How to set up and manage payroll in the Netherlands

How can a foreign company manage payroll in the Netherlands?

If you want to set up payroll for Dutch tax residents on your own, you need to make a substantial investment of time and resources. Ensuring compliance in another country and managing payroll across borders can feel like a daunting business proposition to the unfamiliar.

Thankfully, there are simpler, more cost-effective alternatives to manage your payroll in the Netherlands without putting your company (or your employees’ data) at risk. This guide will help you understand the key considerations and the easiest way to proceed.

For a full guide to employment law in the Netherlands, see our Netherlands Country Explorer.

Outsourcing payroll in the Netherlands

The first question you need to answer is whether you want to outsource your payroll or set up your own Dutch entity. Unless you're starting a complete branch of your business with a dedicated Dutch HR team to match, managing your own payroll in the Netherlands can quickly become complicated. You’ll need payroll specialists, accountants, attorneys, and local HR experts to mitigate risk and stay compliant with local labor laws.

Outsourcing your payroll in the Netherlands makes it easier to hire remote employees without high setup and management costs. By outsourcing your payroll to a global payroll provider, you take back all the time you would normally spend managing everything yourself.

How to choose a payroll partner in the Netherlands

When you choose to outsource your payroll, it's important that you pick a global payroll provider with an owned entity in the country.

Some payroll providers can only offer services in the Netherlands by outsourcing to other providers. Doing so opens your business to the risks of noncompliance, creates barriers between your company and your employees, slows down communication, and puts your intellectual property at risk.

By choosing a quality partner with an owned entity in the country, you retain much more control and security. You'll be able to provide your employees with a consistent experience across borders. And, since there's a team on the ground, you'll have a single point of contact for all your payroll and HR questions.

Should I use an EOR or a PEO in the Netherlands?

Even though they are sometimes used interchangeably, there are some key differences between an Employer Of Record (EOR) and a Professional Employment Organization (PEO). The major difference between an EOR and a PEO has to do with who is the legal employer of your employee. The service you choose depends on your particular situation.

When working with a PEO, you employ your own workers while passing the responsibilities of payroll and benefits management to the PEO. Dutch tax residents need to enter a contract with a Dutch legal entity, meaning that if you choose to work with a PEO, you need your own local entity. Opening such an entity can take months, or even years, not to mention thousands of dollars.

An EOR hires employees for you via a service agreement. When you work with an EOR, you don't need a local legal entity. An EOR has a complete system of compliance, onboarding, and HR in place. This makes an EOR an excellent choice if you're only hiring a few Dutch tax residents. You won't need to set up anything other than your agreement with the EOR.

As your employer of record, Remote can help you sign up and start onboarding employees in the Netherlands in minutes. You can even sign up now if you’re ready to begin!

Registering a company in the Netherlands

If you prefer to work with a PEO in the Netherlands, you need to register yourself as an employer in the country. One of the advantages of the Dutch open economy is that the Netherlands recognizes foreign legal entities. This means that you won't have to convert to a Dutch Legal form.

There are multiple ways you can register a foreign business in the Netherlands. Depending on your business needs, you can register a permanent establishment, a non-permanent establishment, a branch, or a representative office. The only business structure that is not recognized in the Netherlands is a foreign sole proprietorship. Be cautious though: permanent establishment can be expensive.

To establish a foreign company in the Netherlands, you need to register with the Dutch Chamber of Commerce, or KVK. It's worthwhile to hire a Dutch legal professional when setting up your entity. The costs of registration are much lower than the fines and penalties for failing to register when you should.

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Employment and labor laws in the Netherlands

Employment and labor laws in the Netherlands are an amalgamation of different laws and acts. Many important aspects, such as minimum wage and income tax, are determined on a yearly basis.

The complexity of Dutch legislation increases the risk of non-compliance in the Netherlands for companies unfamiliar with the legal landscape. Again, it is critical to work with a partner that owns its own Dutch entity when employing workers in the Netherlands.

These are the basics you need to know about the legislation when setting up your payroll in the Netherlands. You can learn more in our dedicated guide to employee benefits in the Netherlands.

Payment cycles for payroll in the Netherlands

Wage periods in the Netherlands are required to include one payment before the end of the month. Most often, employees receive their payslip and salary once per month instead of every two weeks, a common frequency in other areas of the world.

Minimum wage and working hours in the Netherlands

The legal minimum wage in the Netherlands for employees in 2021 is €1.684,80 per month for a full-time employee over the age of 21. Full-time can be a 36-, 38-, or 40-hour workweek, depending on the sector or company policy.

To make sure employees can maintain a healthy work-life balance, employees may not work more than 60 hours per week. A single shift can be no more than 12 hours long, and an employee needs to get at least 11 hours off between shifts.

Paid annual leave

The legal minimum amount of paid holidays in the Netherlands is based on a calculation. Generally, your employee will be able to take four weeks of paid time off. For an employee with a 40-hour contract, this comes down to 20 holidays per year. It’s not uncommon for Dutch employees to get 25 days or more. This excludes public holidays.

If an employee doesn’t take all their paid leave, they can use their leftover days for up to six months into the new year. You cannot pay out unused paid time off, so it’s important to ensure employees use their full entitlement on time.

On top of the minimum of 20 days of paid time off, every employee has a right to a holiday allowance, or “vakantiegeld.” The minimum holiday allowance is 8% of the employee’s gross yearly wage over the time they have been employed. So if an employee has been employed for three months, they are only entitled to a holiday allowance of 8% of their gross wages over that time. The holiday allowance is usually paid in lump sum in May or June.

Maternity and paternity leave

Dutch Maternity leave is split up into pregnancy leave and maternity leave. The total leave amounts to 14-16 weeks at full wage.

