How to run international payroll for employees in Portugal (Updated 2023)
Operating a global workforce opens up opportunities to employ a wide range of talent, but it can be challenging to balance the requirements and labor laws of different regions. If you’re running payroll for remote employees in Portugal, you must follow a series of crucial steps to avoid penalties or potential legal action from the Portuguese Tax and Customs Authority (Autoridade Tributária e Aduaneira).
Table of Contents
- Step #1: Decide whether or not to create your own entity in Portugal
- Step #2: Pick a global payroll software solution
- Step #3: Determine your workers’ employment status
- Step #4: Capture your new hires’ Portuguese payroll information
- Step #5: Understand the implications of paying in euros
- Step #6: Run payroll
- Step #7: File your taxes in Portugal
- Frequently asked questions about running payroll in Portugal
Step #1: Decide whether or not to create your own entity in Portugal or use an Employer of Record (EOR)
Before hiring and paying Portuguese employees, you must establish a business entity in Portugal. This can be done by creating your own local entity or, to simplify things, you may use an employer of record (EOR). If you use an EOR, they will be the legal employer of the Portuguese worker and take care of all aspects of employment compliance, including statutory employee benefits, payroll, contracts, and taxes (more on that below).
When, why, and how do companies use an EOR?
Companies expanding operations around the world, including in Portugal, typically use EORs to run payroll, issue benefits, and navigate complex international compliance issues.
Commonly used EORs include Papaya Global, Deel, and Rippling. EORs carry all the burden of local statutory requirements for ensuring your company can employ a worker in that region. In addition to making compliance easy, EORs can take up to six months to set up, depending on how you apply. It’s a large administrative load—and many smaller companies decide that outsourcing these tasks is easier because they don’t have the time or resources to spare.
See Rippling
When, why, and how do companies create their own entity?
Should you create your own entity, you would directly hire employees and run your own payroll. You might consider this if the costs of using an outside EOR outweigh those of starting your own entity.
Here are the steps to set up your own entity, commonly known as a subsidiary (or sociedades por quotas in Portuguese):
1. Register your company name at the National Registry of Collective Entities (RNPC). If all the partners in the entity are private individuals, you’ll need to collect their ID cards or passports as proof of identity. If the partners are legal persons or corporations, then you need to collect documentation from the Commercial Registory about the incorporation of the company in the country of origin, general meeting minutes which show powers for company incorporation, the ID of the person with power to sign for company incorporation, and any other associated paperwork.
2. Get an appointment at the Empresa na Hora office for the incorporation process. If all the members can’t be present, they must sign a procuration form giving powers to a third party.
3. At that appointment, you’ll be given a tax identification number (known as a NIF) for you and your company. You or a legal representative must be there in person to get the NIF.
Once you have a NIF, you must submit a Declaration of Start of Activity to the tax authority (Finanças) within 15 days, register the company with social security within 30 days, and register the beneficial owner within 30 days.
Note that you must also register new hires with social security at least 24 hours before their employment contract begins. This is typically done online. You must also take out occupational accident insurance (workers’ compensation), sign up for the national compensation fund, and set up a local bank account.
Step #2: Pick a global payroll software solution
There are two types of international payroll solutions: global payroll processors and global payroll aggregators. We explain more about both in our guide.
- Global payroll processors do all the work of processing your payroll, transmitting funds, and calculating and filing taxes in every country through their own software. Global payroll processors allow you to pay your international employees as easily as your local employees—and all in a single pay run.
- Global payroll aggregators aggregate local payroll providers in every country and manually transmit your payroll files to them.
Step #3: Determine your workers’ employment status
Before onboarding new workers, you must determine whether they are considered employers or self-employed contractors per Portuguese law. Classifying workers correctly is critical for avoiding fines and labor law issues.
Full-time employees will require payroll deductions, including income tax and pension plans (see the tables below), whereas contractors handle their own taxes and social security contributions. The only exception is if a contractor earns up to 80% of their revenue from you. In that case, you are responsible for a 5% social security tax on any payments made to that contractor.
Portugal has regulations to determine whether a worker is considered an employee or contractor, which include:
- The level of control the employer has over the worker's activities, including the time and place in which the work takes place.
- Whether payments are made on a periodic or regular basis, especially if those payments are in a fixed amount.
- Whether the worker or employer owns their tools and equipment.
- Degree of integration into your company.
Step #4: Capture your new hires’ Portuguese payroll information
After determining how to set up an entity in the country, picking a payroll system, and classifying your workers, you can collect payroll information, which includes:
- Name (matching the account where you’ll deposit their pay).
- Date of birth and date of hire.
