What are Statutory Salary Deductions?
Statutory salary deductions is a category of taxes that employers are required to withhold from their employees' wages and pay to the government. These taxes are based specifically on a given worker’s earnings. As such, statutory salary deduction amounts may vary slightly from employee to employee.
As with other employment-related taxes, statutory salary deduction funding is generally used to finance various government programs and benefits, such as social security and pension programs, national healthcare programs, and unemployment insurance.
How are statutory salary deductions calculated?
While every country requires certain deductions to be made from an employee’s salary, the regulations vary widely. That said, there is usually some form of income tax every employee is required to pay as well as a contribution to social security.
For more information about tax rules in a particular nation, check out our country guides.
Income tax is calculated based on an employee’s gross (pre-tax) pay and deducted from their salaries. Income tax rate brackets and exemptions are quite different between countries. For expatriate workers, income tax rates may be significantly lower to serve as an incentive for moving to and working in the country.
Social security, pensions, and other insurance programs
Many countries require employees to contribute to a social security fund. The amount is typically based on a specific percentage determined by the local governing tax authority. While employees cannot opt-out from participating in statutory pension or social security schemes, in some countries, such as the UK, there is no statutory one for the employee but the employer has to contribute.
The amount an employee pays into social security or pension funds varies from country to country. For example, in Estonia, employees born after December 31, 1982, contribute an amount equaling 2% of their gross pay to a pension program. In Portugal, social security totals are equal to 11% of an employee’s gross pay.
Depending on the country, these taxes may be collected and capped at certain amounts. In Croatia, for example, employees contribute 20% of their gross earnings to pension programs but the amount is capped at €970 per month, up to €12,095 per year.
Workers are often required to pay tax contributions to help fund other social programs including national healthcare, disability insurance, accident insurance, unemployment insurance, and so on.
Some countries may impose additional local or municipal taxes on employment income or other forms of taxation specific to certain regions. These vary based on a number of factors and may apply in some areas of a country but not in others.
Expatriate taxes and tax treaties
For employees working across borders, tax rules can become complex. Some countries have specific tax regimes for expatriates or offer tax residency incentives to attract highly skilled workers.
Likewise, many countries have tax treaties in place to avoid double taxation between a worker’s home country and where they reside for employment. This makes it easier for employees working in multiple countries to determine where taxes should be paid and often provide credits or exemptions to prevent double taxation.
What is the difference between statutory salary deductions and employer payroll contributions?
Statutory salary deductions and employer payroll contributions overlap in a few ways, but each technically refers to different aspects of employment taxation. What’s important to note is that both employers and employees pay taxes and the amounts are calculated at every pay period.
Statutory salary deductions are taxes deducted directly from gross earnings and paid by employees to the governing tax body of a given country. In most cases, the employer deducts the taxes and makes sure they are paid to authorities. There may be cases, however, where employees need to do some form of personal tax return. Whatever way these taxes are deducted, they will influence a worker’s final take-home pay.
Employer payroll contributions, however, are not deducted from a worker’s salary but are based on the worker’s gross pay. These taxes are paid by the employer and are considered an expense of doing business.
As previously mentioned, the tax rates from country to country – for both employees and employers – can vary greatly.
For specific tax rules and percentages in a particular nation – paid by both employers and employees – check out our country guides.
Be sure all your employees’ statutory salary deductions are accurate with Boundless
Tax laws and regulations vary significantly from one nation to another. As an employer operating in multiple countries, navigating these differences and ensuring you stay compliant with the tax laws of each country is essential.
The team at Boundless know the ins and outs of every country we serve and can help ensure you follow all necessary laws and regulations.
Speak to one of our experts for more information regarding your specific needs.