How to Hire and Pay Contractors in Iceland

Hiring independent contractors in Iceland offers flexibility and specialized talent. This guide covers key differences, misclassification risks, and hiring, payment, and conversion insights.

The Land of Fire and Ice, Iceland is renowned for its world leadership in renewable energy, innovation, and sustainable industries. It is also an excellent spot to witness the Aurora Borealis (the Northern Lights), making it a prime tourist destination. Drawn by its stunning vistas, the country welcomed over 2.3 million foreign visitors in 2024.

Situated between North America and Europe, Iceland offers businesses a logistical advantage for accessing the transatlantic markets. The country has a well-developed infrastructure with efficient transport links. It’s also close to the major global economies – US, Canada, UK, etc. – making it a hub of international trade and expansion.

The country is also a leader in sustainability with 100% of the electricity generated from hydropower and geothermal power sources. The corporate tax rate is 21% in Iceland, which is lower than the OECD average of 23.85%, making it a cost-effective destination for new businesses.

Iceland consistently ranks among the happiest countries in the world, securing 3rd place in 2024.
The GDP for 2023 was USD 31.3 billion.
Major exports of the country include raw aluminum, fish fillets, non-fillet frozen fish, and orthopedic appliances.
It ranked 7th in Numbeo’s 2025 Quality of Life Index.
It is one of the least densely populated countries with a population of just 370,000 people.
In 2023, Iceland exported USD 1.05 billion worth of fish fillets, making it the world’s 7th largest exporter of Fish Fillets.
Iceland is also the world’s 11th largest aluminum producer.
The median age of the population is 36.8 years.
The literacy rate is 99% as of 2024, remaining constant over the last three years.
43.5% of the population holds specialized education including diplomas, certificates and degrees in technology, fisheries management, marine sciences, engineering, IT, and creative industries.
78% of the working-age population between the ages of 15 to 64 is employed.
The official language of the country is Icelandic.

However, the salaries are amongst the highest in Europe. The country also has very strong labor protections for its employees, so it’s difficult for new businesses to hire, manage and retain their workforce. Still, the country offers a compelling environment with a stable economy and skilled workforce.

If you’re looking to tap into Iceland’s tech sector or creative industries, the best way is to hire independent contractors for services. Let’s learn what independent contractors are in Iceland and how you can hire them there.

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What Are Independent Contractors in Iceland?

Independent contractors are self-employed individuals or freelancers who work on a contractual basis in Iceland. They are not employees and operate their own businesses, or offer services independently. They provide goods or services to their clients and are not classified as ‘employees.’ Here are some key traits of an employee:

Independent contractors are self-employed
They must be registered with the Icelandic Directorate of Internal Revenue (RSK).
They are sole proprietors (einstaklingsrekstur) or may be working as a private limited company.
They pay their own taxes and Social Security contributions.
If the annual revenue exceeds ISK 2,000,000 (USD 14,875), they must register for VAT.

Independent contractors are easy to find in Iceland, especially in the fields of IT, software development, creative art, construction, consulting, and tourism.

Differences Between Employees and Independent Contractors in Iceland

The key difference between independent contractors and employees is based on their working conditions, legal status, and work obligations.

Legal Status

The employees work under a formal employment contract with the employer, they are part of the organization, and must follow the rules, schedules, and work guidelines. The employer controls how, when, and where they complete the work.

The independent contractors, however, work under a service contract. They have complete control over their work, and they set their own working hours and clients. They can also work with multiple clients at a time instead of being tied to one.

Taxation & Social Security

Employers deduct income taxes and Social Security contributions from the employee’s salaries and remit them to the Directorate of Internal Revenue (Skatturinn). They also contribute to the authorized pension funds for them.

The independent contractors, however, are responsible for paying their own taxes and social security (if they self-declare), and they are also responsible for registering for VAT.

Employment Benefits

Employees are entitled to paid vacation leaves, sick leaves, parental leave, and other unemployment benefits. They are covered by the Icelandic labor laws or the Act on Working Environment, Health and Safety in Workplaces and have to abide by the working hour regulations and other workplace obligations.

Independent contractors do not receive any of these benefits, like paid or others, and they are not covered hours and must arrange for their own insurance and retirement savings.

Termination

The employees have job security protections and must serve a notice period before they leave. Businesses have to follow specific Icelandic labor laws to terminate an employee. The independent contractors work, however, is based on contractual agreements. It ends once a project is completed or as per the contract clauses. There are no legal protections for these contractors unless specified in their agreement.

Control

Employees work inside the company, and are provided with the needed equipment, software, and office space. They have to abide by the employer’s instructions and workplace policies. The independent contractors use their own tools, software, and workplace setting. They have complete authority to decide how to complete their tasks, unlike employees.

