10 Sep Payroll Cost in Cyprus
The employment of staff is an agreement between an employer and an employee related to compensation for services. For employers this forms a considerable cost for the business.
A couple of centuries ago this agreement had the form of a simple handshake whereby the employer agreed to pay the employee a set rate per hour of work. Over time, however, history and governmental regulations have complicated this simple relationship. As the industrial revolution expanded so did competition for employees. Employers began to offer benefits to employees and these became more intricate with incentives, matching skills to positions and the introduction of the 8-hour working day (including shifts). Some of these associated costs are shouldered by the employers as they top up the employee’s deductions.
If you are in the process of setting up your business, or have been running your own business for some time and it has grown to the point where you need to employ people to deal with increased demand, or you merely want to free up of your own time, you need to acknowledge that this is a big milestone, and it is not an easy task. Employing new people is a challenge, irrespective of your experience, but if you get it right it can bring great rewards.
If you have not employed staff before, you are likely to have many questions, but chief among these will probably be – “how much will it cost my business?”
The first element of the payroll cost calculation is the gross emoluments. This amount is the starting point for all the other costs related to the employment. The most common emoluments are the following:
- Emolument: A fixed amount of money paid to an employee for each emolument period.
- Hourly Wage: An amount of money paid to an employee at a specified rate per hour worked
- Commission: An amount paid to an employee based on a percentage of the employee’s sales
- Emolument plus Commission or Bonus: An amount paid to an employee based on several categories.
- Piece Rate: A rate of emolument based on the number of items produced.
- 13th/14th emolument
- 53rd/56th week
- The contribution of the Employer to the Central Holiday Fund and to the Trade Unions’ holiday funds etc
- Benefits in kind: the benefit that is, or is deemed to be, granted in connection with any employment or the holding of an office.
Generally, earnings are taxed in the year of receipt. Employment income includes income arising under a contract of employment and the income of office holders, such as directors.
This is compulsory and covers all individuals working in Cyprus (employed and self-employed). The payments are made by three parties, the employer, the employee, and the state. The total rate of social insurance that must be calculated on the employee’s emolument (as from 1/1/2019) is 21.5%, of which the 8.3% is deducted by the employee’s emoluments, 8.3% contributed by the employer and the rest 4.9% is paid from the Consolidated Fund of the Republic. The rate will increase in 2024 by 1.3% (0.5% for employees, 0.5% for employer, and 0.3% for the state) to 22.8% and thereafter will increase by 1.3% every five years, until it reaches 26.7%, as from 1 January 2039.
The rate of Social insurance contributions is applied to a maximum level of emoluments for the year 2020 of €54,864 (weekly €1.055/monthly €4.572). If you omit to deduct the contribution the day you will pay the employee, you have no right to deduct it for future emoluments and you must incur this additional cost.
The deadline for the payment of social insurance is by the end of the calendar month which follows the month for which contributions are due. If you delay the payment an additional charge must be paid to the Social Insurance Fund fixed as a percentage of the contributions due and rising progressively according to the time of delay. For the first month of delay the charge is 3% and increases by 3 points for each month of delay after the first month up to a maximum of 27%, something that will increase your payroll cost significantly.
Social Cohesion Fund
You will also be liable to contribute a percentage of 2%, calculated on emoluments of all employees, both locals and expatriates, to a special fund called “cohesion fund” (as from January 2003). However, an exemption from the contribution to the Social Cohesion Fund is granted in cases of foreign employees employed by an international business company, a foreign government, a ship management company, or a company owning a Cyprus ship. Penalties for not paying cohesion fund on time is €854 and/or imprisonment.
National Health Insurance System
As per the National Health System Law of 2001 (89(I)/2001 as amended in 2017, a national health system was introduced in Cyprus aiming to provide equal access to a holistic health care system for all the population. Effective from 1 March 2019 the National Health Scheme contributions were introduced for employers, employees, and self-employed individuals as well as for individuals receiving other forms of income.
The rates for NHS contributions that an employer will need to make are as follow (as from 1/3/2020):
- Employees (Individual Emoluments) – 65%
- Employers (Employees Emoluments) – 2.90%
Annual Leave Management
Employees who work five days per week have the right to 20 days of annual leave, whereas employees who work six days per week are entitled to 24 days of annual leave. The paid leave can be reduced if the employee has worked less than 48 weeks during the year. Public holidays, maternity leave, leave due to accidents, or inability to work are not calculated as annual leave.
