Countries with the Highest and Lowest Payroll Taxes

With remote work becoming more popular around the globe, international employers can broaden their search when looking for top talent and recruit skilled workers from just about anywhere. Diversifying your talent pool can yield several benefits, including access to new markets and different perspectives. 

In 2023, around 60% of employees aged 22 to 65 work remotely at least part of the time. This allows employees from around the world to communicate in real-time while promoting a more ideal work-life balance. 

Businesses looking to grow their team in international markets can improve productivity and rapidly build a presence. However, companies can face several challenges when expanding. Foreign companies must be aware of the payroll taxes for the specific country they want to hire in and how that can impact business operations. For example, a country with higher taxes may offer more robust social security for citizens, but at the cost of other important factors. 

Here’s a guide for everything you need to know about payroll taxes, from what payroll tax is, how income tax works, and even the Federal Insurance Contributions Act, to Social Security and Medicare, and beyond.

Now, let's take a closer look at which countries have the highest and lowest payroll tax requirements. 

What is Payroll Tax?

If you’re an international company looking to hire in different markets, you may be wondering what payroll tax is. Payroll taxes are mandated financial costs that employers and employees pay on their wages and include federal, state, and local taxes. This also includes contributions to social security programs. 

Your permanent employees are generally subject to these requirements, and some regions may have additional local taxes that must be paid to avoid penalties. 

It’s also important to note that payroll tax and income tax are different. Payroll taxes are generally specific deductions that are meant to fund social security programs such as unemployment insurance. 

Your international payroll refers to the employees that you hire in different countries, and are responsible for handling the necessary payroll tax deductions on behalf of. International payroll systems such as Borderless can help you remain compliant with local labor laws and ensure that all required contributions are handled. 

The payroll tax you need to cover varies drastically across different countries, which can have different economic implications for your company’s expansion plans and international employees. For example, payroll tax in the United States is relatively low compared to certain countries with higher payroll taxes, such as France. 

What Are Income Taxes?

Income tax is a type of tax that is imposed by governments based on the income generated by businesses and individuals alike, within their jurisdiction. Income taxes are collected by federal, state, and local governments to fund many public services and also provide goods for citizens. Taxpayers are required to file an annual income tax return to determine their tax obligations. 

Personal income taxes are levied on wages and other types of income, while business income taxes apply to:

• Corporations
• Partnerships
• Small businesses
• Self-employed

The United States has a more progressive tax system, where earners with a higher income pay a higher tax rate. Taxpayers can claim exemptions, deductions, and credits to help reduce their taxable income and tax obligations.

Countries with High Payroll Taxes

Countries with higher payroll taxes generally have more developed and robust social welfare programs. This can benefit your business in a few different ways because strong social programs can lead to a better quality of life for your workers. However, a country with high payroll taxes also presents certain challenges for businesses that want to build a presence in new areas. 

Countries with high labor costs usually have a high tax wedge – a measure that examines the difference between labor costs for the employer and the total take-home pay for the employee. This examines personal income tax, social security contributions, benefits, and payroll taxes. 

You may be wondering what countries have some of the highest payroll taxes in the world. Here are a few to be mindful of when hiring from outside your country. 

Belgium

Belgium’s strong economy and close cultural ties with other major markets such as France, Germany, and the Netherlands make it an attractive choice for European expansion. 

Belgium has the highest total tax wedge for the average worker among Organization for Economic Co-operation and Development (OECD) member states. Employees have a 53% tax wedge, which means Belgium has a robust and well-funded social security system to support its citizens, though workers lose a greater portion of their paychecks. The welfare system covers programs such as healthcare, pensions, and unemployment benefits. 

It’s also a country with higher taxes as a whole. Your company will be responsible for contributing 25% to 27% of each employee’s salary as a contribution to social security, along with an additional 9% for their pension fund. 

The country has several additional costs that you will be responsible for if you want to hire workers in Belgium. These include employee benefits, severance pay, and a mandatory 13th-month bonus at a certain time of year. The payroll cycle in Belgium is monthly. Corporate tax in Belgium is around 25% and income tax depends on the employee’s annual earnings. 

Sweden

Sweden is another progressive European state with high payroll taxes. The country has a comprehensive system of social programs that include universal healthcare, parental leave, pensions, employment protections, financial support, and more. It’s also important to know that the country does not have a statutory minimum wage. Instead, collective bargaining agreements determine the wages for various industries. 