Partners of pregnant Dutch employees are entitled to paternity leave. New fathers or partners get five working days of paternity leave at full wages and can take an additional five weeks at 70% of their daily wage.

In order to guarantee that new parents get the paid parental leave they are entitled to, businesses can apply for an allowance to the Dutch Employee Insurance Agency (UWV). The allowance covers 100% of the daily wage of your employee for the duration of the maternity leave. For paternity leave, it covers 100% for the first five days and 70% for the optional five weeks.

Tax and Compliance —

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Key payroll deductions in the Netherlands

When you're hiring Dutch tax residents, you have to withhold payroll taxes from their salary. The payroll deductions in the Netherlands consist of wage taxes, national insurance contributions, employed person's insurance contributions, and income-dependent contributions pursuant to the Health Care Insurance Act (ZVW).

Wage taxes in the Netherlands

Employers in the Netherlands withhold wage taxes from an employee’s salary each month. This is an advance on the income tax.

The Netherlands has a tiered income tax applied progressively across two brackets. A Dutch tax resident pays 37.1% income tax up to a taxable income of € 68.507 a year in 2021. If the taxable income exceeds that, the income tax in 2021 is 49.50%.

National insurance contributions

National insurance is social insurance in the Netherlands. Taxes help provide a basic level of wellbeing when someone hits retirement age or becomes chronically ill. Taxes also provide a basic income for unemployed widowed spouses or dependents under 18, as well as help with raising children.

You withhold these contributions from your employee's salary. The amount withheld goes towards the National Old Age Pension (AOW), the Chronic Care Act (WLZ), the National Survivor Benefits Act (ANW) and the General Child Benefit Act (AKW).

The rates for the national insurance contributions are set each year. In 2021, the total state social security rates came down to 27.65% of the gross yearly income of the employee.

Employed person's insurance contributions

The employed person's insurance contribution insures employees against the financial consequences of illness, occupational disability, and unemployment. These contributions are made by the employer and don't affect your employee’s salary. They go towards the Sickness Benefits Act (ZW), the Disability Insurance Act (WAO), the Work and Income according to Work Capacity Act (WIA), the Unemployment Insurance Act (WW), and the Return to Work Fund (Whk).

Contributions to the Unemployment Insurance Act (WW) is 2.94% of wages for an employee with a permanent contract, and 7.94% for employees with a temporary contract. The total basic contribution for the WAO/WIA, including child care benefit, is 7.27%. The contribution to the other acts is calculated by the Dutch tax authorities per employer.

Health Care Insurance Act (ZVW)

Having health insurance in the Netherlands is mandatory. A part is paid by Dutch tax residents on a monthly basis. Another part is paid by a contribution that employers are required to pay. This contribution is put towards the health insurance of their employees, also called the Health Insurance Act (ZVW).

The contribution to the ZVW for 2021 is 7% of the gross yearly wage. It’s capped at a wage of €58,311. This means that no matter how much more an employee makes a year, you won’t be required to pay more than €4,081.77 annually.

Coronavirus-related measures to payroll tax relief

The Dutch government has implemented strong measures to support the economy during the Covid-19 pandemic. The full bridging measurements for the coronavirus crisis is called NOW. In order to help companies and employees affected by the global coronavirus pandemic, the Dutch government has waived certain payroll deductions.

Under the NOW, you can receive contributions towards wage costs that qualify as national insurance contributions. You cannot receive this contribution for employees whose gross wages exceed €9,538 per month

To qualify for the NOW, your company must have suffered a 20% turnover loss over the period stipulated by the government. Financial aid in the form of wage contribution amounts to 90% of wage costs depending on the percentage of turnover loss.

Filing payroll tax returns and contributions

Payroll tax contributions must be paid on a monthly basis. Payments must be made to the local tax office and are due by the end of the month of the following payroll. National insurance contributions are made on a monthly basis, regardless of the days worked by the employee.

On top of these contributions, you have to file payroll tax returns during the same time period. Payroll tax returns have a collective section and an employees section, stipulating the amount of payroll tax paid per employee and in total.

If you fail to file and pay payroll taxes in the Netherlands in the proper time frame, you’ll be fined accordingly. The fines for late payment are 3% of the outstanding amount with a maximum of €5,514. If you don’t file your returns on time, you’ll receive a fine of €68.

If you repeatedly fail to pay or file your payroll taxes on time, the Tax and Customs Administration can impose higher fines.

Paying Dutch contractors

When you’re working with Dutch contractors, you don’t have to worry about any of the payroll deductions or cycles discussed above. Since a contractor is self-employed or employed by a third party, they or their employer (client) are responsible to stay compliant.

Before you think that makes it easier by definition to hire contractors instead of employees, you might be wrong. In order to stop false self-employment and reduce employment competition, the Dutch government implemented a law that requires clients and contractors to assess their work relationship (DBA). Misclassification of contractors carries serious risks.

Both you and your contractor need to be able to show that there is no false employment. If the Tax and Customs Administration finds that there is false employment, both you and your contractor can receive a fine and may even be forced to sever your work relationship.

Set up payroll in the Netherlands with Remote

Setting up and managing payroll in the Netherlands takes a substantial investment. You have to set up a legal entity, find your way through the different rules and legislation, and stay up to date with changes in policy.

Luckily, there is a better way with Remote. Remote handles payroll, benefits, taxes, and compliance for your team in the Netherlands, so you can enjoy worry-free employment and focus on growing your business. Sign up now and start onboarding in minutes!

To learn more about employing workers in the Netherlands, be sure to check out our Netherlands Country Explorer for facts and figures regarding benefits, public holidays, and more.

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