Hiring international employees can be an attractive option for growing companies. Countries like Iceland offer a diverse, skilled talent pool to boost business competitiveness.  

While salaries are important, there are many other costs to keep in mind when it comes to global hiring. For example, employers are typically required to make mandatory social security contributions. They may also provide staff with additional benefits like healthcare when competing for top talent. 

This article will walk you through the various fixed and variable costs of hiring in Iceland. 

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Costs to Consider When Hiring Around the World

The basic hiring costs in Iceland include: 

  • Employee’s gross salary 
  • Taxes and benefits
  • Vacation pay and other leaves 
  • Overtime pay 
  • Severance pay 

Plus, you may want to add certain optional costs like benefits, bonuses, and extras. 

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Mandatory Costs of Hiring an Employee in Iceland 

Salary  

Iceland is home to highly competitive IT talent, thanks to its innovative technology and green energy market. Mostly tapped for specialized talent, Iceland is the 8th most expensive country on the global cost of living index. 

There is no set minimum wage in Iceland. Instead, each industry uses collective bargaining agreements to determine the minimum wage, other payments, and working conditions. 

One of the largest unions is the VR (Store and Office Workers’ Union). It has set the minimum wage for office workers starting at ISK 411,145 per month or just over USD 3,000.   

However, salaries for skilled workers and sophisticated IT talent will vary greatly. You can get an idea of average salaries by doing some market research or partnering with a local staffing agency. 


Mandatory Taxes and Benefits 

Payroll costs in Iceland add up to about 21% of the employee's gross salary. These include: 

  • 11.5%: Mandatory Pension Fund 
  • 2%: Voluntary Pension Fund (employee decides)  
  • 6.35%: Social Security Contribution
  • 0.10%: Rehabilitation Fund 
  • 0.7-1%: Union Fee
  • Varies: Other Union Fees

Employers and employees both contribute to taxes and funds. So, employers must also withhold: 

  • 31.45-46.25%: Individual Income Tax 
  • 4-6%: Pension Fund 

Mandatory Bonuses  

Depending on the collective agreement negotiated by your employee’s union, there are one or two bonuses per year. One is paid in May — ahead of the official holiday season when all employees can take leave. The second one is paid out in December.  

For example, in the VR collective agreement, the May bonus is ISK 56,000 (about USD 410) and the end-of-year bonus is ISK 103,000 (about USD 755). 


Paid Leave

There are several types of paid leave entitlements in Iceland. All leaves are subject to the terms negotiated by collective agreements and will vary accordingly. Below are statutory minimums. 

  • Public holidays: There are 16 public holidays in Iceland. 
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  • Paid time off: Full-time employees are entitled to 24 days of paid vacation after their first year of service. This number increases as they work more years for the same employer. 
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  • Sick leave: At a minimum, Icelandic employees can take two days of sick leave per month of work. As their tenure increases, so does their paid sick leave allowance.  
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  • Parental leave: New mothers and fathers are each entitled to three months of maternity leave and paternity leave, respectively. They may also split another three months of parental leave as they see fit. 

Overtime Pay 

The standard working hours in Iceland are eight hours per day for up to five days per week, including breaks. For office workers, the hourly rate for overtime is 1.0385% of fixed monthly wages. This goes up to 1.375% for work performed on holidays. 


Severance pay 

Severance compensation is not required by law, although unions may bargain for a mutual rate that applies to their members.

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Additional Costs of Hiring Icelandic Talent 

Today’s talent market is extremely competitive. To hire top Icelandic talent, employers may also want to offer a benefits package, which can help both search and retention. Here are some benefits you might consider offering Icelandic employees along with other possible costs. 


Benefits 

Offering the right benefits package can help you stand out from the competition. In Iceland, many employers offer benefits like extended retirement plans, training funds, flexible work arrangements, and more. 


Bonuses and Extras 

Finally, you’ll want to think about smaller expenses like gifts for special occasions, comped meals or coffees for meetings, etc. 

If you hire one or two employees in Iceland, they’ll likely do remote work. Even so, you may want to pay for a coworking space or provide funding to set up a home office. Weekly rates for coworking spaces in Iceland start at about USD 295. 

However, you might be hiring an entire team to work on larger projects such as software development. If that’s the case, it can be wise to rent an office space to facilitate collaboration among your staff in Iceland. 

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Average Cost of Hiring One Employee in Iceland (Annual in USD)

Below is an estimate based on a salary of $100,000 for an employee in Iceland. This salary is for ease of calculation only. It will change as per your hiring goals including the employment contract, the candidate’s experience, and the type of position. 

  • Salary: $100,000
  • Employer Taxes: $21,000
  • Mandatory Pension Fund 
  • Voluntary Pension Fund (employee decides)  
  • Social Security Contribution
  • Rehabilitation Fund 
  • Union Fee
  • Annual Bonuses: $1165
  • TOTAL: $122,165 + Benefits (discretionary) 

Note that these totals do not include other standard costs like soft benefits commonly offered in Iceland.

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A Global EOR Can Help You Manage International Payroll 

With so many costs to consider, it may feel overwhelming to start hiring globally. An Employer of Record (EOR) can help. An EOR like Borderless can help you compliantly hire and pay employees in Iceland.

If you’d like to begin global hiring but aren’t sure where to start, book a demo with Borderless. We’ll walk you through every step, so you can reap all the benefits without the added headaches. 

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Disclaimer

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