How to hire and pay remote workers in Estonia

Hiring remote workers from Estonia provides businesses the opportunity to tap into the country’s highly educated and tech-savvy population. But hiring from this country has its challenges. Our Estonia Country Explorer provides basic information on employment in Estonia and labor regulations, but for a more in-depth understanding of how to employ remote workers in the country, read on!

Estonia's labor laws are liberal and allow for flexibility in terms and conditions of employment. They do, however, provide strong protection for workers. Regulations on workers' benefits, minimum wage, paid time off, working hours, and misclassification are outlined in detail.

Special regulations in Estonia regarding overtime pay, employment taxes, and social contribution requirements for employees and employers can make staying compliant as a foreign employer tricky. This article discusses all you need to know to hire and pay remote workers in Estonia with ease and without running afoul of its many labor regulations.

How do businesses pay remote workers in Estonia?

You can pay remote workers in Estonia using any of three options:

Open a legal entity in Estonia

Opening a legal entity in Estonia can be done online, provided you have the right documents and verification. If you hold an Estonian ID card or e-Residency card, or an ID card from one of the qualified European Union (EU) member states, you can establish a private limited company. You can then employ remote workers under the name of the entity. However, establishing an Estonian company comes with the responsibility of declaring corporate taxes and complying with the country’s labor regulations.

Unfortunately, if you are not an Estonian citizen or resident, opening an entity in the country can be far more difficult and more expensive. That’s why most businesses looking to employ remote workers in Estonia choose the second option of working with an EOR.

Work with an employer of record (EOR)

Another option is to work with an employer of record (EOR) like Remote. Your EOR will hire and pay your employees in Estonia on your behalf. You can rely on your EOR to take care of issues like compliance, payroll, and benefits for your Estonian employees.

When choosing an EOR, look for one that has set up a legal entity in Estonia and will not depend on third parties to serve your employees. That way, you can be sure you are compliant with all local laws. In addition, an EOR with its own local legal entity will be able to provide your employees with a better experience by not having to involve third parties in payroll, benefits, or other processes.

Pay Estonian workers as contractors

Although hiring workers as independent contractors is not common in Estonia, you can do so if the nature of the services they render puts them into that category. Do not take this route simply to avoid hiring workers as employees. This option is appropriate for contractors working on short-term projects for your business if they also work for other businesses as well. If you choose this route, Remote makes paying contractors in Estonia easy.

In what currency do companies pay remote workers in Estonia?

Estonia joined the Eurozone in 2011 and so uses the euro as its currency. Currencies other than the euro are not widely accepted. Therefore, it is recommended (and easiest) to pay your workers in Estonia with the euro.

What are the tax rates for tax brackets in Estonia?

Income in Estonia has a 20% tax rate irrespective of income size for both residents and non-residents. Often, the rules guiding where remote workers should pay taxes can be confusing. In Estonia, the law is straightforward.

Taxable income for residents includes earnings from employment contracts or other service contracts, business income, royalties, capital gains, pensions, scholarships, and interest, irrespective of the source. Non-residents pay tax only on income earned from Estonian sources.

Which parts of salary in Estonia are taxable?

In Estonia, the annual basic exemption (non-taxable amount) is up to €6,000, but it can be less depending on the level of income.

Components of Estonian salaries that incur full taxes

Estonian workers with income above €25,200 yearly or €2,100 monthly pay taxes in full.

Components of Estonian salaries that incur partial taxes

A person with an annual income of €14,400 enjoys a basic tax exemption of €500 monthly or €6,000 annually. When the income is above €14,400 but less than €25,200, the basic exemption decreases according to the formula below:

6,000 – 6,000 ÷ 10,800 × (income amount – 14,400)

Estonian parents can also enjoy basic exemptions up to €1,848 starting from the second child and €3,048 from the third child.

There can also be additional deductions for mortgage interest, educational expenses, gifts, donations, insurance premiums, pension funds, and social security contributions.

Is per diem taxable in Estonia?

The term per diem is used in two ways. It refers to a system of worker classification and a way of covering work-related travel expenses.

“Per diem employees” are paid a certain amount of money daily, irrespective of the work done.

“Per diem payments” are daily allowances paid to cover work-related travel expenses including transportation, accommodation, and food. In per diem, instead of paying for the actual expenses your employees incur on business trips, you pay them a daily allowance.

