Hire Employees in Iceland

Your own entity is normally an einkahlutafélag (ehf.). Registration is straightforward, and payroll is reported monthly to Skatturinn, which administers both income tax withholding and the employer payroll tax.

An Employer of Record inverts the sequence: the Icelandic entity signs the contract, applies the relevant collective agreement, remits pension and tryggingagjald and handles union deductions — while you direct the day-to-day work.

Iceland has no statutory minimum wage. Pay floors come from collective agreements, which cover almost the entire workforce, so identifying the applicable agreement precedes any offer — it sets not only pay but the vacation bonus and the December bonus as well.

Iceland has no statutory minimum wage, and that single fact shapes the whole hiring process. Pay floors, the vacation bonus and the December bonus all come from the applicable collective agreement, and union density is among the highest in the world — so identifying the right agreement before making an offer matters more here than reading the contribution table does.

New agreements concluded in late 2024 and early 2025 raised minimum wages across several sectors and increased both bonuses, so figures from before that round are stale.

Employer cost is about 19%, not the 17.85% the headline components suggest. The pension contribution is 11.5% and tryggingagjald is 6.35%, but the payroll tax is charged on wages including the employer pension contribution, so the second compounds on the first. Calculating tryggingagjald on gross alone understates cost on every payroll.

One further variable is employee-driven: where an employee elects to make additional voluntary pension savings, the employer must match with a further 2%. That is triggered by individual choice rather than employer policy, so it needs modelling rather than assuming.

Break-even rule of thumb: EOR fees begin to exceed the running cost of a small Icelandic entity somewhere between 15 and 20 employees. Model both before committing — see EOR vs Entity for the full comparison, and plan any later migration so employees keep seniority.

Employer cost is about 19%, not the 17.85% the headline components suggest. The pension contribution is 11.5% and tryggingagjald 6.35%, but the payroll tax is charged on wages including the employer pension contribution, so the second compounds on the first. Calculating tryggingagjald on gross alone understates cost on every payroll.

Tryggingagjald has been 6.35% since 2022 and is employer-only — at least one published source describes it as split between employer and employee at around 7.5% and 6.85%, which is incorrect and would produce an unlawful deduction from wages.

One further variable is employee-driven: where an employee elects to make additional voluntary pension savings, the employer must match with a further 2%. That is triggered by individual choice rather than employer policy, so it needs modelling rather than assuming.

One exemption changes the arithmetic completely for cross-border hires. Where the employer holds an A1 certificate showing the employee remains covered by another EEA state’s social security system, the full tryggingagjald is not charged — the rate for that group is 0.425% rather than 6.35%, since the exemption covers the unemployment, social security and parental leave components. The certificate has to be held on file. Note also the age limits: neither the employee contribution nor the 11.5% employer match applies below 16 or from 70, and employer contributions above 12% of the base plus ISK 2,000,000 a year become taxable income for the employee.

Four representative profiles, costed with the 2026 contribution rates above. Salaries are illustrative market midpoints, not GX operating data — use them to see how the on-cost percentage behaves as pay rises, not as a salary benchmark for a specific role. For real market data on your roles, ask for a costing.

Nothing here is capped, so the on-cost percentage is identical at every salary level. A senior hire costs proportionally exactly what a junior one does, which is not true in most comparable markets and makes salary the only variable worth modelling.

Four representative profiles costed on 2026 statutory rates. Salaries are illustrative market midpoints, not GX operating data.

Payroll runs monthly in krónur. The skilagrein wage report and payment are due by the fifteenth of the month following the payroll period, covering income tax withheld and tryggingagjald together.

Income tax combines a national rate with the municipality’s útsvar, giving combined rates of about 31.49%, 37.99% and 46.29% across three bands for 2026. The monthly personal tax credit of ISK 72,492 is deducted from the calculated tax rather than from income, and any unused portion may transfer between spouses.

The employee’s 4% pension contribution reduces the income tax base, which differs from markets such as Malta where contributions do not. Union fees are deducted after tax and remitted to the relevant union.

Thresholds and ceilings are uprated periodically, so a figure correct in January may not hold later in the year. Where a row below is flagged, published sources disagreed and the conflict is recorded rather than resolved.

Thresholds move on a local cycle that does not always fall in January, so a figure correct at the start of the year may not hold through it. Where a row below carries a flag, published sources disagreed and the conflict is recorded rather than resolved — there are 2 such rows on this page.

The sections that follow set out contracts and probation, working time, leave, termination and immigration in that order. Where an entitlement comes from a collective agreement rather than statute it is marked as such, because that distinction determines whether it is negotiable.

Written terms must be provided, and the applicable collective agreement identified before an offer because it sets the pay floor. Icelandic and English are both used in practice.

