Iceland: A Guideline to Payroll and Employer of Record

Run your business seamlessly with Neeyamo as we help you go beyond borders to manage your international payroll and hire new talent in Iceland.

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Iceland is a small island nation that is Europe's westernmost country and home to the world's northernmost capital, Reykjavik.

The pillars of the Icelandic economy are aluminum smelting, fishing, and tourism. Iceland's main material exports are aluminum products and fish products, and main service exports are tourism-related services.

Neeyamo assists with onboarding and managing employees in Singapore and processing a firm's payroll, compliance, benefits, and more.

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Global Payroll

Neeyamo’s global payroll solution covering 180+ countries

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Global Work

A tech-based EOR solution to manage your extended workforce

Facts And Stats




Icelandic krona

Official Language


Fiscal Year

1 January - 31 December

Date Format


Country Calling Code


Other Languages

Polish, Lithuanian

Time Zone

GMT 00:00 Greenwich Mean Time

Global Payroll


Handling payroll for a widespread workforce can pose a major challenge for any firm. The added complication of compliance can make things worse and drastically affect the time and efforts that can be used in other equally important aspects of an organization's development.

Over the years, Neeyamo has observed these complexities and strived to provide a global payroll solution through a single technology platform, Neeyamo Payroll.

Payroll Taxes

Payroll tax is the percentage amount retained from an employee's salary and paid to the government to invest in the general population's welfare.

Employee Taxes

Employees must contribute 4% towards Pension Fund Contribution.

The income tax bracket is as follows:

Income from 0 – 370,482 ISK 31.45%
Income from 370,483 - 1,040,106 ISK 37.95%
Above 1,040,106 ISK 46.25%

Employer Taxes

Employers are required to make the following contributions:

  • 11.50%: Mandatory Pension Fund
  • 2.00%: Supplementary (optional) Pension Fund (the employee can elect to supplement their pension by either 2% or 4%, and the employer then is obliged to match this with 2% in either case)
  • 6.10%: Social Security contribution (this contribution is calculated on the Gross salary + Mandatory Pension Fund + Supplementary Pension fund amounts)
  • 1.55% : Union fee
  • 0.10% : Rehabilitation Fund
  • 10.17%: Vacation Allowance - once annually (this value is a minimum of 10.17% of annual gross salary and can go up to 13.04% of annual gross salary, depending on the employee's tenure with the employer)

Payroll Cycle


Undoubtedly, payroll is a critical process for any organization.The pay cycle in Japan refers to the period for which an organization pays its employees, and this can vary depending on the pay frequency that the organization chooses to adopt.


Employees in Iceland are typically paid on a monthly basis.

13th Month Cycle

There is no statutory requirement to pay the 13th or 14th month salary.

Global Work


An Employer of Record service provider helps you get rid of the hassle of handling the complexities that come with setting up a new employee in remote locations. They act as legal employers, facilitate salary payments, and handle everything from health insurance. Payroll taxes, and employee benefits to comply with local tax laws and regulations.

This ensures that the client company can focus on the employee’s everyday tasks safely in the knowledge that they have a cost-effective solution as they continue their global expansion.

HR Mandates and Practices

Minimum Wage

There’s no minimum wage mandated under Icelandic law; employers and employees can enter into collective bargaining to determine wage rates as they see fit.


Icelandic legislation outlines how overtime should be calculated. 

Collective agreements include provisions on overtime wages. What constitutes overtime varies between collective agreements. 

According to most collective agreements, overtime must be paid at an hourly rate that is equivalent to 1.0385% of the employee’s monthly wages for regular day work. Work on major holidays must be paid at an hourly rate that is equivalent to 1.375% of the employee’s monthly wages for regular day work.

Data Retention Policy

The rules on data retention stipulate that personal data collected by electronic surveillance cannot be retained for a longer period of time than 90 days unless otherwise provided for by law.

However, data should be retained no longer than is necessary for the purpose(s) for which the data are processed.

Hiring and Onboarding Requirements


In accordance with the Act on the Equal Status and Equal Rights of Women and Men (10/2008), advertisers cannot advertise or publish an ad for a vacant position indicating a preference for one sex over the other. This provision does not apply if the advertiser is promoting equal representation of women and men within an occupational sector. The same will apply if there are valid reasons for advertising for a man or a woman only.

Ads that belittle or disrespect either sex and run contrary to gender equality in any way may not be published in the media or any other public forum.

