Over the past decade, Lithuania has quietly positioned itself as one of Europe’s most business-friendly destinations. With a highly educated, tech-savvy, and English-proficient workforce of around 1.5 million, the country has become a strong option for international companies seeking skilled talent without the cost levels of Western Europe.

Lithuania operates on a monthly payroll cycle, and while its tax system is simpler than that of many EU countries, it still requires close attention. Personal income tax (PIT) is progressive, ranging from 20% to 32% depending on income level. Employers must also account for statutory payments such as social security contributions and compulsory health insurance, which fund pensions, unemployment benefits, and healthcare coverage. If you plan to do business in Lithuania successfully, it is important to understand these tax rules and how they apply to your specific hiring setup.

What is Payroll Tax in Lithuania?

Payroll taxes are taxes imposed on employers and employees by local, state, or federal governments to fund social insurance programs for workers, such as health insurance, pensions, and unemployment insurance. Basically, the tax imposed is a percentage of the employee’s gross salary or wages.

Definition and purpose of Payroll Tax

In Lithuania, payroll tax is called Sodros mokesčiai or Sodra taxes. This social security contribution is split into state social insurance (Valstybinis socialinis draudimas – VSD) and healthcare insurance (Privalomasis sveikatos draudimas – PSD).

Both employees and employers contribute to the country’s social security system, which covers pensions, health insurance, and unemployment benefits. As an employer, you are responsible for withholding and remitting social security contributions to the Government.

However, keep in mind that payroll tax isn’t the same as income tax, even though your employee is liable to pay both. Income tax is imposed on an individual’s income (salary inclusive), while payroll tax is levied on employees’ wages and salaries. Also, the main purpose of payroll tax in Lithuania is to fund the social security system, while income tax funds public expenditures and government operations.

Employer and Employee Responsibilities

As we mentioned in the previous section, the social security fund in Lithuania is divided into two: state social insurance (Valstybinis socialinis draudimas – VSD) and healthcare insurance (Privalomasis sveikatos draudimas – PSD). The entire system is managed by the State Social Insurance Fund Board (Sodra or Valstybinio socialinio draudimo fondo valdyba).

As an employer in Lithuania, you must register employees with Sodra, calculate the correct VSD and PSD contributions, and withhold your employee’s portion from gross salary. In addition to deductions, you’re equally responsible for paying your own employer-side contributions on top of the employee’s wages. These payments must be reported and remitted within the deadlines set by Sodra.

Your employees, on the other hand, contribute to the system through automatic payroll deductions in your company. Their VSD and PSD contributions entitle them to social benefits, including pensions, sickness and maternity benefits, unemployment insurance, and public healthcare coverage.

Failure to correctly calculate, report, or remit the Sodra taxes can result in monetary penalties and compliance issues. If you don’t have the administrative capacity or time to shoulder these responsibilities, consider partnering with an EOR service in Lithuania to manage your entire employment cycle, including payroll.

Employer Payroll Tax Rates in Lithuania

Payroll tax in Lithuania isn’t a fixed amount, but a cumulative of the state social and healthcare insurance.

Breakdown of Employer Contributions

Here are the current payroll tax rates in Lithuania, as outlined by Sodra:

State social insurance (Valstybinis socialinis draudimas – VSD)

The state social insurance is paid to Sodra and used to finance unemployment benefits, pensions, sickness benefits, and employee benefits.

The rate varies by employment type, but, in general, employees pay 19.5%. If the employee wants a supplementary pension, an additional 3% will be added, bringing the total to 22.5%. Here’s a breakdown of the payment:

Contribution TypeRate
Pension social insurance8.72%
Diseases1.99%
Maternity1.81%
Health insurance6.98%
Supplementary pension provision (optional)3%
Total19.5% – 22.5%

Employers, on the other hand, pay 2.03% for fixed-term employment contracts and 1.31% for permanent employment contracts. Lithuania has a maximum income threshold called Sodros įmokų lubos. The amount is based on the Average Monthly Wage (VDU) and is calculated as 60 VDU. For instance, since the current VDU is EUR 2,108.88, the maximum income threshold is EUR 126, 352.80. Once your employee’s earnings exceed this limit, they may stop paying social security contributions.