Because of their well-funded welfare program, Swedish employees are responsible for larger amounts of payroll taxes. It is your responsibility to deduct 31.42% of your Swedish workers’ salaries for taxation purposes. This helps cover national health insurance, parental insurance, retirement benefits, and other aspects of the country’s robust social assistance program. 

Sweden has a relatively complicated taxation landscape. Engaging an Employer of Record (EOR) can help you remain compliant with the complicated local labor laws and important CBA terms. Individual income tax is calculated on a progressive scale depending on how much the employee makes. 

France

France is another country with higher payroll taxes. In terms of tax wedge statistics, France ranked number three among eligible countries and was only 0.8% behind Germany in 2022. Employers are obligated to contribute to social insurance programs by withholding taxes from their employees. 

The country has a wide range of social programs to provide citizens with a safety net and guarantee a certain quality of life. These programs include accessible universal healthcare, a robust pension system for retirement, and funding for education. 

As an employer, you will need to contribute:

• 7% or 13% toward health, maternity, disability, and death (based on income)
• 3.45% toward family benefits
• 0.89% toward supplementary incapacity, invalidity, and death insurance
• 0.77% toward workplace accidents and occupational illnesses insurance
• 8.55% toward social security (capped)
• 1.9% toward social security (uncapped)
• 4.2% toward unemployment insurance
• 5% as a business allowance
• 0.41% toward occupational medicine
• 0.1% toward FNAL

The payroll cycle is typically on or before the last working day of the month. France does not legally mandate a 13th-month salary. 

Honorable Mentions

There are a few other countries that have notably high payroll taxes. These countries include:

• Germany: The country has a strong social welfare program that includes a national pension, health insurance, nursing care insurance, unemployment insurance, and accident insurance. German payroll tax is roughly equal to 20% of each employee’s income. Additionally, workers are typically paid once per month. 
• Austria: Like many other European nations, Austria has a strong social welfare program that’s largely funded through payroll and income taxes. The country ranked as the fourth biggest tax wedge among OECD countries and has a relatively high payroll taxation rate of 21.03. Their payroll cycle is monthly. 
• Other Scandinavian countries, such as Finland and Denmark also have comprehensive funding for social programs. This can impose high employment taxes as a result. 

Advantages and Disadvantages of Hiring in Countries with Higher Taxes

Federal payroll taxes are an important consideration for any business looking to build a presence in a foreign country. Countries with higher taxation rates usually offer several benefits, which can help improve your employees’ quality of life. However, there are also some challenges you might face that can impact a company’s operations and associated costs. 

Countries with high payroll taxes usually have strong social welfare systems, resulting in greater financial security and reduced stress for employees. This can help lead to healthier and more productive workers that will help your organization grow. 

Countries with extensive social programs also tend to be more developed and allocate more funding for their education systems. This could give your company access to a wider and highly-educated global talent pool. Additionally, high job satisfaction and a good quality of life can help boost employee retention and performance. 

On the other hand, countries with higher federal income tax tend to be more expensive to operate in. High labor taxes increase the associated costs for each employee in several ways, which can potentially lead to slower economic growth. High taxation rates can also lead to additional legal or HR expenses to ensure you remain compliant with local labor laws. 

Which Countries Have Low Payroll Taxes?

Looking into countries with lower taxes can also be advantageous when growing your business. These countries typically don’t offer the extensive social welfare programs found in countries with higher taxes, meaning that workers can take home a higher percentage of their wages.

Singapore

Singapore has a business-friendly tax system and a straightforward payroll process, which makes it an excellent choice if you want to access Southeastern markets. Payroll for each month requires contributions to the Central Provident Fund. In Singapore, workers get paid once per month. 

Employers are not responsible for withholding federal income taxes on an employee’s monthly salary, meaning the worker needs to file their own taxes. Employers must contribute 17% as a corporate tax to social programs. In Singapore, the associated payroll taxes are:

• 9% toward social insurance
• 2% toward occupational hazard
• 1% toward unemployment insurance

It’s important to know that the taxation and contribution amount can vary depending on the employee’s age. As of 2016, it’s also mandatory that employers provide a written itemized pay-slip to all employees within three working days of the payment. 

South Korea

South Korea is another country that offers a relatively intuitive payroll process and lower taxes compared to many Western alternatives. This helps to maintain a competitive and straightforward business environment, helping to facilitate economic growth and innovation. All payments are made on the 25th or last day of the month. 

