In this article, we will take you through some examples of how to employ
- Estonian tax residents,
- residents of other EU countries and
- residents of non-EU countries to work for your Estonian OÜ.
If you have not yet, first read the Labour relations in Estonia and Individual tax residency articles.
Employing an Estonian tax resident
Consider hiring an Estonian tax resident to physically work in Estonia for your Estonian company. After negotiating the employment terms, as usual, there are only two steps to complete regarding taxes.
1. Register the new employee in the employment register, the latest on his/her first working day.
The employment register is maintained by the Tax Authorities. You can access the employment register online via the e-Tax system by logging in to your Company’s profile with your e-residency card.
You must insert the general information about the employee – name, personal ID code or date of birth (if the person has no personal ID code), the beginning date of the employment, type of employment, place of employment, the position of the employee, working time rate and date of termination of the contract (if applicable). Please remember to also de-register the employee when he/she no longer works for you. The termination of employment should be registered within ten days of the date of termination of employment.
2. Declare salary payments on the monthly combined corporate income and payroll tax return (called TSD in Estonia) and pay the taxes due.
The TSD return must be submitted and the calculated taxes paid by the 10th day of the month following the month when the salary payment was made.
Since the employee is an Estonian tax resident working in Estonia, all payroll taxes must be paid in Estonia.
The tax return is accessible via the e-tax system, where you need to report the employee’s ID code, gross salary amount and whether the individual would like to make use of monthly deductions or not. Tax calculations are automatically made by the system itself.
Example for the calculation of payroll taxes
| The gross salary agreed with the employee is EUR 1,000 | 1,000 | |
| 1) | 1,6% employee’s unemployment insurance contribution | -16 |
| 2) | 2% mandatory funded pension contribution* | -20 |
| 3) | EUR 700 monthly tax-free income** | -700 |
| 4) | 22% personal income tax | -58.08 |
| The employee receives a net salary of EUR 905,92 | ||
| 5) | 33% social tax calculated on top of the gross salary payable by the employer | 330 |
| 6) | 0,8% employer’s unemployment insurance contribution | 8 |
| The total cost born by the employer is EUR 1,338 |
* The mandatory funded pension is obligatory for those born in 1983 and later. Persons who were born between the years 1942 and 1982 had the option to voluntarily subscribe to the funded pension system. The right and obligation to pay the contributions arise on 1 January following the year when a person becomes 18 years old.
** The amount of tax-free income or the so-called basic exemption in Estonia depends on an individual’s total annual income, so it is different for everyone. The aim of the basic exemption is to reduce the tax base for personal income tax. The employer applies it based on the employee’s own application as the employer may not know about the employee’s income from other sources. An employee makes the application according to the following brackets:
- Average monthly income up to EUR 1,200 – basic exemption EUR 700 per month
- Average monthly income EUR 1,201-2,099 – basic exemption equals 700 - 0,55556 * (employee’s income 1,200).
- Average monthly income more than EUR 2,100 – no basic exemption available
The amount of basic exemption can be changed during the year multiple times. For example, if the employee has received an automated notification from the Estonian Tax Authority that his/her used basic tax exemption is higher than his/her expected maximum basic exemption, the employee can submit a new application and change the amount the employer can deduct in the TSD return so as to avoid paying additional income tax upon submitting the annual personal income tax return.
In the example above, the total payroll cost for the company is EUR 1,338. The total taxes payable amount to EUR 432.08 remitted to the state budget and the employee receives EUR 905,92 as a net salary.
The minimum monthly gross wage in 2025 is EUR 886 per month. Moreover, Statistics Estonia publishes overviews of average wages per economic activity. The latest one can be found here and from the same webpage, you are able to search for more detailed statistics about wage levels and other macroeconomic indicators.
Together with salary reporting, it is also necessary to report any fringe benefits given to the employee, but these are not personalised and do not affect the employee’s taxable income.
In general, fringe benefits are all non-monetary benefits, that the employer provides to the employee and employee benefits from them.
