How to hire and pay an employee in Portugal – Guide to Portuguese payroll and employment law

Portugal is an attractive destination for international businesses due to its strategic location, skilled workforce, and competitive costs. However, hiring and paying employees in Portugal requires an understanding of the country’s employment laws, payroll regulations, and benefits. This guide provides a comprehensive overview for international businesses.

Employment law in Portugal

Portuguese employment law is governed by the Labour Code (Código do Trabalho), which establishes the rights and obligations of employers and employees. It includes rules on employment contracts, working hours, wages, benefits, and terminations.

Key points of Portuguese employment law

1. Employment contracts:
   • Contracts may be indefinite, fixed-term, or temporary.
   • Written contracts are mandatory for fixed-term, part-time, and teleworking arrangements.
   • Contracts must outline the job role, salary, working hours, and duration (if applicable).
2. Working hours:
   • Standard working hours: 40 hours per week (8 hours per day).
   • Overtime is permitted, but limits apply, and higher rates (typically 125%-150%) are mandated.
3. Minimum wage:
   • The national minimum wage for 2025 is €820 per month (14 payments annually).
   • Higher wages may apply based on industry standards and collective agreements.
4. Leave entitlements:
   • Annual leave: 22 working days.
   • Public holidays: 13 annually.
   • Sick leave: Up to 1095 days with social security payments (after the third day).
   • Parental leave: 120 to 150 days shared between parents, with additional flexibility for extended leave.
5. Dismissals:
   • Employers must follow strict rules, including providing notice (15 to 75 days, depending on tenure).
   • Unfair dismissal can result in compensation, typically 15-30 days of pay per year of service.

Payroll system in Portugal

Setting up payroll in Portugal involves registration with local authorities and compliance with strict reporting requirements.

Payroll registration and setup

1. Tax registration:
   • Register with the Portuguese Tax Authority (Autoridade Tributária e Aduaneira) to obtain a Tax Identification Number (NIF) for the business.
2. Social security:
   • Employers must register with the Social Security Institute (Segurança Social) and obtain a Social Security Contribution Number.
3. Bank accounts:
   • Payments must be made through Portuguese bank accounts, as local regulations require traceable transactions.
4. Payroll software or provider:
   • Use payroll software compatible with Portuguese regulations or hire a payroll provider for compliance.

Payroll components

1. Gross salary:
   • The agreed salary before taxes and deductions.
2. Income tax:
   • Progressive rates apply, ranging from 14.5% to 48% depending on annual income.
   • Employers withhold taxes monthly and remit them to the tax authority.
3. Social security contributions:
   • Employers contribute 23.75% of gross salary, while employees contribute 11%.
4. Holiday and Christmas bonuses:
   • Common practice to pay salaries in 14 instalments, including two extra payments in June and December.
5. Other deductions:
   • Health insurance (optional) and union fees (if applicable).

Payroll processing in Portugal

Setting up and managing payroll in Portugal involves a systematic approach to ensure compliance with tax, social security, and employment laws. Below are the key steps involved in payroll processing:

1. Register your business

Before hiring employees, businesses must complete the following registrations:

• Tax Authority (Autoridade Tributária e Aduaneira): Obtain a Tax Identification Number (NIF) for corporate tax purposes.
• Social Security Institute (Segurança Social): Register the business to secure a Social Security Contribution Number.
• Workplace Accident Insurance: Employers are required to arrange coverage for employees through an insurance provider.

2. Collect employee information

Gather all necessary details from employees for payroll processing:

• Personal information: Full name, date of birth, address, and national ID or residency documents.
• Tax details: Employee’s Tax Identification Number (NIF).
• Social Security Number (Número de Identificação de Segurança Social – NISS): Used for social contributions.
• Bank account details: For salary deposits.
• Employment contract: Document outlining salary, benefits, and working conditions.

3. Calculate gross pay

Determine the gross salary based on the employment contract:

• Include any overtime, bonuses, or commissions if applicable.
• Calculate holiday pay and Christmas bonus if salaries are divided into 14 instalments.