Probation is commonly three months, set by contract or the agreement, with shorter notice during it. Because there is no statutory minimum wage, the probationary rate must still meet the agreement floor rather than being freely set.

Pension contributions are mandatory for employees aged 16 to 70 and apply from the first day of employment regardless of probationary status.

Forty hours a week is the statutory maximum, though many collective agreements have reduced the standard week to between 36 and 39 hours without a pay reduction. Overtime premiums come from the applicable agreement.

Overtime is where payroll disputes usually start. Record hours from day one even where the role is salaried and the expectation is that overtime will not arise — reconstructing records after a complaint is far harder than keeping them.

Overtime is where payroll disputes usually begin, and the burden of proving hours worked generally sits with the employer. Record hours from the first day even for salaried roles where overtime is not expected — reconstructing a record after a complaint is considerably harder than keeping one.

Public holidays sit on top of the annual leave entitlement. Where a holiday falls at a weekend, practice varies — some markets move it, some grant a substitute day and some do neither, so check the position before assuming a day in lieu.

The 16 dates below are the statutory position. Employers in many markets grant more by policy or collective agreement, and sector agreements sometimes add local or patronal days that do not appear in a national list.

Iceland observes 16 paid public holidays in 2026. Dates that fall at a weekend and any substitution rules are set out below; entitlement is separate from annual leave.

Parental leave: 12 months shared between parents — Six months each, of which six weeks may be transferred. Paid by the Parental Leave Fund up to a cap. Extension of shared component: Recent amendments extended the shared element — Reinforcing Iceland’s position among the most generous parental leave regimes. Sick leave: Set by collective agreement — Typically two days per month worked in the first year, rising with service. Employer-paid. Child sickness leave: Paid days to care for a sick child — Under the applicable agreement.

December bonus: A separate payment under the applicable agreement — Contractual once the agreement applies.

Notice comes from the applicable collective agreement rather than a single statute, and rises with length of service — commonly from one month to three or more.

There is no general statutory severance payment in Iceland. The notice period, and any redundancy support the agreement provides, is the cost. That makes Icelandic exits relatively predictable compared with the Nordic neighbours, where objective-grounds regimes and works council obligations add both time and uncertainty.

Dismissal must not be discriminatory or in breach of the agreement, and an employee may request written reasons. Union involvement in disputes is common and effective given near-universal membership, so the practical position is more constrained than the statutory one.

Probation is commonly three months, set by contract or the agreement, with shorter notice during it.

EEA and EFTA nationals need no permit. Other foreign nationals need a work permit tied to a specific employer, and allow six to ten weeks.

Iceland introduced a digital nomad visa in 2022 permitting remote workers employed abroad to stay for up to six months. It does not create an Icelandic employment relationship, so it is not an alternative to employing someone locally — a distinction worth drawing explicitly with candidates.

Because Iceland is in the EEA but not the EU, posted worker rules and A1 certificates operate on the EEA basis, which needs checking for cross-border arrangements rather than assuming the intra-EU position.

A cross-border hire may not attract local contributions at all. Under EU Regulations 883/2004 and 987/2009 a worker moving within the EEA is subject to one state’s social security system at a time. A posted worker stays in the home system for up to 24 months under Article 12, and someone working across two or more states follows a single state determined by a 25% activity test under Article 13. Where a valid A1 portable document is held, the host state cannot charge contributions. The certificate is declaratory rather than constitutive — the right legislation applies either way — but without it a host state can assess retroactively with penalties, and enforcement is aggressive in France, Belgium and Austria. Residual local charges are not always nil, so confirm the specific position rather than assuming zero.

The two recurring errors are both arithmetic rather than legal. Calculating tryggingagjald on wages alone rather than the pension-inclusive base understates employer cost on every run; treating it as shared with the employee produces an unlawful wage deduction.

The third is the collective agreement. With no statutory minimum wage, setting pay from a market benchmark rather than the agreement floor risks underpayment claims, and the agreement also carries the vacation and December bonuses that a base-salary model omits.

Practical controls: identify the applicable agreement before making an offer, calculate tryggingagjald on wages plus the 11.5% pension contribution, keep the payroll tax entirely employer-side, model the voluntary 2% match for employees likely to opt in, and administer union deductions after tax.

Work backwards from the start date. For an EEA or EFTA national, a week or two is realistic. Other foreign nationals need a work permit tied to a specific employer, adding six to ten weeks.

Confirm before making an offer: which collective agreement applies and what floor it sets, since there is no statutory minimum wage; whether the vacation and December bonuses under that agreement have been priced in; and that tryggingagjald is configured on the pension-inclusive base.

Tryggingagjald is employer-only and must never be deducted from wages. At least one published source describes it as shared between employer and employee, which is incorrect. Union deductions are applied after tax and remitted to the relevant union, and the skilagrein wage report with payment is due by the 15th of the following month.