Understanding the Payroll in Luxembourg: Comprehensive Guide

Luxembourg is a favorable destination for foreign investment due to its wide range of flourishing sectors, government support, European gateway, availability of various tax incentives, and skilled workforce. It ranks 72nd in the 2020 Ease of Doing Business Index regarding starting a business and protecting minor investors. 

To entice, hire, and sustain the top talent in the company, you must know how to manage the payroll in Luxembourg. Moreover, to accomplish the payroll process, understand salary structure, tax systems, payroll options, tax systems, entitlement and termination terms, social security contributions, etc. You should also be familiar with local rules and regulations stipulated by the Luxembourg government.

You should thoroughly understand payroll tax in Luxembourg and labor requirements to establish accurate and compliant payroll. The following guide explains all the facets you must know about payroll in Luxembourg.

How Is Payroll Calculated in Luxembourg?

The payroll policies and procedures in Luxembourg tracks employees’ standard working hours and ascertains that employees receive timely payments. Besides, you must withdraw social security contributions and other valid deductions by conforming to payroll rules and regulations in Luxembourg.

The formula to calculate payroll is

Net Salary = Gross Salary – Gross Deductions

here,

• Gross Salary = Basic Salary + Reimbursements + HRA + All types of Allowances + Arrears + Bonus
• Gross Deductions = Income Tax + Professional Tax + Leave adjustments + Loan repayments (if any) + Insurance

Important Elements of Salary Structure in Luxembourg

The elements discussed in this section constitute the salary structure in Luxembourg:

Cost to Company (CTC)

The CTC indicates an annual amount payable by a company when recruiting an employee. It includes payroll deductions in Luxembourg, employees’ gross and net remuneration, additional benefits, etc.

Gross salary

It covers all aspects that help an employer outline an employee’s salary package. These aspects are social security contributions, total income before calculating payroll deductions in Luxembourg, health insurance, etc.

Basic salary

Basic salary denotes the amount employees get after the employer calculates all deductions from the annual salary package. It is determined by employee’s designation and industry in which they are working in.

Net salary

It represents the amount transferred to an employee’s bank accounts after considering all deductions from the gross salary.

Allowances

In Luxembourg, all employees are entitled to several allowances (like travel allowance, family allowance, coaching allowance, etc.) irrespective of the industry and the employer. It represents all job employment expenditures that employers must pay to their employees. It guarantees a decent work-life balance for the employees.

How to Set Up a Payroll in Luxembourg

The below steps assist businesses intending to set up payroll in Luxembourg:

• Step 1: Register a business in Luxembourg with the RCS (Trade and Companies Registry). This step also authenticates your business name’s validity.
• Step 2: Obtain an EIN (Employer Identification Number) from the IRS.
• Step 3: Register the national tax number, company name, and labor and tax registration.
• Step 4: Obtain a local or state business ID (if required).
• Step 5: State each employee’s full name, date of birth, address, tax filing number,  job title, joining or termination date, and compensation particulars. Moreover, other details that must be included are bank details, annual salary, personal income tax forms, and work certificates from their previous employers. All these details assist you in calculating the payment amounts of employees precisely.
• Step 6: Classify your employees among full-time, part-time, and independent contractors.
• Step 7: Collect tax information from the employees. The employees fill out various forms based on their type of employment. For example, full-time and part-time employees may fill up a W-4 form and an I-9, and freelance or contract employees may fill up a W-9 form.
• Step 8: Register with the ACD (Luxembourg Inland Revenue) (for tax purposes) and CCSS (Social Security Common Center) to release social security payments (including pension insurance, maternity and sickness insurance, accident insurance, and long-term care insurance).
• Step 9: Register for pension and health insurance via the Tax Authority.
• Step 10: Open a Luxembourg bank account with a local bank to disburse payroll-related payments. Before validating the business bank account, you need the court and registration details (like proof of statistical number, health insurance registry, etc.).
• Step 11: Create a payroll policy based on voluntary and mandatory payroll deductions, standard workweek, wage structure, payroll record-keeping process, number of pay periods per year, and more related aspects.
• Step 12: Calculate each employee’s gross pay.
• Step 13: Calculate deductions for each employee. Reference their W-4 (Employee’s Withholding Certificate), and evaluate state and federal requirements for tax withholdings. Moreover, you must calculate insurance costs and other benefit requisites to calculate deductions.
• Step 14: Determine the employee’s net pay and approve your company’s payroll cycle and system.
• Step 15: Compensate each employee via a local entity (lets you hire and pay employees compliantly) or use service from an Employer of Record (EOR) platform in Luxembourg. The available payment methods are cash, direct deposit, mobile wallet, paper checks, or prepaid cards.

