Understanding payroll taxes and employer contributions in Portugal

As international companies expand into Portugal, understanding the local payroll landscape becomes critical to workforce management. Understanding how international businesses’ payroll taxes and employer contributions are structured is vital to ensuring compliance with Portuguese labour laws.

In this guide, we’ll explore the key components of payroll taxation in Portugal, covering both employer and employee responsibilities, and provide actionable insights to help your business manage these obligations effectively.

This article is specifically designed for HR professionals, finance teams, and international companies looking to hire in Portugal. Understanding the underlying tax framework will help you make more informed decisions and avoid compliance pitfalls, whether you’re managing payroll in-house or considering external solutions.

We’ll also discuss how a Portuguese Employer of Record (EOR) can assist companies without a local entity, streamlining payroll operations while ensuring legal compliance.

Overview of payroll taxation in Portugal

Payroll taxes in Portugal consist of a combination of social security contributions, income tax withholdings, and other deductions mandated by law. Employers and employees are responsible for contributing to the country’s social security system, which funds pensions, unemployment benefits, healthcare, and family allowances.

When processing payroll, businesses must calculate gross salary, apply the appropriate deductions, and remit the corresponding amounts to Portuguese tax authorities. Gross salary typically includes not just the base pay but also bonuses, commissions, and any additional taxable benefits provided to employees.

Employer contributions: what companies must pay

Portugal employers must contribute to the Segurança Social (Social Security) system. These contributions generally amount to 23.75% of an employee’s gross salary, covering the following areas:

• Pensions: Providing income for employees after retirement.
• Unemployment benefits: Supporting workers during periods of joblessness.
• Healthcare: Funding public health services and medical benefits.
• Family allowances: Offering financial support for employees with dependents.

In addition to Social Security contributions, employers may also need to account for specific sector-based obligations, collective labour agreements, or supplementary pension schemes. These costs are typically calculated as a percentage of the employee’s gross salary, meaning that higher salaries result in higher employer contributions.

Employee payroll deductions

On the employee side, payroll deductions include both Social Security contributions and IRS (Imposto sobre o Rendimento das Pessoas Singulares), which is Portugal’s personal income tax.

• Social security contributions: Employees generally contribute 11% of their gross salary.
• Income tax withholdings (IRS): Portugal uses a progressive income tax system, so the percentage withheld from an employee’s paycheck depends on their income bracket. For example, lower-income earners pay a smaller percentage, while higher-income earners face higher rates.

Employers are responsible for withholding these amounts from their employees’ gross salaries and transferring them to the appropriate authorities. The result is the employee’s net salary, the amount they take home after deductions.

Severance pay and termination costs

In Portugal, employers have specific legal obligations regarding severance pay. Employees terminated under certain conditions—such as redundancy—are entitled to compensation based on their length of service and salary level. Severance pay is generally calculated as a multiple of the employee’s monthly salary, with the exact formula depending on factors such as the type of contract and duration of employment.

Employers should also be aware of potential termination-related costs, including payments for unused vacation days, notice periods, and any outstanding salary or bonuses. Understanding these obligations in advance can help employers plan for the financial impact of workforce changes.

Corporate tax and its impact on payroll

While corporate tax is separate from payroll taxes, it indirectly influences a company’s total employment cost. Portugal’s standard corporate income tax rate is 21%, with additional municipal and state surtaxes that may apply. These taxes are calculated on the company’s profits, which means that higher payroll costs, such as employer contributions and employee gross salaries, can reduce taxable income.

In addition, employers must comply with VAT (value-added tax) regulations and other levies that might affect their overall financial operations. While VAT is not directly linked to employee salaries, businesses providing services may need to ensure that VAT reporting aligns with their payroll and expense structures.

