. 

Residency is determined by different criteria. According to Lithuanian law, an individual is considered a resident for tax purposes if: 

• Their permanent place of residence is in Lithuania.

• Their center of vital interests (personal, social and/or economic) is in Lithuania.

• They spend more than 183 days in Lithuania during the tax period in question.

• They spend more than 280 days in Lithuania during two consecutive years and at least 90 days in each year.

Tax withholding and reporting 

Income tax from employment income is withheld at source by the employer and paid to the State Tax Inspectorate on a monthly basis. Payments are due either by the 15th of the same month (if the employee has already received a payment in that month) or by the end of the month. Payment deadlines are different for non-residents. 

It should be noted that employers are only responsible for withholding income tax on employee salaries and wages at the rate of 20%. If the employee’s total annual income exceeds the set threshold for the higher tax rate, it is his or her responsibility to pay the outstanding amount of taxes or hand in a request to the employer to withhold a higher amount of income tax every month.  

A monthly payroll tax report is due on the 15th of the month following the pay period. An annual payroll tax report must be filed by 15 February of the year following the tax year. Individuals must submit an annual tax declaration for the previous tax year by 1 May if they receive additional income from sources other than employment. The tax year is the calendar year.

Social security contributions

The main share of the social security contributions (SSC) is paid by the employee - employers contribute a much smaller amount. The basic employee contribution is 12.52% which is split between pension, sickness and maternity fund. In addition, employees make a 6.98% contribution towards health insurance. Contributions to complementary pension funds (minimum 2.7%, will be 3% starting from 2023) can be made on a voluntary basis. In 2022, the income ceiling for employee contributions is EUR 90,246 - health insurance premiums are uncapped. 

The employer share is 1.77% (for open-ended employment contracts) or 2.49% (for fixed-term contracts) of the employee’s entire earnings - no ceiling. Foreign employers pay a reduced rate of 1.6% (for open-ended employment contracts) or 2.33% (for fixed-term contracts). This includes unemployment insurance, occupational accident insurance and contributions to the Long-term Employment Fund and the Guarantee Fund. 

It is the employer’s responsibility to withhold the employee’s share of the social security contributions and pay them to the competent authority (SODRA) along with their own contributions. A social security report must be submitted on a monthly basis - electronic filing is mandatory. The due date is the 15th of the month following the respective pay period. Payments are due on the same day. 

* Depending on whether the employee is hired on the basis of a fixed-term or open-ended contract. 

** Contribution rates may be higher, depending on the work risk. 

*** Additional pension fund contributions are voluntary.

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

• Annual leave and public holidays: 20 days (24 for employees under 18, single parents and those who are disabled), plus 12 public holidays 

• Maternity leave: 126 days (70 days before and 56 days after birth), paid through a statutory allowance equal to 77.58% of the employee’s normal wages (minimum EUR 240 per month)

• Paternity leave: 30 days (uninterrupted) which must be taken during the first three months following birth and during which the father receives the same statutory benefits as the mother

• Parental leave: until the child is 3 years old; either 1 or 2 years of the leave are paid, depending on the chosen allowance amount

• Sick leave: 2 days paid by the employer at a rate of at least 62.06%; thereafter, sickness benefits equal to 62.06% of the employee’s wages are paid by SODRA

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

Since January 2022, the national minimum wage in Lithuania is set at EUR 730 per month - up from EUR 642 in 2021. Overtime is limited to 8 hours per week and must be compensated by additional pay. In no case should overtime pay be less than 150% of the employee’s usual hourly wages. There is no legal obligation to pay employees an annual bonus. 

Unless otherwise agreed in the individual employment agreement, employees in Lithuania are paid twice a month. Salaries and wages are usually paid in the local currency (euros). Since January 2022, it is no longer possible to pay employees in cash. 

After each pay period, employers must issue a payslip detailing gross and net pay, deducted taxes, social security contributions, working hours and other payroll-related information. Payslips can either be provided in hard copy or electronically. Payroll records must be kept for a period of up to 50 years.