Similarly to the UK, employers withhold a percentage of the gross salary agreed as a payment on account of income tax of the employee.
Generally, for permanent contracts the amount withheld will depend on the size of the salary and the employee’s personal entitlements given some of their personal circumstances. Therefore, the amounts withheld should be very close to the actual tax liability of the employee, should they then file a tax return following the year end there would only be a small balancing payment or refund due.
However, for temporary contracts the minimum amount withheld is 2%. This means that during the temporary contract phase the employee will probably be under contributing to the actual income tax liability accrued, therefore when the employee changes to a permanent contract the amount under contributed will need to be regularised.
Let’s look at an example, for an employee earning € 1,500 gross per month:
Estimate of PAYE Employee Deductions (€)
Withholding minimum 2% is an obligation for temporary contracts; however, you may opt by agreement with the employee to retain the correct PAYE percentage hence avoiding three potential problems. On one hand the employee will not get accustomed to an artificially high net pay which could potentially lead to dissatisfaction later on. Secondly, given that the retentions match the income tax liability no large adjustment will be needed. Thirdly, if the pay has been agreed on a gross pay basis there will be no increase in the cost to the employer when the contract is renewed on a permanent basis.
Our recommendation is that salaries are always agreed on a gross pay basis and if at all possible that even if the contract is temporary, you opt to withhold the correct amount.