Employing a tax non-resident from the EU, Iceland, Liechtenstein, Norway or Switzerland
You are hiring an Estonian tax non-resident from either an EU country, Iceland, Liechtenstein, Norway or Switzerland. The employee would continue working in their home country i.e. not in Estonia.
No tax reporting or tax payment obligations should arise in Estonia. Both income and social tax would be payable in the employee’s country of residence.
Please bear in mind to check the respective country’s (where the employee works and is a resident) domestic tax laws. It is likely that your Estonian company would have to register as a foreign employer and start paying payroll taxes in that country.
Main principles of social security in the EU
Individuals are covered by the social security system of one Member State at a time, therefore contributions are payable only in one country.
Usually, social tax is paid in the country where you work, unless you are on an assignment or working in different Member States.
Now, consider hiring somebody who is not an Estonian tax resident, but is a citizen of the EU, Iceland, Liechtenstein, Norway or Switzerland and who is happy to start temporarily working from Estonia while still mainly living somewhere else.
It is good news that a European Economic Area (EEA) or Swiss citizen can work in Estonia for up to 3 months without registering the right of residence. After three months have passed, the individual must register his/her place of residence in the population register of Estonia to obtain the right of residence in Estonia. The right of temporary residence is given for five years with extension opportunities. The ID card can be applied from the Police and Border Guard Board. An ID card certifies the person’s right to temporary residence.
In case the employee becomes an Estonian tax resident, please see the compliance-related comments above for Scenario 1 - Employing an Estonian tax resident.
In case the employee remains a tax resident in another country, the following must be done.
1. Register the new employee in the employment register, the latest on his/her first working day.
You can access the employment register via the e-Tax system by logging in with your e-Residency card.
The general information about the employee needs to be filled in – name, personal ID code, the beginning date of the employment, type of employment, place of employment, the position of the employee and date of termination of the contract (if applicable). Please remember to terminate the employee registration when he/she no longer works for you.
Please note that the tax non-resident employee needs to have a non-resident number or an ID number to register them in the employment register. This can be requested from the Tax and Customs Board.
However, if it is already agreed at the beginning of the employment relationship that the person will be working for more than 3 months, it is advisable that the individual registers his/her place of residence in the population register of Estonia before commencing work.
The application for an ID card can be submitted to the Police and Border Guard Board. This certifies the person’s right to temporary residence. Furthermore, an ID card gives the opportunity, for example, to digitally sign documents and access electronic services. More information from the Police and Border Guard Board.
2. Declare salary payments on the monthly corporate income- and payroll taxes return (called “TSD” in Estonia) and pay the taxes due.
Since the non-resident is physically working in Estonia and the salary payment is made by an Estonian resident company (your company is established in Estonia), the income tax is payable in Estonia.
As the place of work is in Estonia and no exemption applies i.e. this is not an assignment nor working in different member states, the social tax is also payable in Estonia. To avoid paying double social security contributions in Estonia and in the country of residence, the exact position of the non-resident should be analysed in detail.
The tax return is accessible via the e-tax system, where you need to report the employee ID code and gross salary amount. Tax calculations are made by the system itself. However, please remember that non-residents are reported in a different annex of the TSD as residents.
Example of the calculation of payroll taxes
| The gross salary agreed with the employee is EUR 1,000 | 1,000 | |
| 1) | 1,6% employee’s unemployment insurance contribution | -16 |
| 2) | 22% personal income tax | -216.49 |
| The employee receives a net salary of EUR | 767.52 | |
| 3) | 33% social tax calculated on top of the gross salary payable by the employer | 330 |
| 4) | 0.8% employer's unemployment insurance contribution | 8 |
Tax-free income usually cannot be taken into account when making salary payments to tax non-residents. Also, the mandatory funded pension payments are not obligatory.
Tax non-residents can later apply for basic exemption via their annual personal income tax return.
