While Iceland is a fairly isolated country with a small population, it’s an important and highly advanced economy that punches far above its weight. The country is home to just 391,000 people, about as big as a medium-sized city in many other countries. Its GDP, however, is over $37.31 billion, giving its people a per capita GDP of $90,280 per year, one of the highest in the world.

Of Iceland’s 248,440-strong  labor force, roughly 65% work in services, especially hospitality, trade, and professional and business services. Another 21% of workers are employed in industry, such as mining, utilities, and manufacturing, while only about 4% are involved in agriculture.

As a high-income country, Icelandic workers enjoy relatively high wages. The average monthly salary is roughly 750,000-800,000 ISK (Icelandic krona), which equates to about 5,450-5,800 USD. Their salaries may be high, but Iceland’s workers are known to be well-educated and highly skilled, making them very valuable to many employers.

It can be hard, though, to manage them and their needs effectively for international employers. Differences in language, systems, and regulations can make many functions challenging, and a few more so than payroll. For this reason, an increasing number of employers are choosing to outsource this function to third-party providers.

This review will detail how Iceland payroll outsourcing services work and explain the benefits that make them attractive to many organizations.

What is Payroll Outsourcing in Iceland?

Payroll outsourcing, in Iceland or anywhere around the world, is the act of hiring an external service provider to handle your payroll function, rather than taking on the challenge of managing it yourself. While you still need to set salary levels and keep track of your workers’ hours and attendance, a third-party provider will normally handle everything else.

It will calculate every employee’s earnings and deductions for each pay period, pay their salaries, and keep records of all payments. These services can be used explicitly in Iceland, or for employees in many countries as part of a global payroll management strategy.

Payroll providers employ experts in payroll and tax management. Their professional knowledge contributes to the complex online platforms that these providers use to calculate and manage payroll for their clients.

Since they manage this function for multiple clients at once, their services are normally offered at rates that are far less than most small and medium businesses (SMBs) could perform them internally.

In addition to handling payroll processing, providers also manage compliance for their clients. They constantly monitor local regulations and make changes to their systems accordingly. They manage deductions and tax withholdings, as well as remitting payments to the Icelandic authorities, helping to reduce risk exposure for their clients.

How Payroll Outsourcing in Iceland Works?

When working with a service provider, payroll outsourcing in Iceland can be a simple and effective way to handle this complicated function. While service offerings will vary between providers, most perform the following key activities for their clients:

Needs Assessment

To get the ball rolling, many providers will ask to meet with you to discuss your needs and the details of your business. Specifically, they’ll ask you about the size of the workforce you currently employ or plan to hire, the remuneration you provide, and the types of contracts you use. This information will allow a provider to give you an offer of a set of services, as well as a quote.

If the terms are agreeable to you, you can engage the provider of your choice by signing a service agreement with it, and this will give it the green light to start handling payroll for your organization.

Data Collection

Any provider you hire will need you to supply it with the key data it requires to set up and manage your payroll. This will include your employees’ personal and employment information, which will let the provider create profiles for each worker and set up their automatic payroll calculations.

It will also enable the provider to register new employees with the appropriate authorities on your behalf. Your employees’ banking information will be needed to set up direct deposit payments. You may also be asked to provide payroll records if you’ve already been operating in Iceland.

These records will be used for reporting to the tax authorities. It’s important that your provider supplies you with a safe and secure means of transferring all of this data to protect it from harmful actors.

Payroll Processing

The provider will set up all calculations related to your employees’ earnings and deductions so that payroll processing will be quick and highly accurate. To power its calculations for each pay period, however, the provider will need you to supply it with each employee’s time and attendance data. You can collect this data with your own tools, but it’s more common these days to use the time-tracking tools built into your provider’s platform to reduce data processing requirements.

Once this data is obtained, the provider will quickly process your payroll and show you exactly how much each employee must be paid.

Tax and Social Security Management

In Iceland, as in most countries worldwide, employers are required to withhold personal income taxes from their employees’ pay. They also have to make contributions to social security and pension funds, and deduct their employees’ pension contributions as well. Most payroll outsourcing service providers will handle these deductions for you as well as the subsequent remittances to the Icelandic authorities.

Making Payments and Reporting

When it has each employee’s earnings and deductions successfully calculated, your provider will normally send you the processed payroll to check and confirm.

Once you do this, it will run the payroll and pay all of your employees. While this is almost always done by bank transfer in Iceland, some providers may offer alternative payment methods for the convenience of your workforce.

It will also supply each employee with a detailed pay stub for the pay period, and save all payroll data to be used in later reporting and analysis.

Iceland Labor Law and Payroll Compliance

Iceland is a constitutional republic with a body of law based on European civil law. Collective agreements have a significant influence on labor relations and can affect how payroll is managed. Some of the most relevant rules and regulations to be aware of include the following:

Minimum Wage and Overtime

Unlike in other countries, there is no mandated minimum wage across Iceland. Instead, collective agreements generally secure minimum salaries for workers in different industries.

