Whether you are a small company or in charge of a large corporation, hiring employees for your business in Portugal entails paying compensation and handling all deductions and tax contributions. Familiarizing yourself with how the payroll and tax systems in Portugal work is vital to ensure compliance with the local business regulations.
Portugal has its own set of unique laws and processes when it comes to employment and tax contributions. You must be mindful of the necessary payments and deductions that need to be made for each employee. To help you out, here is a guide on what to know about payroll and tax contributions in Portugal.
(You can also find out more about doing business in Portugal here).
Payroll in Portugal
Salaries are paid at least every other week, either through direct bank deposit, money order, or check. Payments must be made during workdays and scheduled working hours.
When it comes to processing payroll, you must consider employment regulations on leave days, working hours, holidays, as well as termination and severance. As an employer, you need to provide a payslip regularly to your employees. It should include all the benefits, deductions, and compensations of the employee.
Here is some important information about the payroll system in Portugal below:
- Salary payout
The minimum wage in Portugal is adjusted annually. Currently, it is around €9,300 per year. This is divided into either 12 or 14 paychecks, depending on your setup.
- Overtime pay
Overtime pay is paid at a rate of 125% of the salary for the first hour and 137.5% for the following hour, for a maximum of two hours on working days per week. On rest days or holidays, employees must be paid at a rate of 150% for all hours they work, up to a maximum of eight hours per week.
- Fixed-term contracts
You are free to employ several workers on fixed-term projects for your business. However, you must pay additional payroll tax if you exceed the industry average for hiring people on fixed-term contracts. The additional tax rate is computed using the difference between the average and the actual number of contracts you have. The results can be taxed up to a maximum of 2%.
- Unemployment benefits
As an employer, you must also take note of paying into unemployment benefits of your employees. There are two separate funds that you must contribute to, namely: the Fundo de Compensacão do Trabalho (FCT), which has a rate of 0.925% of the employee’s salary, and the Fundo de Garantia de Compensacão do Trabalho (FCGT), which has a rate of 0.075%.
Social Security in Portugal
In Portugal, contributions to the social security system are divided between employees and employers. With profit organizations, the employer rate is 23.75% while the employee has to shoulder 11%.
For non-profit organizations, the employee’s contribution stays at 11%, while the employer has to shoulder 22.3%. Contributions go to benefits such as pensions, leaves, and unemployment insurance.
Paying Tax in Portugal
Employers have to take note of the different kinds of taxes implemented in Portugal. Some of the most important taxes include:
Income tax is deducted from employee salary on a regular basis. The amount deducted is assessed using a progressive scale with rates starting from 14.5% up to 48%, depending on the salary level of the employee. Here is a list of the most recent income brackets and their corresponding taxes.
- €0 – € 7,112: 14.5%
- €7,113 – €10,732: 23%
- €10,733 – €20,322: 28.5%
- €20,323 – €25,075: 35%
- €25,076 – €36,967: 37%
- €36,968 – €80,882: 45%
- More than €80,882: 48%
Employees with annual salaries ranging from €80,000 to €250,000 are subject to a solidarity surtax amounting to 2.5% of their income. Those with salaries exceeding €250,000 are subject to a higher solidarity tax of 5%.
Meanwhile, non-residents working in Portugal are taxed at a flat rate of 25%.
Your task as an employer is to withhold income tax and remit the payments to the government every month. You must also provide an annual tax summary to your employees by January the 20th of each year.
If your business is in either Madeira or Azores, income tax rates would be different as these areas are autonomous regions of Portugal.
The corporate tax in Portugal is currently set at 21%. Lower rates apply to Madeira (20%) and Azores (16.8%). SMEs enjoy reduced corporate taxes for the first €25,000 of the company’s taxable income.
There are also state surcharge taxes that range from 3% to 7%. Municipal taxes of up to 1.5% also apply, depending on the rate imposed in the area.
If you are self-employed, you have to shoulder your full social security contribution. While the total amount varies due to several factors, the general rate paid by self-employed workers in Portugal is around 21.4%. Payments must be made between the 1st and 20th of every month.
The Portuguese Tax Authority is aggressive in penalizing both major and minor offenders when it comes to tax evasion and fraud. You could be fined between 30% to 100% of the tax due if you pay your taxes late.
Why Outsource Your Payroll Processing
Payroll processing can be complex, and it is possible to miss some requirements that can result in disputes and other issues arising. To avoid this, outsourcing the processing of your payroll and tax contributions to professional third-party service providers can help ensure accuracy and compliance with local tax and employment regulations.
Tax and Payroll in Portugal
As a global expansion solutions partner INS Global is able to assist your business with all its payroll needs in Portugal. Our payroll experts ensure that your payroll is paid on time and all the necessary taxes and deductions have been made. We take care of all HR administrative duties while you focus on running your business in Portugal. We can also help your business hire and pay staff in Portugal, find top talent, or invoice clients. Get started today and let our consultants take care of your businesses admin needs.