In the example above, the total cost for the company is EUR 1,338. The total tax amount of EUR 570.49 is remitted to the state budget and the employee receives EUR 767.52 as net salary.
Together with salary reporting, it is also necessary to report any fringe benefits provided to the employee. In general, the fringe benefits are all non-monetary benefits, that the employer provides to the employee and the employee benefits from them.
Employing tax non-residents from a third country
You are hiring an Estonian tax non-resident from a third country. The employee would continue working in his/her home country i.e. not in Estonia.
No tax reporting or tax payment obligations in Estonia. Both income and social tax would be payable in the employee’s country of residence.
However, please bear in mind to check the respective country’s (where the employee works and is a resident) domestic tax laws. It is likely that your Estonian company would have to register as a foreign employer and start paying payroll taxes in that country.
However, if you are hiring an Estonian tax non-resident from a third country to start working in Estonia, a number of aspects should be considered for your employee to work in Estonia legally.
1 - they need to have a legal right to temporarily stay in Estonia or to move to Estonia.
2 - once they have a legal right to stay in Estonia temporarily, in the majority of cases, the employer, meaning you, must register short-term employment with the Police and Border Guard Board before the employment starts.
Non-residents may act as members of the management or supervisory board of an Estonian legal entity without registration.
Foreigners with residence permits, in general, have the right to work in Estonia. Working requirements are dependent on the specifics of the residence permit.
3 - if the employee is staying in Estonia temporarily, it is necessary to apply for an ID code in order to register the employee in the employment register. This can be requested from the Tax and Customs Board unless the employee is already an Estonian e-resident in which case they have an ID code.
Now the following steps apply after the employee has received the right to stay and work in Estonia. Let’s assume, that the individual's tax residency changes to Estonia. If the individual keeps his home tax residency (at least in the beginning) please follow the reporting rules set up in Scenario 2.
1. Register the new employee in the employment register, the latest on his/her first working day.
Same as under other scenarios, you can access the employment register via the e-Tax system by logging in with your e-residency card.
The general information about the employee needs to be provided – name, personal ID code, the beginning date of the employment, type of employment, place of employment, the position of the employee, working time rate and date of termination of the contract (if applicable). Please remember to also terminate the employee registration when he/she no longer works for you.
2. Report salary payments made to the employee on monthly income and social tax return (called TSD in Estonia), paying both income and social tax in Estonia.
Submitting tax returns and paying taxes by the 10th day of the month following the month during which the payment was made.
Since the individual is physically working in Estonia and the salary payment is made from an Estonian company (your company was established in Estonia), the income tax is payable in Estonia.
Since the place of work is in Estonia and assuming that no social tax treaty applies, the social tax is also payable in Estonia.
Example of the calculation of payroll taxes
| The gross salary agreed with the employee is EUR 1,000 | 1,000 | |
| 1) | 1,6% employee’s unemployment insurance contribution | -16 |
| 2) | 2% mandatory funded pension contribution* | -20 |
| 3) | EUR 700 monthly tax-free income** | -700 |
| 4) | 22% | -58.08 |
| The employee receives a net salary of EUR 905,92 | ||
| 5) | 33% social tax calculated on top of the gross salary payable by the employer | 330 |
| 6) | 0,8% employer’s unemployment insurance contribution | 8 |
| The total cost born by the employer is EUR 1,338 |
* The mandatory funded pension is obligatory for persons born in 1983 and later. Persons who were born between the years 1942 and 1982 had the option to voluntarily subscribe to the funded pension system. The right and obligation to pay the contributions arise on 1 January following the year when a person becomes 18 years old.
** The basic exemption can be applied according to the employee’s application. The employee makes the application according to the following brackets:
- Average monthly income up to EUR 1,200 – basic exemption EUR 500 (EUR 700 from 1 January 2025) per month.
- Average monthly income EUR 1,201-2,099 – basic exemption equals 500 – 0.55556* (employees income - 1,200).
- Average monthly income more than EUR 2,100 – no basic exemption available