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

Three stages constitute the processing of payroll in Luxembourg. The corresponding explanation is available here. 

Pre-payroll stage

It considers Luxembourg’s legal requirements to process payments and payroll. The details of the relevant mandatory components are as below.

Business profile

You should first register your business as a legal entity under the Luxembourg Chamber of Commerce. It will provide you with a unique business number. You must specify this number on all official payroll communications.

Attendance policy

The attendance policy stipulates the rules declared for the employees’ attendance. It assists you in calculating overtime, standard and special attendance, permissions, and more. So, this policy simplifies payroll calculation and compliance.

Statutory components

It states the prevailing and new statutory compensation laws and regulations that provide employee salary and leaves benefits.

Salary components

It involves various factors affecting salary calculation, i.e., allowances, deductions, payroll tax in Luxembourg, and leave types.

Payment schedule

It outlines the day on which the employer must pay the employees’ payments. It also states a fixed payment schedule to prevent payment delays. Through this component, employees stay informed on when they will receive monthly payments.

Employee details

You should collect professional and personal details about all your employees. These details include employees’ names, job titles, nationalities, departments, salary details, compensation, benefits, etc. If any payroll-related issues arise, these details will work as evidence and assure that the employee receives timely payments. Make sure to mention all active employees. Such gathered details are entered into payroll software.

Payroll calculation stage

In the Luxembourg payroll compliance checklist stage, you must enter the data collected from the previous stage into the payroll system. You should track working hours and calculate deductions and taxes. Next, you should calculate employees’ net salaries and print payslips to ensure the payroll process is error-free.

You should calculate and maintain payroll records either manually or automatically. Subsequently, you can process payments timely.  

Post-payroll stage

All components described in this stage of the Luxembourg payroll compliance checklist help you determine the payroll process.

Statutory compliance

The payroll administrator should rigorously follow statutory compliances while carrying out payroll processing. Make different deductions like standard deductions (EUR 540), social security contributions, insurance premiums, debit interest, mortgage interest, private old age pension schemes, lump sum deductions, etc. from the employees’ payroll. All such deductions will be sent to the concerned authorities or government agencies.

Payroll accounting

It focuses on tracking payments and payroll-related expenditures. It includes all compensations like commission, gross pay, and health insurance. You can control such expenses by using internal payroll accounting. Otherwise, you can outsource it to an external auditing service.

Payroll reporting and compliance

It focuses on preparing all statutory compliance and reporting forms to send to local regulatory authorities. Furthermore, it stipulates all contributions, compensation, withholdings, and other data inquired in your compliance and reporting forms.

Payroll Contributions

Depending on the salary, employers and employees must contribute to social security in Luxembourg to abide by the Luxembourg payroll requirements.

Employer contribution

Employee contribution

Employee payroll contributions cover the following elements.

Payroll Cycle

Generally, the payroll cycle in Luxembourg is monthly and paid on the last day of each month. Certain companies pay weekly on the last day of the week.

Luxembourg Payroll Options for Companies

Depending on the needs and financial plan, employers can choose among various options to smoothly process the payroll in Luxembourg. The below section discusses different HR payroll options in Luxembourg.