Per diem allowances are not taxable in Estonia as long as they are within the limits established by law. The per diem rate for a business trip abroad that is tax-free is €50 per day up to 15 days a month and €32 for the rest of the month.

Is there a difference between an allowance and a reimbursement in Estonia?

Yes. A reimbursement is a refund of out-of-pocket expenses that employees incur in performing their duties. Reimbursement for the use of a personal car for work is one example. An allowance is a set amount given to employees for a particular purpose. For example, if an Estonian employee needs to travel abroad for work, the employer must provide a minimum per diem allowance of €22.37.

What payroll deductions are employers required to make in Estonia?

Employers in Estonia are required to make the following deductions from their employees’ salaries:

• Income tax, 20% of employee salary

• Unemployment insurance tax, 1.6% of employee salary

• Pension contribution, 2% of gross salary, mandatory for employees born after December 31, 1982.

What is the minimum wage in Estonia?

The minimum wage in Estonia is €584.00 monthly or €3.48 hourly. The government enforces minimum wage and any employer who pays less than the minimum may be punished. Also, in calculating the minimum wage, an employer must exclude any allowance paid to the employee.

How much is overtime pay in Estonia?

When employees work more than the hours stipulated in their employment contracts, it is considered overtime, and they must be paid for the extra hours. An employer and an employee may agree on overtime as long as it does not exceed the maximum time stipulated by law. Overtime compensation is an equivalent paid time off or monetary payment (at least 1.5 times the employee’s salary).

What are the local labor laws in Estonia?

Labor laws in Estonia follow the principles laid down in various international labor organization conventions and the country’s constitution. Various legislation regulating employment includes:

• The Employment Contracts Act

• The Law of Obligations Act

• The Occupational Health and Safety Act

• Collective Agreements Act

• The Individual Labor Dispute Resolution Act

• Collective Labor Dispute Resolution Act

• Community-scale Involvement of Employees Act

How do you pay contractors in Estonia?

Estonian laws treat employees differently from contractors, and paying contractors often comes with the risk of contractor misclassification.

Contractor misclassification happens when a company hires a worker as an independent contractor, but the terms of work show that the person is an employee. It is immaterial that the agreement states that an individual will work as an independent contractor.

Certain factors are considered in determining whether a worker is an employee or a contractor:

• Who decides when and how the work is performed?

• Who provides the equipment?

• How is the worker paid?

• How important is the work?

• Who does the work?

• What is the length of the relationship?

Generally, if you have control over how and when work is done, you provide the equipment needed to perform the work, and the workers work for only your company, your workers are more likely to be employees, not independent contractors. Hiring workers as contractors instead of employees looks attractive in terms of monetary savings and having less responsibility toward them, but the penalty and the bad PR your business may get as a result can outweigh any advantage.

Avoiding employee misclassification requires you to be proactive. Having good intentions is not enough. Periodically review the working relationship you have with your contractors to know when any of them have become employees and follow our guide to convert them from contractors to employees.

How do you pay remote employees in Estonia?

As noted earlier, you can pay your remote employees in Estonia either by setting up a legal entity and paying them as your employees or by using an employer of record.

Most countries require you to have a legal entity before you can hire employees in the country. This is both expensive and time-consuming. An employer of record can help you hire employees in countries where you don’t have a legal entity. An employer of record hires the employees on your behalf, and handles their payroll management, benefits, and taxes in compliance with the countries’ labor laws.

If you want to build a global team cost-effectively, and without exposing your company to the risk of contravening labor and tax laws, you need an employer of record.

Pay remote workers in Estonia with Remote

Building a global team has its challenges, but for many companies, it is no longer optional. To remain competitive in today’s business world, you need to hire top talent, no matter where that talent is located.

Remote’s global employment and global contractor solutions make it easy for any business anywhere in the world to hire and pay remote workers in Estonia without opening a legal entity.

Ready to employ remote workers in Estonia?

Hiring remote workers from Estonia gives you access to a highly-skilled, technologically advanced workforce. However, labor law in Estonia is complicated, and keeping up with the constantly changing regulations can be challenging. An employer of record like Remote can help you navigate it with ease.

As an employer of record, Remote takes care of the hiring, onboarding, compensation, and payroll management of your employees or independent contractors and ensures compliance with employment laws. Contact us today to learn more about our global employment and global contractor solution for Estonia, or sign up now and begin onboarding workers in minutes.