- Contact information, including their mailing address in Portugal.
- Social security number (Número de Identificação de Segurança Social or NISS).
- Tax identification number (NIF).
- Bank account information.
- Amount to be paid in euros (including any bonuses).
Again, remember that all new hires must be registered with social security at least 24 hours before their employment begins. You must also have occupational accident insurance and be signed up for the national compensation fund.
Step #5: Choose to pay in your local currency or in euros (EUR)
You have to pay Portugal-based employees in euros (EUR) unless you’ve specifically obtained their written permission to pay them in another currency.
If you’re based outside of the European Union (EU), there may be complications to paying in euros. For example, the exchange rate between your preferred currency and the euro may vary and, if the rate is unfavorable, you’ll pay more to cover your worker’s wages. What’s more, you may need to account for exchange rate fluctuations when calculating financial statements, which can make accounting complex.
Step #6: Run payroll
Now you’re ready to run payroll.
If you choose to use Rippling, here’s how the global payroll system works:
Step #7: Withhold the correct amount of taxes
Once payroll is running for your employees in Portugal, you must pay taxes to the Portuguese government.
Income tax
In Portugal, personal income tax should be automatically deducted from regular pay. Portugal has a progressive tax rate, meaning that citizens are taxed depending on how much they make, whether they’re independent or married/filing jointly, or if they have dependents. The rates are as follows for individuals:
- Earnings up to €7,116: 14.5%
- Earnings between €7,117–€10,736: 23%
- Earnings between €10,737-€15,216: 26.5%
- Earnings between €15,217-€19,696: 28.5%
- Earnings between €19,676-€25,076: 35%
- Earnings between €25,076-€36,757: 37%
- Earnings between €36,758-€48,033: 43.5%
- Earnings between €48,034-€75,009: 45%
- Earnings at or above €75,010: 48%
Pension
You will need to register with the Portuguese social security system and make regular pension contributions on behalf of your employee. Pension plans are handled by the government’s Ministry of Labour, Solidarity, and Social Security. Both employees and employers contribute to the plans at the following rates:
- Employers make a payroll contribution equal to 26.5% of an employee’s wages.
- Full-time employees have 11% of social security tax deducted from each paycheck.
Working Compensation and Working Compensation Warranty Funds
These funds (known as the Fundo de Compensação do Trabalho and Fundo de Garantia de Compensação do Trabalho) are required to protect workers if your company becomes insolvent or if you have other issues paying salaries. You must contribute 1% of pay toward this fund.
Labor Accident Insurance
You must pay 1.75% of the employee's gross income toward this insurance.
Wage Guarantee Fund
You must pay 1% of the employee's gross income toward this fund, with the exclusion of bonuses, allowances, and “13th and 14th salaries” (which are statutory holiday bonus pay).
Step #8: File your taxes in Portugal
There are several types of tax-related paperwork that you will need to file.
Monthly Returns (Declaração de Remunerações)
File this electronically to report social security statements and monthly salary amounts to the Tax and Customs Authority. This return should include:
- Your employee’s NIF.
- Gross salary.
- Withheld taxes.
- Social security contributions.
Annual Statements (Declaração Anual de Rendimentos)
At the end of the calendar year, you must send your employee an annual statement, which includes:
- Your employee’s annual income.
- Taxes withheld.
- Social security contributions.
This will help your employee appropriately file their taxes and avoid any complications.
Corporate Income Tax Return (Imposto sobre o Rendimento das Pessoas Coletivas, or IRC)
Companies registered outside of Portugal must still pay corporate tax on any Portuguese income that isn’t subject to personal income tax. If your company qualifies for this, the annual tax return will include the following information:
- Your company’s income.
- Expenses.
- Any taxes paid in Portugal, including taxes and contributions on behalf of your employees.
If you fail to issue these forms or submit them late, you may face penalties or interest.
Frequently asked questions about running payroll in Portugal
What are the employer costs for full-time employees in Portugal?
Employers are responsible for deducting the following from their full-time employees’ paychecks:
Income tax
Varies by income
Social security tax
11% from each paycheck
Employers are responsible for contributing:
Social security
Payroll contribution of 23.75% of wages
Labor accident insurance
1.75% of gross income
Wage guarantee fund
1% of gross income (bonuses and allowances excluded)
Working Compensation and Working Compensation Warranty Funds
1% of wages
Workers' Compensation
This is another cost associated with doing business in Portugal. While Portuguese social security covers sick leave, disability leave, unemployment, parental leave, maternity leave, paternity leave, and orphan/widow pension, employers must have worker’s compensation insurance in case of a workplace-related accident. If you don’t carry this insurance, you may be fined and may also be responsible for any claims that may arise from your employee or their dependents. The cost of this insurance will vary depending on several factors, including your industry and the extent of the coverage.