4. Withhold taxes and deductions

Apply the following mandatory deductions:

• Income tax (IRS): Deduct based on the progressive tax brackets set by the Portuguese government. Rates range from 14.5% to 48% depending on income level.
• Social security contributions: Deduct 11% from the employee’s gross salary for their contribution to social security.

5. Employer contributions

Calculate the employer’s share of contributions:

• Social security: Employers contribute 23.75% of the employee’s gross salary.
• Workplace accident insurance: The premium depends on the industry and associated risks.

6. Submit monthly payroll reports

• Employers must report payroll details to:
• Tax Authority: File monthly income tax withholdings through the Modelo 10 form or equivalent system.
• Social Security Institute: Submit reports via the Segurança Social Direta online portal by the 10th of the following month.

7. Pay salaries

• Transfer net salaries to employees’ bank accounts by the agreed payment date.
• Salary payments must be traceable and typically made via bank transfer.

8. Pay tax and social security contributions

• Remit withheld taxes to the Portuguese Tax Authority by the 20th of the following month.
• Pay employer and employee social security contributions to the Social Security Institute within the same timeframe.

9. Provide payslips

• Issue detailed payslips to employees each pay period. These must include:
• Gross salary.
• Tax deductions (IRS).
• Social security contributions (employee and employer portions).
• Net pay.
• Additional benefits or allowances.

10. Maintain payroll records

Keep records of all payroll-related documentation for at least five years. This includes:

• Employment contracts.
• Payslips.
• Tax filings.
• Social security reports.

11. Handle year-end reporting

At the end of each fiscal year, employers must:

• Submit the Annual Tax Return (Declaração Modelo 22) detailing employee income and taxes.
• Provide employees with an Annual Income Statement (Declaração de Rendimentos) for personal tax filing.

Employee benefits in Portugal

Offering competitive benefits is crucial for attracting and retaining talent in Portugal. Mandatory and supplementary benefits include:

Mandatory benefits

1. Social security:
   • Covers pensions, healthcare, maternity leave, unemployment, and disability benefits.
2. Healthcare:
   • Employees are entitled to free or subsidised healthcare under the National Health Service (Serviço Nacional de Saúde).
3. Paid leave:
   • Includes annual leave, public holidays, sick leave, and parental leave.
4. Meal allowance:
   • Employers often provide a meal subsidy, typically €5 to €8 per working day, which can be tax-free if provided via meal cards.

Optional benefits

1. Private health insurance:
   • Supplementary coverage to reduce waiting times in public healthcare.
2. Pension plans:
   • Private contributions to enhance retirement savings.
3. Training and development:
   • Offering courses or subsidies for professional growth.
4. Flexible working:
   • Options for remote work or flexible hours, especially post-pandemic.

Hiring options for international businesses

International businesses can hire employees in Portugal through the following methods:

1. Direct employment:
   • Establishing a local entity (branch or subsidiary) to hire directly.
2. Employer of Record (EOR):
   • Partnering with an EOR allows businesses to hire employees without setting up a legal entity. The EOR handles payroll, compliance, and taxes.
3. Freelancers and contractors:
   • Freelancers must register as self-employed (Trabalhador Independente) and are responsible for their own taxes and social security.

Compliance tips for hiring in Portugal

1. Stay updated on labour laws:
   • Portuguese employment laws are regularly updated, so monitor changes.
2. Maintain proper documentation:
   • Keep copies of employment contracts, payslips, and tax records for at least five years.
3. Meet reporting deadlines:
   • Monthly payroll submissions and social security contributions are due by the 10th of the following month.
4. Understand collective agreements:
   • Some industries have sector-specific agreements with unique wage and benefit rules.

Conclusion

Hiring and paying employees in Portugal requires compliance with labour laws, tax regulations, and payroll practices.

While the process involves detailed administrative work, the benefits of accessing Portugal’s skilled workforce and favourable business environment outweigh the challenges.

International businesses can simplify the process by partnering with international payroll experts or EOR services to ensure seamless operations.

If you’re considering expanding your workforce into Portugal, careful planning and adherence to these guidelines will ensure a successful hiring process.

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