Payroll in Estonia

Bordering the Gulf of Finland and the Baltic Sea, Estonia is renowned for its flourishing market economy. Today the world recognizes Estonia as a leader in human capital and other resources essential for business organizations to thrive in a competitive economy. 

The Government of Estonia strongly encourages investment by foreign business organizations from different sectors, such as hardware and software development, logistics, blockchain, cyber security, and risk capital. Estonia is known for its highly productive and skilled workforce that attracts investors from all over the world. 

Establishing a company and payroll in Estonia is a profitable mode of foreign investment. However, setting up a payroll in Estonia requires a thorough knowledge of payroll rules and regulations in Estonia, and payroll tax in Estonia.

Read the Estonia payroll guide to gain a deeper insight into the payroll requirements of Estonia.

How is Payroll Calculated in Estonia?

Payroll refers to the company’s record with information on employees and the amount to be paid by employers. 

Calculating the HR payroll in Estonia involves the determination of the basic salary to which allowances and bonuses are added. It is usually calculated in the following way: 

Payroll (Net Salary) = Gross Salary – Deductions

Important Elements of Salary Structure in Estonia

It is crucial to understand the payroll policies and procedures in Estonia to remunerate the employees every month. The payroll process in Estonia follows a salary structure of fundamental elements, as given below:

• Basic salary: It is the monthly income of an employee in an Estonian company. In the payroll process of Estonia, the basic salary is calculated by excluding bonuses, allowances, overtime, and other compensations. 
• Gross pay: It refers to the monthly salary obtained by adding allowances and bonuses to the basic salary while excluding taxes. 
• Net pay: Net pay is the payment made to an employee by the employer after the withholding taxes payroll deductions in Estonia. It is directly credited to the employee’s bank account. 
• Overtime: Companies in Estonia offer overtime pay only to employees who get paid hourly. Employees who receive a fixed salary at the end of every month are not entitled to overtime pay. As per the payroll policies and procedures in Estonia, the overtime pay per hour is at least 50% of the hourly pay.
• Bonuses: Not every company in Estonia offers bonuses to employees. However, employees of several companies in Estonia are offered four types of bonuses. The four kinds of bonuses include individual bonuses based on performance, goal-oriented bonuses, company performance bonuses, and Holiday bonuses.

How to Set Up a Payroll in Estonia?

A comprehensive understanding of the payroll rules and regulations in Estonia is important for setting up payroll in Estonia. The steps to set up an HR payroll in Estonia are mentioned below:

• Step 1: File the Certificate of Registration and the Articles of Association of the parent company with the Estonian authorities.
• Step 2: Draft the Articles of Association of the company mentioning the details about the company’s operations.
• Step 3: Submit proof of the company’s registered address in Estonia.
• Step 4: Open a bank account in any bank in Estonia.
• Step 5: Register with the Central Sick Fund of Estonia and VAT.
• Step 6: Recruit new staff to be kept on the payroll in Estonia.

A Step-by-step Process of Payroll Processing in Estonia

A company may follow the steps mentioned below for processing the payroll in Estonia:

1. Select a payroll system: 

• Start the procedure of payroll processing in Estonia by deciding how you will be processing the salaries. 
• You can use a manual procedure or opt for payroll software. 
• One of the most affordable options is outsourcing the job of setting up a payroll in Estonia. 

2. Create payroll policy:

• Draft a set of suitable payroll policies and procedures in Estonia defining the pay dates, payment methods and other details. 
• It is mandatory for a company to deposit the salary of every employee on the last working day of the month.

3. Gather employee information:

• Collect all the information about the employee, such as details on withholding tax, joining dates and others. 
• You need to upload the information to the payroll system. 

4. Collect timesheets and establish a time-tracking system:

• Track the work hours of employees for accurate payroll processing in Estonia. 
• Add upon the time tracked, verify it, and import the information on timesheets. 

5. Estimation of salary: 

• The financial heads of the company calculate the gross pay of every employee and estimate the payment for leaves, holidays, overtime, and allowances for drafting the payslip.
• The Estonian Tax and Customs Board regulates the payroll tax in Estonia. Employers deduct 20% of income tax from the salary of the employees.

6. Settlement of payment: 

• The Estonia payroll process ends with the remittance of payment to the employees. Settling the payment on time helps with avoiding late charges.

7. Issuance of payslips: 

• The payroll policies and procedures in Estonia mandate the issuance of payslips, stating a detailed salary breakup, to the employees in the form of hard or soft copies.

Payroll Contributions

The payroll rules and regulations in Estonia make it mandatory for both the employer and the employee to make equitable contributions to the payroll. 