In fewer cases, individuals have to negotiate acceptable wages with their employers. Most employees work a workweek of 40 regular hours, including paid 30-60-minute lunchbreaks.

Employees can’t work longer than 13 total hours in a day, including overtime. Their overtime hours are not limited by law, but are often limited by collective agreements. For their first 162.5 overtime hours each month, workers are paid 0.875% of their monthly salary per hour. After this, the rate increases to 1.0385%.

Taxes

Iceland’s workers must pay income taxes at quite high rates. They pay 31.49% on income from 0-472,005 ISK (0-3,860) per month, 37.99% on the next 853,122 ISK, and 46.29% on any income over that. These taxes must be withheld by the employer and remitted to the Skatturinn, or Iceland Directorate of Internal Revenue (DIR).

Social Security

In addition to withholding taxes, employers in Iceland need to deduct pension contributions from their employees’ paychecks and also add their own contributions. Employees are deducted at least 4% of their earnings for their pension fund contributions, while employers add 11.5% to reach a 15.5% total contribution. Employers also pay 6.35% of employee salaries into social security programs.

What are the Benefits of Payroll Outsourcing in Iceland?

More and more employers in Iceland are choosing to outsource their payroll functions to professional third-party providers because of the competitive advantages they can obtain by doing so, including:

  • Lower Costs: Compared to setting up a payroll team and managing them internally, outsourcing to a service provider is generally more cost-effective. Providers work at scale and use advanced platforms to automate most processes, allowing them to manage payroll processing cheaply.
  • Legal Compliance: The professionals working for payroll providers use their experience and expert knowledge to ensure their systems are in line with Icelandic laws related to employment and taxation. They also organize reporting to the authorities to help you stay compliant at all times.
  • Operational Efficiency: Managing payroll in another country requires expert knowledge, which is hard to acquire. Outsourcing lets you leverage this knowledge while focusing your time and resources on the core areas of your business where your own expertise lies.

What are the Downsides of Payroll Outsourcing in Iceland?

Outsourcing payroll can be an excellent option for many organizations. However, you’ll need to weigh the negatives against the positives before you decide if this action is right for your business. The downsides of outsourcing payroll can include:

  • Reduced Control: Because you’ll outsource to a third party, you’ll have limited control over how and when your payroll is processed. This means you’ll also give up the opportunity to learn to manage this complex function internally.
  • Data Security Risks: You need to share information with your provider, and this means that sensitive data will be at greater risk than if you keep it within your organization. It’s critical that your provider has excellent security features in place, but you’ll still increase your level of risk.
  • Varying Service Quality: If you choose a less-professional provider, you may risk your employees being paid late or incorrectly. The same can happen with remittances to authorities, putting you in danger of penalties for non-compliance.

How to Choose a Payroll Outsourcing Provider in Iceland

Finding the right provider to partner with in Iceland can be challenging. There are dozens of options to choose from, and most can seem very similar. To help you distinguish them and save time in your selection process, we suggest focusing on these criteria:

Price

Set your budget right away and use this to compare with providers’ fees. Those you can’t afford can be quickly eliminated from the competition. Be sure that the options remaining provide all the services you require for the price they offer.

Reliability

Look for reviews and ratings on trusted sites to find a reliable partner. This will help you eliminate providers that have been unreliable in the past or created serious issues for past clients.

Security

Read potential partners’ security policies and ensure that they can protect your data adequately. While Iceland is not a member of the EU, it’s highly connected to this group of countries, so you should look for a provider that is compliant with the EU’s General Data Protection Regulation (GDPR).

Experience

While new providers may have effective systems in place, established providers typically have the important experience needed to work effectively in Iceland and with Icelandic employees and authorities.

How Much Does Payroll Outsourcing Cost in Iceland?

With Iceland’s high wages and cost of living, it’s not surprising that payroll outsourcing services can also cost more here than in other countries. You can find providers that charge between $30 and $150 per employee per month.

Payroll Outsourcing Alternative: Employer of Record

A payroll outsourcing service provider can be a great partner if you already own an entity in Iceland or are planning to incorporate soon.

If not, however, or if you want to completely avoid setting up a local entity but still hire Icelanders, you can choose to work with an Iceland Employer of Record (EOR) instead. This different type of provider helps you hire local workers without needing an entity because it hires them through its own entity on your behalf. This makes it their legal employer and the party responsible for compliance with local laws.

An EOR partner will also manage HR for these employees, handling administration, payroll, benefits, paid time off, and more. This greatly reduces your administrative burden and lets you focus on the core activities of your business while leveraging the expertise of Icelandic workers.

Payroll Outsourcing for Success in Iceland

Outsourcing payroll to a third party in Iceland is normally cheaper, easier, more accurate, and more compliant than doing it in-house. This makes it a preferred option for local and international employers.

Learn how professional payroll outsourcing services in Iceland can benefit your company by contacting RemotePeople today.