Misclassification and Its Consequences

When a worker is wrongly classified as an independent contractor, instead of an employee, it is called misclassification. Iceland has a clear distinction between independent contractors and employees based on the work and control. If a contractor is working as an employee, but is not classified as the same, the company may have to face financial and legal consequences.

Here are some signs to check if your employee is misclassified as an independent contractor.

They are working exclusively for your company.
You are managing their work schedule, tasks, and way of working.
They don’t handle their taxes or pension contributions.
They are given benefits similar to those of employees, such as bonuses and paid time off.

Once it is established that an independent contractor is actually an employee, the company may have to pay the unpaid taxes, pension contribution, and social fees. They may also have to pay the fines for misclassification as imposed by the Icelandic tax and labor authorities.

The workers may also file legal claims to receive the employee benefits they had previously been denied. All of this will also negatively affect the company’s reputation and business.

The Benefits of Hiring Independent Contractors in Iceland

There are many benefits of hiring independent contractors in Iceland. Since the population is already small, many people are working small jobs or as contractors for multiple clients. The flexibility is beneficial for both workers and businesses. Let’s take a look at some of the key advantages of hiring independent contractors in Iceland.

Cost Savings

When you hire a full-time workforce in the country, you have to pay them the mandatory benefits. You also have to ensure you make the Social Security contributions, taxes, pension payments, etc. But, when you hire an independent contractor, they handle these costs themselves.

Since you don’t have to have an in-house HR department, or give them paid vacations, leaves, or other benefits, it greatly reduces the overhead costs. Another benefit is that independent contractors use their own equipment and work from their own offices. So it eliminates costs of giving them the dedicated office space, equipment, and work tools.

Flexibility

At times, you have a greater workforce requirement for a short-term period. You may have an ongoing project or a high seasonal demand. So you can hire these independent contractors without any long-term hassles.

It also becomes easy to scare your workforce up or down depending on the requirement, since the independent contractors don’t need to be terminated following the procedure of normal employees, they can immediately be released per the contract or once the job is complete.

Specialized Skills

Independent contractors often bring in diverse expertise and experience as they’ve worked in different areas or with different clients. They can bring in value to your company without requiring any training or investments in their development.

Less Administrative Burden

When you have employees working for you in Iceland, you have to take care of their tax withholdings, payroll processing, compliance with the labor laws, and other red tape requirements.

But, when you hire independent contractors, you don’t have to deduct their taxes or Social Security contributions. The contractors are responsible for handling them themselves. Also, the contract is simple for independent contractors. Since employment agreements are long-term, they are more complex and detailed.

Increased Efficiency

Independent contractors get to work immediately and work towards the achievement of the final results. They don’t have to be given any formal training or onboarding. This reduces the delays and you get immediate results without incurring further costs. They are also focused on delivering results rather than meeting the office routines.

Labor Laws in Iceland

Iceland labor laws are quite stringent and are designed to protect the rights of the workers. They ensure that there is a fair environment for all the workers. Here are the key aspects of labor laws concerning independent contractors and employees in Iceland.

Wage Rates: There is no official government-mandated minimum wage rate in Iceland. The wages are determined by the bargaining agreement, between labor unions and employers. The wage rate varies by industry, job role, seniority, and education. Similarly, independent contractors have no minimum wage requirements. They negotiate their terms with the clients.
Working Hours: The standard work week in Iceland is 40 hours a week. It is divided into 8-hour days. If an employee works more than 8 hours a day, they are said to be working overtime. The pay rate for overtime is 1.0385% of the total monthly salary. The total working hours, however, are capped at 48 hours a week including the overtime.

Independent contractors have no working hours or overtime pay limitations. They just have to complete the given tasks. They set their own schedules and work on their own convenience.
Benefits: The employees are entitled to 16 days of public holidays a year and are compensated at 1.375% of their monthly salary, sick leave, annual leave, and other benefits. Employers also have to pay certain contributions to their employees. These include the pension contribution, which is deducted at the rate of 11.5% of the employee’s salary, and the employee has to contribute an additional 4%.

The employees have to serve a notice period upon termination, the length of which is determined by the employment contract or collective agreement. It can be based on the duration of the employment and the terms agreed upon.

There is no statutory requirement for severance pay in the country, but provisions may exist in an employment contract or collective agreement. The independent contractors aren’t given any of these benefits.

Taxation Laws

The taxation for employees in Iceland is as follows:

Income Tax

The employees must pay an income tax, which combines the national and municipal taxes. Iceland has a progressive income tax rate since 2020, which is:

Monthly Income (ISK)	Monthly Income (USD)	Tax Rate
Up to 336,916	Up to 2,507	35.04%
336,917 – 945,873	2,508 – 7,039	37.19%
Over 945,873	Over 7,039	46.24%

Independent Contractors Income Tax

Independent contractors or self-employed people must declare their income. This income is then subject to tax rates, similar to those of the employees. Self-employed individuals must report a presumptive employment income, closest to what they would earn if employed by an unrelated party. This ensures that their taxable income aligns with the standard employment earnings.