What is the average salary for employees in Portugal?
According to the Portugal News, the average employee’s net monthly salary—after accounting for social security and income taxes—in Portugal was 1,041 euros. However, salary averages vary widely by industry and occupation. Pay in larger cities, such as the capital of Lisbon, are also higher than in other areas.
When you calculate salary, keep in mind that in Portugal salaries are split into 14 payments throughout the year rather than 12, with pay doubled as Christmas holiday and summer holiday bonuses. This can be handled in one of two ways:
- Pay 50% of both the allowances before the summer holidays (typically in June) and before Christmas, with the remainder paid out throughout the other pay periods of the year.
- Pay the subsidies in full before the respective holidays.
What are the minimum wages in Portugal?
As of January 2024, the national minimum wage in Portugal is €956.66 per month (or €11,479.22 per year if there were 12 payments/year at that rate). The minimum wage may be higher depending on collective bargaining, and there may also be more specific minimum wages for the regions of Azores and Madeira.
What information is needed from employees to run payroll in Portugal?
Here’s the information you need from employees to process their payroll:
- Name (matching the account where you’ll deposit their pay).
- Date of birth and date of hire.
- Contact information, including their mailing address in Portugal.
- Social security number (Número de Identificação de Segurança Social or NISS).
- Tax identification number (NIF).
- Bank account information.
- Amount to be paid in euros (including any bonuses).
How much does it cost to run payroll in Portugal?
Most payroll software is either priced on a per-employee basis or per pay run. Payroll service pricing varies according to:
- Payroll frequency.
- The number of employees on your payroll.
- How often you add and remove payees.
- Any additional services you need, such as year-end processing or mailing out pay stubs.
Can I manually run payroll for workers in Portugal?
You may choose to run payroll yourself using a payroll calculator and direct deposits into employee accounts. While it may seem like this will cut costs, running payroll is time consuming, especially for those with a growing business. There are also risks to keep in mind:
- Compliance: Running Portugal payroll manually without using native global payroll software, puts you at risk of manual errors and omissions. Rippling handles your compliance work for you—enforcing Portuguese minimum wages and overtime rules, which can save you from heavy fines.
- Security: Processing payroll manually can pose security risks, especially if you are using spreadsheets or paper records. This increases the risk of sensitive employee information being lost, stolen, or misused.
What are payroll taxes in Portugal?
Employers are responsible for deducting certain costs from their full-time employees’ paychecks, including income tax and social security tax—see our employer cost tables.
What are the late tax filing penalties in Portugal?
- Late payment of social security: If you are late to pay social security contributions, Portugal has the right to enforce collection, including late payment interest. If contributions are delayed for more than 30 days, that may be considered a serious administrative offense. There may be criminal proceedings if more than 7,500 euros are due or if you deduct the contributions due from the worker’s pay and don't deliver that amount to social security.
- Late or failed tax payment: If you are late or fail to file Corporate Income Tax, you could be penalized 30-100% of the tax due, with a cap of €45,000.
Other tax-related penalties include:
Delay in preparing accounting records and data
€500 to €5,000
Failure to file a statement regarding the commencement, changes, or cease of business activity
€600 to €7,500
Failure to prepare accounts in accordance with Portuguese accounting standards (Sistema de Normalização Contabilística)
€1,000 to €10,000
Issues with invoices (failure to keep them for the required time, failure to present them when requested, etc.)
€150 to €2,000
Failure to hold a bank account when mandatory
€540 to €27,000
How do you pay contractors in Portugal?
- First, make sure you’ve correctly classified your worker as a contractor rather than as an employee. (Use Rippling’s free Worker Classification Analyzer if you’re unsure.)
- Agree on the payment terms with the contractor, including the hourly or project rate, the payment cadence, and the method of payment.
- Collect their payroll information, including their name, date of birth, contact information, bank account information, and business number—you’ll need this later when reporting the payments.
- Use your chosen payroll software to pay the contractor in euros. With Rippling, you can pay contractors in euros, in a single pay run, without waiting on transfers or conversion.
Remember, when hiring Portuguese contractors, employers are not responsible for deducting taxes from their paychecks. Instead, the contractor is responsible for tax remittance and social security payments. (The only exception is if a contractor earns up to 80% of their revenue from you. In those instances, you are responsible for a 5% social security tax on any payments made to that contractor.) Even if you use contractors, keep an accurate record of employment and payroll information for each worker.
Rippling and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any related activities or transactions.