Payroll tax calculation: step-by-step example

To illustrate how payroll taxes and contributions work, let’s consider a simplified example:

• Gross salary: €3,000 per month
• Employer social security contribution: 23.75% of €3,000 = €712.50
• Employee social security contribution: 11% of €3,000 = €330
• IRS withholding: 20% of €3,000 = €600 (assuming a hypothetical tax rate for simplicity)

Employer’s total cost: €3,000 (gross salary) + €712.50 (employer Social Security) = €3,712.50

Employee’s net salary: €3,000 – €330 (employee Social Security) – €600 (IRS) = €2,070

This example demonstrates how the employer’s costs exceed the employee’s net salary due to the additional contributions they must make.

Non-resident tax advantages in Portugal: NHR and NHR 2.0

Portugal has long been an attractive destination for expatriates, thanks in part to its favorable tax regimes. The original Non-Habitual Resident (NHR) program, introduced in 2009, offered significant tax reductions and exemptions for a period of ten years. Key benefits included:

• Flat tax rates: 20% on Portuguese-source employment income and 10% on foreign pensions.
• Tax exemptions: On certain non-Portuguese income.
• Inheritance and gift tax exemptions: For direct family members.

To qualify, individuals needed to become tax residents in Portugal and not have been tax residents in the previous five years.

As of January 1, 2024, the NHR regime has been replaced by NHR 2.0, which focuses on attracting professionals in scientific research, technical fields, and innovation. Notable features of NHR 2.0 include:

• Flat tax rate: 20% on Portuguese-sourced income from specific high-value-added activities, primarily in IT and related fields.
• Reduced scope of tax exemptions: Unlike the original NHR, NHR 2.0 does not offer broad tax exemptions for foreign-sourced income.
• Focused eligibility: Targeted at individuals earning income from high-value-added activities recognized by Portuguese authorities.​

Employers can leverage these regimes to attract and retain top international talent, offering them increased net incomes through reduced tax rates. Partnering with a Portuguese Employer of Record can further simplify the process, ensuring compliance with local tax laws and maximising the benefits of these tax incentives

How an Employer of Record helps with payroll compliance

Managing payroll and ensuring compliance can be particularly challenging for companies without a Portuguese legal entity. This is where an Employer of Record (EOR) comes in. An EOR acts as the legal employer on behalf of the client company, handling all payroll, tax, and social contribution obligations.

Here are the benefits of using an EOR:

• Compliance assurance: Ensures that payroll calculations, tax filings, and Social Security contributions comply with Portuguese labour laws.
• Reduced administrative burden: The EOR manages all payroll-related tasks, freeing up the company’s HR and finance teams.
• Faster market entry: Companies can hire employees quickly without waiting to establish a local subsidiary.
• Cost efficiency: Avoids the expenses and complexities of setting up and maintaining a local entity.

How does it works:

• The company identifies the employee(s) they wish to hire in Portugal.
• The EOR drafts a compliant employment contract and handles all onboarding tasks.
• The EOR processes payroll, calculates deductions and contributions, and ensures that all amounts are remitted on time to the relevant authorities.
• The company retains control over the employee’s day-to-day tasks while the EOR ensures full compliance on the administrative side.

For example, a Dutch tech company is hiring remote developers in Portugal. They’re unfamiliar with local rules, like Portugal’s 23.75% employer social security rate and annual holiday bonuses. Within a few months, they face penalties for late filings and misclassified payments.

By partnering with an Employer of Record in Portugal, they transferred responsibility for calculating and submitting payroll taxes, ensuring full compliance with Portuguese labour law. The EOR handled payslips, social contributions, and end-of-year reporting—freeing the company to focus on growing their team without the stress of navigating a foreign tax system.

Final considerations for managing payroll taxes in Portugal

Hiring and managing employees in Portugal involves careful planning, especially regarding payroll taxes and employer contributions. Staying informed about local tax laws, Social Security requirements, and employee rights is essential to maintaining compliance and avoiding penalties.

Partnering with an Employer of Record for businesses without a Portuguese legal entity can simplify the payroll process, ensure contribution accuracy, and allow seamless compliance with local regulations. With the right approach and professional support, international companies can build a thriving workforce in Portugal while keeping payroll operations manageable and legally compliant. Contact us today to learn more about how an Employer of Record can help your company streamline payroll and ensure compliance with Portuguese labour laws.