Value Added Tax (VAT)

Independent contractors selling goods and services in Iceland must also register for VAT if their annual turnover exceeds ISK 2,000,000 (USD 14,884). The standard tax rate is 24% but some goods and services have a reduced rate of 11%.

How to Pay Independent Contractors in Iceland

Independent contractors in Iceland can be paid using various methods. Some of the most common ones are discussed below.

Bank Transfers / Wire Transfers

Bank transfers are the most widely accepted and reliable form of payment for paying contractors in Iceland. The payments are made directly into the contractor’s bank account in Iceland. It can also be made for international or remote workers, but a certain fee may apply and you will have to use a network like SWIFT.

However, these international wire transfers may take several business days to complete and a certain fee may apply depending on the banking channel being used. Also, the exchange rate will affect the final amount the contractor receives.

Digital Payment Platforms

Different digital payment platforms like PayPal, Wise, and Payoneer provide digital solutions for international payments. These are known for their speed and convenience. The transaction fees vary depending on the platform and may be higher than those of traditional payment methods. Additionally, contractors must be registered on their chosen platform to receive the payment.

Contractor Management Platforms

There are also certain contractor management platforms, usually by independent contractor providers, that not just facilitate hiring but also pay the contractors globally. They handle the compliance, invoicing, and payments in multiple currencies. Key examples are Deel and Rippling. However, please note that a certain subscription fee may apply when using these services.

International Money Orders or Checks

There are traditional methods like money orders and paper checks, but they are less common in Iceland. This is because these methods are slow and take several days (even weeks) to process. There are also high fees involved in purchasing and cashing the money orders and checks.

Top Independent Contractors Providers in the Iceland

Let’s take a look at the top independent contractor providers in Iceland.

Horizons

Horizons is the one place to manage talent and global employment. It provides payroll management, benefits administration, and workforce management-compliant solutions on one platform. It’s an automated platform for making payments. You can hire contractors from over 180 countries without any upfront costs. It has a simple three-step process for hiring contractors: select, onboard, and distribute payroll in over 100 countries.

Deel

Deel supports international expansion by making global payroll management easy. It has an all-in-one global platform that provides extensive support for individuals from onboarding to offboarding. Deel scales up or down with the business requirements. Whether you are looking to hire individuals from around the globe without a local presence or find a consolidated payroll management system for your diverse and remote team, Deel has the ultimate and compliant solution.

Globalization Partners

Globalization Partners provides Employer of Record (EOR) services to hire and onboard employees and contractors in over 180 countries. You can quickly onboard contractors without setting a local entity. It features the G-P Gia, the smartest AI global HR advisor which reduces the cost and time of compliance by up to 95%. You can begin the hiring within minutes on the platform. G-P has over 200 global partners.

Velocity Global

Velocity Global has supported building and management of teams in over 185 countries. The best thing about the platform is that there are no hidden fees and it has a very transparent pricing structure. It also provides engagement and top talent retention support by offering tailored benefits and services via in-country experts. It is an AI-powered workforce building platform.

Expand and Succeed with Independent Contractors in Iceland

Given the contrasting nature of fire and ice, Iceland’s workforce is quite adaptable and resilient. They are known for their high education levels and work ethic. This is why they excel in industries ranging from tech and creative arts to engineering and tourism. However, Iceland is still a relatively small market, so businesses looking for specialized talent can benefit best by hiring independent contractors for quick onboarding.

So if you’re looking to hire a skilled workforce without the long-term commitments of employment, contact us at Remote People.

We offer fast hiring solutions at up to 40% reduced rates with us. With us, you can access the top tier talent while remaining compliant in the region with ease.

Get in touch with our experts today and let us deal with the hassles of workforce management while you can focus on your business expansion.

Frequently Asked Questions

What are the tax implications of hiring independent contractors in Iceland?

The independent contractors must handle their own income taxes and VAT if applicable. The businesses hiring independent contractors don’t have to withhold these taxes or remit them to the authorities. However, they should verify that the contractor is registered for tax purposes.

What is the best way to pay independent contractors in Iceland?

The most common and widely accepted method of paying independent contractors in Iceland is bank transfer. Many independent contractors also preferred digital payments via Wise and PayPal.

Then, there are contractor management services like Deel and Remote People, which are also used to pay independent contractors.

Do independent contractors in Iceland need a specific registration?

Yes, independent contractors need to legally register themselves as ‘self-employed’ or Einstaklingsfyrirtæki. They must register with the Directorate of Internal Revenue or Skatturinn and also obtain a VAT number if the annual turnover exceeds ISK 2,000,000 or USD 14,875.