Portuguese and international citizens working in Portugal earn valuable entitlements, such as paid parental and sick leave, unemployment and pension benefits, and child allowances for eligible families, through a system known as Segurança Social.
However, the payroll contributions that support Portugal's social security require a tax rate that may seem quite high for companies that haven't previously employed remote employees in Portugal.
Here, we'll explain how Portugal's social security system works and what employers need to know about their financial obligations when hiring in Portugal.
Social Security Contributions in Portugal Explained
Employers in Portugal are legally required to register with Segurança Social and make regular contributions on behalf of employees.
Employers contribute 23.75% of employee salaries towards social security and must deduct employee contributions (11%), then remit the total by the 20th of the following month.
With the exclusion of lunch subsidies, social security contributions are uncapped, and all salaries, wages, bonuses, and other regular income are taxed. Failure to follow these policies can result in penalties, including fines and interest on late payments.
Social Security Identification Number Registration
Employers need a Social Security Identification Number (NISS) to contribute to the Portuguese social security system. Once a company is established in Portugal, the Portuguese Tax and Customs Authority notifies Segurança Social to issue an NISS.
At that point, the Segurança Social website allows employers to manage contributions, view payment history, and access necessary documents.
Social Security Contributions for Self-Employed Individuals and Contractors
Self-employed individuals, such as freelancers, must make their own monthly social security contributions. They typically contribute 21.4% of their income, which can increase to 25.2% in specific situations.
Employers are not responsible for freelancer social security payments — with one exception. If a contractor earns up to 80% of their income from one business, that employer is liable for a 5% tax on any payments made to the contractor.
Income Tax Rates in Portugal
Portugal taxes companies registered as residents of mainland Portugal at a flat rate of 21% on their worldwide annual income. In contrast, non-resident companies are only taxed on income earned within the country.
Small and medium-sized businesses can receive a reduced rate of 17% for companies registered in mainland Portugal.
Businesses registered in Portuguese territories beyond the mainland and companies with specific designations, such as startups, are eligible for further discounts on their corporate income tax rates.
Additional Costs When Hiring Employees in Portugal
Employers in Portugal have several other financial obligations in addition to social security. These include:
- Occupational accident insurance: Employers must purchase insurance to cover workplace accidents, with the cost varying depending on the job's risk level.
- Working compensation and working compensation warranty funds: Employers contribute 1% towards these funds.
- Labor accident insurance: An additional 1.75% contribution is required.
- Wage guarantee fund: Employers contribute 1% to this fund, which provides financial protection for employees in the event of company insolvency.
13th-Month and 14th-Month Pay
Beyond social security benefits, employers are also responsible for paying biannual bonuses, often called 13th-month and 14th-month pay.
These additional payments, each equivalent to a month's salary, are made in June and December.
Paid Leave
Employers must also comply with Portuguese laws regarding annual leave, which include public holidays and vacation time, as well as maternity leave, paternity leave, and parental leave. These entitlements vary depending on the employment contract and industry regulations.
Employ Global Talent in Portugal
Directly hiring individuals can be the most cost-effective way to work with international talent in Portugal. Still, employers need to be cautious about inadvertently creating a permanent establishment in the country.
Working with an Employer of Record (EOR) can help mitigate this risk. An EOR acts as a remote worker's legal employer, handling onboarding as well as complex tasks like:
- Registration and compliance: The EOR registers businesses with the relevant social security and tax authorities and ensures compliance with local laws.
- Payroll and tax management: The EOR calculates salaries, deducts social security and other taxes, and ensures timely payments.
- Benefits administration: The EOR handles employee benefits, including health insurance, pension plans, and paid leave.
By partnering with an EOR, companies can focus on core business practices while leaving the complexities of hiring and managing international talent to the experts. Book a demo today to learn more.