When hiring in South Korea, employers are responsible for deducting certain contributions to social programs. Employers must withhold:

• 4.5% toward the National Pension System 
• 3.43% toward health insurance 
• 1.05% to 1.65% toward employment insurance
• 0.7% to 1.9% toward worker accident compensation insurance
• 0.5% toward resident tax

It is an employer’s responsibility to remain compliant with other costs of hiring in South Korea, such as abiding by the minimum wage requirements and providing benefits. 

United States

The United States has an accommodating environment for businesses and significantly lower payroll taxes than many other major Western economies. In the US, payments are generally sent out twice a month. Tax is calculated on a progressive scale based on the worker’s yearly earnings. 

Employers are responsible for the necessary tax withholdings and contributions. Companies in America are required to provide:

• 6.2% toward social security
• 1.45% toward medicare 

When hiring in America, companies should also be aware that certain states can have different tax requirements and rates. Additionally, employees must pay a 6% unemployment tax, which is charged on their first $7,000 of income per year. 

However, it’s worth noting that many US companies offer supplementary benefits to attract and retain top talent. Here’s a rough idea of what types of benefits companies typically provide. 

Another thing companies hiring in the United States must consider is the Federal Insurance Contributions Act (FICA). This states that both the employer and employee must pay 7.65% of their income for a total contribution of 15.3%. The required amount can be found by multiplying an employee’s gross pay by 7.65%. Independent contractors must pay the entire amount by themselves. This includes medicare taxes and Social Security taxes for your workers. 

There's no doubt that employer payroll taxes can quickly become complicated. This is why a number of employers pay a dedicated payroll administrator or work with a payroll service provider, who can automate the process and simplify employer payroll taxes long-term.

The Federal Unemployment Tax Act (FUTA) covers the costs of providing unemployment insurance and social security tax across all states. If a company in the US has at least one employee who works for 20 weeks out of the year, you’re responsible for paying FUTA taxes. This is another employer payroll tax your company must consider.

Honorable Mentions

There are a few other countries that have notably low payroll tax and understandable tax structures:

• Switzerland: This is another Western country with relatively low federal payroll taxes. Employers need to provide anywhere from 7.57% and 22.9% to fund the country’s social welfare programs. Switzerland also has the lowest tax wedge among all European countries in the OECD. 
• Hong Kong: The country is a solid choice for businesses that want a gateway to the Chinese market. It has a business-friendly tax system that’s easy to navigate and a reasonable 16.5% corporate tax rate. Employers and employees must make contributions to the Mandatory Provident Fund equal to 5% of an employee’s salary if it’s over $7,100. 

Advantages and Disadvantages of Hiring in a Country with Lower Taxes

Countries with lower payroll taxes generally have more simplistic rules and regulations for tax systems. Depending on the goals of your business, low-tax countries can be beneficial for your company. 

In contrast with countries that have higher federal payroll taxes, the labor costs in countries such as Singapore and the United States can be cost-effective. This makes it more affordable to attract skilled employees to your workforce. 

Additionally, countries with lower taxes can facilitate more rapid economic growth for companies by creating new jobs and investment opportunities. 

A downside to hiring in these countries is more limited funding for social programs. This may restrict an employee’s access to vital services such as healthcare, education, retirement savings, and time off. Additionally, workers in countries with a weaker social support system may have less job security than in countries with higher payroll taxes. 

How Can an EOR Help With Federal Income Tax? 

Engaging an Employer of Record (EOR) in the country you want to hire from can help streamline the hiring process and keep you compliant with complicated labor laws. Your EOR provides comprehensive knowledge about the country’s payroll requirements, tax structure, and required social security contributions. This can give you more time and focus on figuring out how to grow your business. 

An EOR handles all the complicated matters of hiring a global employee, ensuring that your workers get paid the right amount. Additionally, your EOR deals with all employee benefits packages. Whether you’re hiring in a country with higher taxes or a more cost-effective option, your Employer of Record can help you to efficiently hire. 

Consider Borderless

Borderless is an EOR that provides an extensive range of services, including payroll, benefits administration, and more. We can help you quickly hire skilled workers without needing to understand complex international labor laws. Book a demo or speak with us today to see how we can help you hire employees from over 170 different countries worldwide.

_Disclaimer

_{Borderless does not provide legal services or legal advice to customers, contractors, employees, partners, or the general public. We are not lawyers or paralegals. Please read our full disclaimer here.}

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