Employer contribution

 As per the payroll policies and procedures in Estonia, it is mandatory for the employer in Estonian companies to pay a monthly social tax of 192.72 Euros. The employer has to pay the monthly social tax even if there is no salary payment for employees.

Employee contribution

The table below provides an enumeration of the employer’s contribution to the payroll in Estonia:

 The minimum monthly salary amount for which the employer does not deduct a payroll tax in Estonia is 500 Euros.

Payroll Cycle

The payroll cycle in Estonia is operated monthly. It is mandatory for every company, according to the payroll rules and regulations in Estonia, to process the payroll on the last working day of the month. In Estonia, it is not obligatory for an employer to make a salary payment on the 13th day of the month. However, the payroll process in Estonia allows the annual payment of bonuses and incentives to employees.

Estonia Payroll Options for Companies

A company can choose from the following options for processing payroll in Estonia:

• Remote payroll processing: A company in Estonia can engage in remote payroll processing if it has a parent company in another country. The parent company can use its payroll to pay the employees in Estonia in compliance with the payroll rules and regulations in Estonia.
• Estonia payroll processing companies: Companies in Estonia can outsource the payroll processing work to firms exclusively dedicated to processing payroll in Estonia. The firm processes the payroll according to the payroll rules and regulations in Estonia.
• Internal payroll processing: Companies with thousands of employees working in Estonia have a payroll department for processing payroll in Estonia. The department head adheres to the payroll policies and procedures in Estonia to process the employees’ payroll.
• Payroll process outsourcing: Outsourcing the extensive payroll process to a company like Multiplier to help you focus on the growth and development of the business. It maintains strict compliance with payroll rules and regulations in Estonia to diligently process the payroll for each employee of the companies in Estonia.

Entitlement and Termination Terms

The payroll rules and regulations in Estonia entitle employees to different types of paid leaves and holidays throughout the year. Employees in the companies of Estonia are entitled to the following leaves every calendar year:

• Holiday leave: Companies in Estonia offer a paid holiday leave of 28 days every year. The holiday leave does not include public holidays and national holidays.
• Sick leave: As per the payroll rules and regulations in Estonia, an employee can apply for 182 days of sick leave every year. Health Insurance Fund covers the salary of the paid sick leave from the ninth day of the leave.
• Maternity leave: Companies offer 140 days of maternity leave per payroll rules and regulations in Estonia. Pregnant employees can apply for maternity leave at least 30-70 days before delivery. It is also mandatory for the pregnant employee to furnish a medical certificate from a doctor recommending maternity leave.
• Paternity leave: Male employees in Estonia are entitled to paternity leave for up to 10 days within two months of the due date. The payment made by the company to the employee on paternity leave depends on the employee’s average salary.
• Childbirth allowance: The state government grants a childbirth allowance of 320 Euros and 1000 Euros for funding the birth of a single child and triplets, respectively.
• Childcare leaves: Depending on the kids’ age, parents may apply for paid childcare leave according to the payroll requirements of Estonia. The childcare leave is of six days for one child under the age of three or more than three kids under the age of fourteen. Either parent can apply for three days of childcare leave for one or two children under the age of fourteen years.
• Study leave: According to the provisions of the Adult Education Act, an employee on the payroll in Estonia can avail of a study leave of up to thirty days in a year. The payroll process in Estonia compensates for twenty days of study leave for the employee.

Termination of employment

The payroll rules and regulations in Estonia make it mandatory for the employer to maintain absolute fairness in the termination of an employee. There are five ways of terminating the employment contract between the employer and the employee as per the payroll policies and procedures in Estonia, as given below:

• By a mutual agreement between the employer and the employee
• By resignation of the employee
• By the termination of the employee during probation
• By resignation of the employee
• By the expiry of the employment contract upon the death of the employee or the expiry of the term

Notice period

Estonia Payroll Processing Company

Setting up payroll in Estonia requires in-depth knowledge of the intricate payroll rules and regulations in Estonia and the payroll tax rate in Estonia. It takes an immeasurable amount of time to comprehend the Estonia payroll process to expand your business into Estonia. That is why it is advised to focus on business growth and development while outsourcing the work of establishing payroll in Estonia to Multiplier. The professionals at Multiplier possess a thorough understanding of the payroll policies and procedures of Estonia. Any business organization can contact Multiplier today to know how to do payroll in Estonia before establishing payroll in Estonia in compliance with Estonian payroll requirements. 

How Multiplier Can Help with Global Payroll?

Outsourcing the payroll service to Multiplier helps streamline the payroll process operations of your company. We help comply with employment, payroll requirements, and laws related to the payroll tax rate in Estonia. You can benefit from our one-click Estonia payroll guide for managing the payroll of global teams and raising a single invoice for all employees.