Every employer is liable to pay a contribution of 8% of the employee’s emolument, depending on the type of work, to the Annual Leave Fund from which the employees are paid for their annual leave, unless the employer pays the employees directly for their leave.
Other Contributions Required by Law
You will be also liable to contributions to other funds as well. These contributions are the Redundancy Fund (1.2%) and the Human Resource Development (0.5%) for all employees.
Pay – As – You – Earn (PAYE)
The PAYE is the system that the Cyprus Tax Authorities use to collect Income Tax contributions that arise from employment provisions. It is a withholding tax (deducted from the employee’s gross emoluments) and applies to all emoluments, wages, directors’ emolument, pensions, and benefits in kind. The amounts withheld are considered advance payments of income tax due. They are refundable to the extent they exceed tax as determined on tax returns.
To comply with the PAYE system, you need to follow a specific process. The first step is the distribution of the Income Declaration Form (IR59). With this form, the employees can declare two set of information. Their emoluments other than their employment income and their individual allowances (life insurance premiums, contributions to professional bodies, charity contributions, etc.) as per provisions of tax law. The employee then must return the signed form.
The next step of the process is to calculate the tax obligation for each employee based on his IR59 declaration. The tax residency of the employee is important at this point. Tax residents in Cyprus are taxed on their worldwide income while non-resident employees are taxed on the income they generate in Cyprus.
For the calculation of PAYE it is important to know the tax rates that apply to individuals. There is a tax-free limit of €19.500 per year, upon which you do not pay Income Tax. Thereafter, the rates are:
- 20% on €19.501 – €28.000
- 25% on €28.001 – €36.300
- 30% on €36.301 – €60.000
- 35% on any amount more than €60.000
The last step of the process is to withhold, and pay on behalf of the employees, the relevant tax from their emoluments, on a monthly basis. As well as deducting payable Income Tax from the employees’ emoluments, employers must report, in real-time, details to the Tax Authorities and pay any tax owed. Be careful of the deadlines. The payment of the tax liability must be made by the end of the following month. For example, the deductions of January must be paid by the end of February. The employer must also provide their employees with a payslip which details all the deductions and contributions for the pay period.
Contributions NOT required by law
There are some other contributions that employers can offer to their employees that are not compulsory as per Cyprus legislation, but many employers incur these costs, so as to offer additional benefits (and thus incentives) to their employees. Some examples include the following:
- Provident fund: The employee and employer contribute to this fund, a rate that is agreed by the commencement of employment. A provident fund should be an approved fund in order to enjoy all the tax benefits. It must attain the approval of Commissioner of Taxation.
- Medical insurance/fund
- Life insurance
- Trade unions
Employers Liability Insurance
According to the provisions of the Employer’s Liability Compulsory Insurance Law, all employers are required by the Law to obtain an Employer’s Liability insurance. The minimum limits of indemnity by law are the following:
- For each employee: €160.000
- Per event or series of events: €3.415.000
- Aggregate limit any one period of insurance: €5.125.000
The rates for these insurance policies vary depending on the occupation of the employees, thus increasing the cost of your payroll.
Maintenance of proper records
You should maintain certain documents regarding employees such as their employment contract, copy of their ID/Passport, residential address and telephone number, tax number, Social Insurance number and Yellow/Pink slip for foreigners. You are also required to keep signed weekly/monthly payslips, IR.59 forms and IR.63 forms and record any absence from work. The maintenance of this records will further increase your cost.
What is the total cost?
The answer to this question is offered below using a simple example:
You = the employer; Employee = Andreas
Let’s say that you decided to employ Andreas in your business and offer him a monthly gross salary of €1.500, and you decide that you will pay for his annual leave (so you do not need to contribute to Annual Holiday Fund). Your total cost of this employment will be:
|Add:||Social insurance (employer’s contribution – 8.3% @ 1,500)
Social Cohesion Fund (2% @ 1,500)
Redundancy Fund (1.2% @ 1,500)
Industrial Training (0.5% @ 1,500)
NHS (2.9% @ 1,500)
Therefore, the cost over and above the salary offered to Andreas is €223.5.
Overall, it should be noted that whenever any additional benefits are offered to an employee then the cost of the employee will automatically be increased.
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