Learn more about the average salary in Lithuania.

Compulsory healthcare insurance (Privalomasis sveikatos draudimas – PSD)

Compulsory healthcare insurance is pegged at 6.98% for employees and is always added to the total social security contributions. The amount is withheld directly from the employee’s gross salary and transferred to Sodra. This fund grants employees access to Lithuania’s public healthcare system, including primary care, hospital treatment, and medications.

Overview of Income Tax in Lithuania

The personal income tax in Lithuania is called Gyventojų pajamų mokestis (GPM). Here, both permanent residents and non-residents pay taxes on their income. Residents are taxed on their worldwide income (including employment, dividends, and capital gains), while non-residents are taxed only on income earned in Lithuania, including salary or profit from real estate. The income tax is overseen by the State Tax Inspectorate (STI) or VMI (Valstybinė mokesčių inspekcija).

Personal Income Tax (PIT) Brackets and Rates

Currently, Lithuania applies a 20% PIT rate on all employment-related income below EUR 126,532 per year. Income exceeding this amount is taxed at 32%. For foreign employees who also made investments in the country, the PIT is 15% on dividends and specific capital gains.

But starting January 1, 2026, the Lithuanian Government plans to transition to a progressive income tax system, which means the tax levied depends on the individual’s income level.

Income Level (EUR) Personal Income Tax Rate
Up to 82,962 20%
82,963 – 138,270 25%
More than 138,270 32%

This new proposed tax system uses the average monthly salary instead of fixed euro thresholds, so that the tax automatically adjusts as the minimum wage changes over the year.

There are no extra local, state or provincial income taxes in Lithuania.

Tax-Free Allowances and Deductions

  • Social security contributions: The mandatory social security contributions and health insurance are deductible from taxable income.
  • Disability allowances: Individuals with disabilities may receive tax-exempt income in the form of statutory benefits, compensation, or pensions, provided that the payments satisfy the conditions set by the law.
  • Monthly tax-exempt amount (TEA): The Lithuanian Government applies a monthly tax-exempt amount (TEA) to the employment income to reduce the taxable income. This is the greatest tax relief in Lithuania, especially for low-income earners. The amount is pegged at EUR 747 per month for employees who earn within the minimum monthly salary at that time.

    And if the income exceeds or amounts to EUR 2,864.22 per month, no TEA is applied. Non-resident employees can also benefit from the TEA, as long as their gross income doesn’t exceed EUR 34,370.67.
  • Life insurance premiums for personal use or dependant: Life insurance premiums paid for employees and/or their dependents can also qualify for tax deduction if the insurance company is registered in an EEA member state or an OECD member country. This is only applicable for contracts concluded up to 31 December 2024.
  • Work-related expenses: Work-related expenses, such as travel costs and other work-related expenses, may be deductible if properly documented.
  • Payments for the vocational training program: If you plan to add training allowances to your employee’s pay slip, the total amount paid for them to acquire the qualifications can also qualify as a tax-deductible expense. However, before it can qualify, the training has to be formal and lead to an official qualification or recognized skills.

Key Components of Payroll in Lithuania

Here is a breakdown of the payroll system in Lithuania:

Payroll Cycle and Pay Slips

Lithuania follows a monthly payroll cycle, and salaries must be paid on the last working day of the month, or no later than the 10th day of the following month. You can also offer bi-weekly payments if the employee requests them.

All employers are also mandated to provide their workers with a detailed payslip that includes their gross & net salary, total hours worked, social security contributions, and any other applicable taxes.

