Payroll in Spain

What is payroll in Spain?

Payroll in Spain is how companies manage benefits, onboarding, payments, deductions, compliance, taxes, termination, severance, and other parts of the employee lifecycle. 

Companies that already have an entity in Spain can use a PEO service to run payroll or partner with an EOR service like Via to avoid the lengthy and costly process of opening an entity. 

Spanish employers have a lot of requirements that they need to follow in order to compliantly run payroll, which means setting up payroll in Spain can prove to be an extremely difficult process. Employers not only have to pay taxes at the national level; they are also subject to paying various deductions at the municipal level.

This article gives everything you need to know when you plan to expand to Spain, as well as how to set up payroll in Spain while maintaining compliance with local labor laws.

In Spain, the pay period for employees is monthly. These payments normally go out on the last day of the month. Most employers opt to give their employees two extra months pay, one in July and another December. These bonuses should be explained by the employment contract during the hiring process. Employers should also provide their employees a record of payment so they have it for their taxes each year.

Payroll taxes in Spain

Tax year

The fiscal year in Spain is from the 1st of January to the 31st of December.

Minimum wage

The minimum wage in Spain is usually regulated by industry and determined in the employment contract.

Generally, the minimum wage in Spain is $965 EUR per month or $32.17 EUR per day.

For temporary employees or seasonal workers of less than 120 days, the minimum wage can be no less than $45.70 EUR per day.

Social Security

Both employers and employees are required to pay into the Spanish social security system. Social security in Spain covers things like maternity and paternity leave, paid leave, and unemployment.

Employer social security contributions break down as:

• 23.6% for Social Security

• 5.5% for Unemployment

• 0.2% for Salary Guarantee Fund

• 0.6% for Professional training

When added up together, the contributions equal 29.9% of the employees’ salaries.

Employee contributions break down as:

• 4.7% for Social Security

• 1.5% for Unemployment

• 0.1% for Professional Training

These contributions add together for employee social security contributions of 6.4%.

Corporate tax

The corporate income tax rate in Spain is a flat 25%. All companies are required to pay this standard deduction when calculating their deductions at the end of the year.

VAT

In Spain, the Value Added Tax (or sales tax) rate is 21% on all goods and services.

There are reduced tax rates of 10% for passenger transport from the airport and hotel and restaurant services. Also, there is a reduced rate for food and drink and construction work.

Withholding tax

The withholding or income tax system in Spain is set up as a progressive tax rate system. This means that for workers in Spain, the income tax deduction depends entirely on the employee's salary.

When it comes to payroll taxes, Spain is different from many other EU countries. Any income earned by non-residents will still be subject to withholding tax. For EU and EEA citizens, the income tax deduction is 19%. For non-EU citizens, the withholding rate is 24%.

Employee income tax

13th-month salary

13th and 14th month salaries are mandatory in Spain. Commonly, employees annual salaries are split into 14 installments to account for the bonus payment. Employers normally make these bonus payments in July and December.

Working hours

The standard work week in Spain is 40 hours per week, Monday-Friday.

The day is split up with work starting between 8:30-9am and closing around 2pm for siesta. Work will resume around 4pm or 5pm until 8pm.

Overtime

If employees work more than 40 hours in 1 week, overtime payments are compulsory. The amount of overtime pay is agreed upon by the employer and employee in the employment contract. Employees may not work more than 80 hours of overtime in 1 year.

Paid time off

All employees in Spain are entitled to 30 days of paid time off per year.

There are 10 national holidays that employees must receive off.

Sick days

In cases of personal injury or serious illness, employees are entitled to disability benefits at 60% of their regular salary.

For common illness or non-work related injuries employees are entitled to:

• 0% pay for 1-3 days

• 60% paid by the employer for 4-15 days

• 60% paid by social security for 16-20 days

• 75% paid by social security for 21 days and over

Maternity leave

New mothers are entitled to 16 weeks of unpaid maternity leave by the employer. This leave can be increased to 18 weeks in the case of complications or multiple births.

Maternity leave consists of 2 periods:

• Compulsory leave for the first 6 weeks after birth

• Remaining leave can be taken as full absences for 10 weeks or 20 weeks of half-day absences that can be taken any time for up to 1 year with written notice

Social security system pays the maternity benefit at 100% directly to the employee. Pregnant women in Spain are always covered for healthcare, before, during, and after the birth of their child.

Paternity leave

New fathers are entitled to 16 days of paternity leave paid directly by the social security system. In same-sex couples, both parents are entitled to paid time off.

Options for setting up payroll in Spain internally vs. externally

To pay Spanish employees from a foreign country like the United States, there are a few options.

Foreign companies can use a remote payroll system that runs out of the parent company for their business in Spain, team up with a third-party outsourced payroll (like a PEO), or partner with a global EOR service like Via that handles the entire process and knows how payroll operates in Spain.

Setting up internal payroll

For companies that have a commitment to establishing and growing a business presence in Spain, running payroll internally makes sense. However, this option requires setting up an entity, which can take over six months and requires in-depth knowledge about tax laws. You will need a large amount of investment capital, so you can set up an internal HR team and register with a number of government organizations.

Setup a PEO/have another company run payroll

Another option is to use a global PEO service that handles payroll and hiring, or to use an internal payroll processing company. These services handle payments, benefits, deductions, and other payroll processes.

However, PEO services and internal processing companies do not take full responsibility for legal compliance. If anything were to go wrong, the parent company is still held liable. This is technically a co-employment model, which means the parent company will still need to set up an entity within the country.

Fully outsource payroll and benefits with an EOR like Via

Finally, you can hire employees using a global EOR service like Via. EOR services handle global payroll, benefits, and compliant onboarding. An EOR service already has an established entity in Spain, so that you don’t have to worry about establishing your own-employer-of-record to pay Spanish employees.