• Internal payroll: Larger companies with long-term agreements with Luxembourg can operate internal payroll. This HR payroll in Luxembourg is expensive because the firm has to spare adequate time and hire a proficient workforce experienced at establishing payroll.
• Remote payroll: A remote payroll service provider pays the employees. It is a reasonable option, but the company should be familiar with different labor laws in Luxembourg.
• A Luxembourg payroll processing company: You must use this option of the Luxembourg payroll guide after profoundly researching the market. It involves utilizing services from a reliable payroll processing company experienced at establishing payroll and payroll rules and regulations in Luxembourg.
• Luxembourg payroll outsourcing: It is known to be an easy, flexible, and cost-effective option for governing payroll in Luxembourg. It handles all the elements of the Luxembourg payroll process and confirms that the payroll processes obey the Luxembourg payroll requirements. Besides, it excludes all the hassles of payroll processing in the country and lets you prioritize the company’s progress. Companies can use services from a worldwide PEO service provider like Multiplier.

Entitlement and Termination Terms

Entitlement terms in Luxembourg

Employees in Luxembourg are entitled to the following benefits.

Paid time off

• Employees in Luxembourg receive a minimum paid annual leave of 26 working days.
• The employers or the collective bargaining agreements may grant additional paid vacation days.

Sick leave

• Employees in Luxembourg are entitled to up to 26 weeks of sick leave.
• Employees receive 100.00% of their standard salary during sick leave. 
• This entitlement applies until the calendar month’s end when the employee’s 77th calendar day of sickness leave falls. 
• Within 18 months, an employee can get 11 weeks of sick leave with 100% pay and the number of days left between the 77th day of leave and the end of the month.
• The employee need not present a medical certificate for 1-2 days of sickness.
• The employee must present a medical certificate for more than three days of sickness.

Maternity leave

• Pregnant employees in Luxembourg get 20 weeks of maternity leave.
• The employee must be covered under the mandatory health insurance for at least six months within the last year before maternity leave.
• The maternity leave can start eight weeks before the expected delivery date.
• The employee must inform their employee a minimum of 12 weeks before the expected delivery date.
• Social insurance pays for maternity leave. It rounds off at five times the minimum wage.

Paternity leave

• Employees in Luxembourg are entitled to up to 10 days of paternity leave.
• The father should inform the employee at least two months before the leave, or the leave can reduce to 2 days.
• Employees can take paternity leave within two months of the child’s birth.

Parental leave

• There are two eligibility criteria for parental leave. They are mentioned below:

1. 1. The employees must work at least 10 hours per week
   2. The employees should register with social security during the child’s birth/adoption for at least 12 continuous months.

• The Children’s Future Fund compensates for the parental leave.

Public holidays

• The employees in Luxembourg get 11 public holidays per year.

Severance pay

• Employees in Luxembourg receive severance pay as follows:

Termination terms in Luxembourg

• The termination process in Luxembourg varies based on the type of contract, the reason for termination, and implementation of the Employment Agreement and the Collective Agreement.
• According to the labor code, for companies with more than 150 employees, there must be a hearing before the employee termination takes place.
• For companies with a minimum 15 employees, the organization should notify the Economic Committee about the dismissal.  
• The notice period for a permanent or temporary employee depends on the employee’s duration of employment as mentioned below:

Note: The employer can pay their employees in lieu of notice.

Luxembourg Payroll Processing Company

It is easy to run timely, precise, and compliant payroll in Luxembourg if foreign investors understand reporting, local tax, and employment and compensation requirements. Before setting up payroll in Luxembourg, they must also understand the compliance with Luxembourg Labor and local employment laws. You can use services from a worldwide PEO company like Multiplier to acquire the optimum benefits of payroll rules and regulations in Luxembourg.

How Can Multiplier Help with Global Payroll?

Luxembourg’s payroll management covers various factors ranging from payroll calculation to employees’ entitlement and termination terms. Businesses may need help handling the payroll process autonomously since it is time-consuming. You can use the services from a global PEO platform like Multiplier to exclude these hassles and implement the Luxembourg payroll process.

Multiplier is popular for providing EOR solutions to worldwide corporations prevalent in 150+ nations. Our experts govern payroll calculation and processing, employee & employer contributions, employee recruitment, and other related tasks. Besides, our SaaS-based PEO services guarantee that payroll processing works smoothly in the country.