Employer Responsibilities for Payroll Tax Compliance

As an employer, you are responsible for calculating and withholding Sodra taxes and health insurance from your employees’ salaries. You also need to contribute your own quota (to the employee’s gross salary) before remitting the total amount to the State Social Insurance Fund Board.

Common Payroll Errors and How to Avoid Them in Lithuania

  • Late salary payments: By law, you must make payments on the last working day of the month, or the 10th day of the following month. Exceeding this window incurs a late fee (approved by the Minister of Social Security and Labor) of 0.07% of the salary for each day the window is exceeded. 

    What to do: Create a payroll calendar and ensure all variable data, such as overtime and bonuses, is collected by the 25th of the current month. This gives you enough time to process and make payments by the due date.   
  • Incorrect overtime calculations: The Lithuanian Government permits employees to work 8 hours of overtime per week, provided they give written consent and are duly compensated for the time worked. This can be extended to 12 hours, and, again, the employee must provide written consent. The compensation is 1.5X on regular working days and 2.5X on public holidays. Reducing the payment or avoiding it altogether can incur a fine of EUR 300 – EUR 5000 per offence.

    What to do: Use digital time-tracking software that automatically records overtime and applies the correct multiplier according to Lithuanian law. An EOR platform can help you do this. 
  • Failure to issue legal payslips: By law, you must provide a detailed payslip to every employee by the end of the month. This payslip must clearly show the gross and net pay, Sodra contributions and income tax. Failure to issue these slips will incur fines from the State Labor inspectorate up to EUR 6,000!  

    What to do: Automate payslip delivery through an employee self-service portal. Ensure each payslip includes detailed breakdowns of hours worked, overtime, and all applicable deductions. You can also use a Professional Employer Service provider in Lithuania to oversee employee management on your behalf.
  • Misclassification of workers: In 2025, Lithuania increased scrutiny of worker misclassification, with fines of up to €6,000 for non-compliance.

    What to do: Use an EOR platform like RemotePeople to ensure all your employees are properly classified. Or learn more about how to hire employees in Lithuania. 
  • Incorrect tax withholding: Lastly, you also need to calculate, withhold, and remit taxes correctly and accurately. Any slight mistake or failure to account for taxes can result in a 10% – 15% penalty on the underpaid amount. 

    What to do:     Use payroll software that is localized for Lithuania (RemotePeople works perfectly here). The platform can help you calculate your payroll costs in compliance with Lithuanian labor law.

Tax Treaties and Withholding Taxes

Lithuania has multiple tax treaties and withholding regulations to reduce double taxation and also to streamline cross-border payments. For foreign employers (and employees), these agreements may reduce or eliminate Lithuanian withholding taxes, depending on the beneficiary’s home country and the terms of the treaty. Here’s a brief overview of what you should know:

Lithuanian Double Taxation Treaties (DTT)

Lithuania has double tax agreements with 60 countries worldwide, including the United States, the United Kingdom, Slovenia, Sweden, Latvia, Andorra, Turkey, Romania, and many more. With these treaties in place, you may be totally exempt from tax in Lithuania, or claim tax credits for taxes already paid.

Withholding Tax on Foreign Income

In Lithuania, dividends paid to non-residents are subject to 16% WHT. This rate also applies to other types of profit distributions unless a DTT or specific EU directive reduces or exempts the payment. Also, interest paid to foreign entities is normally taxed at 10%, and royalties are also subject to 10% WHT, unless exemptions under the European Commission Interest and Royalty Directive or a relevant DTT apply.

However, certain types of income are exempt from WHT. For example, interest paid to members in the EEA or countries with which Lithuania has a DTT is not subject to WHT. Similarly, payments related to government securities issued on international financial markets, interest on deposits, and qualifying subordinated loans are exempt from withholding.

Lithuania Payroll Tax Calculator

Ready to calculate what it’ll cost to hire from Lithuania? We’ve got you covered! The Remote People Global Payroll Calculator can help you calculate payroll taxes for your local and foreign employees in Lithuania at no extra cost.