All workers in Iceland, irrespective of gender or nationality, enjoy the same rights regarding wages and other working conditions as negotiated by unions in the Icelandic labor market.

Discrimination against employees is not a normal part of the work environment.


The following information is required during onboarding:

  • Name
  • Address
  • Contact details
  • National Insurance number
  • Education Certificates
  • Identity Card

Probationary or Trial Period

These cannot exceed three months. As there is no provision under labor law for trial periods, these are governed by business practice or collective agreements.


Public Holidays

National Holidays

  • January 1: New Year's Day
  • April 7: Good Friday
  • April 9: Easter Sunday
  • April 10: Easter Monday
  • April 6: Maundy Thursday
  • May 1: First Day of Summer
  • May 21: Whit Sunday
  • May 22: Whit Monday
  • May 25: Ascension Day
  • August 7: August Bank Holiday
  • December 25: Christmas Day
  • December 24 [after 12:00 noon]: Christmas Eve
  • December 31 [after 12:00 noon]: New Year's Eve
  • December 26: Boxing Day

Annual Leave

Number of holidays:

Employees earn at least two days of holiday for each month of employment during the holiday year, which runs from 1 May to 30 April. The minimum holiday entitlement is, therefore, 24 days a year, based on the full-time job ratio.

Employees are entitled to take their entire holiday allowance in one go during the period between 2 May and 15 September, unless otherwise provided for in collective wage agreements. Decisions concerning holidays, however, must always be made in consultation with the employer and take the nature of the operation into account.

The employer may negotiate with the employee for the employee to use his/her holidays outside this period.

Holiday allowance:

Holiday allowance is intended to ensure that wage earners are not without income during the summer holidays. They are an addition to monthly wage payments, and taxes and fees are paid on them, as with other wages.

Holiday allowance is calculated at each payment of wages and is at least 10.17% of the total wages. This proportion may be higher according to some collective wage agreements.

Holiday allowance can be paid either at the beginning of the holiday period or during the holiday taking, in which case it is paid at the same time as wages are usually paid. The latter is a common arrangement for people who are paid on a monthly basis.

When an employee leaves employment, the employer shall calculate the earned holiday allowance and pay this amount.

Sick Leave

Rules on the number of sick days differ depending on whether collective wage agreements in the general labor market or in the public sector are involved.

Minimum rights, according to legislation, state that for each month worked, an employee is entitled to wages for two days of sick leave.

  • After one year of work for the same employer, two months for every 12-month period.
  • After five years of work for the same employer, four months for every 12-month period.
  • After ten years of work for the same employer, six months for every 12-month period.

Your employer has the right to demand a note from your doctor to verify your illness. To obtain one, contact your local healthcare clinic. After five years, you are entitled to four months of sick leave and six months after ten years. If you change employers after five years, you are still entitled to at least two months of sick leave with your new employer.

During the first six months at a new job, you are also entitled to two days each month you have worked with your employer for children's sick leave if your child is under the age of 13. After the first six months, children's sick leave rights become 12 days per year.

Transfer of sickness leave:

An employee who has earned rights to 4 or 6 months of wage payments during sickness leave with their previous employer and who changes workplace shall be entitled to receive wages for no less than two months during each 12-month period.

Work-Related Accidents:

Employees who suffer work-related accidents may be entitled to wages for up to three months in addition to the sick leave days they may have earned. This applies also to occupational illnesses.

Employees unable to work due to a work-related accident for ten days or more are entitled to sick leave daily payments from the Social Insurance Administration until they regain health or for up to 52 weeks. It must be noted that while the injured worker is on paid sick leave, the daily payments will be paid to the employer.

Employers are under obligation, in accordance with collective wage agreements, to insure their staff with accident insurance. If a work-related accident causes disability or death, benefits are paid in accordance with the terms of such insurance.

If the cause of a work-related accident is the responsibility of the employer, the employee may be entitled to compensation.

Child Care Leave

During the first six months at work with an employer, a parent is permitted to spend two days for each month worked to care for their sick children under the age of 13, provided that no other arrangements can be made to have them cared for. After 6 months of work, the entitlement becomes 12 days for every 12-month period.

Maternity Leave

Each parent receives six months of leave, with six weeks transferable between the parents. However, the right to parental leave will then expire when the child reaches 24 months old. The extended parental leave encourages both parents to fulfill their family obligations, increases employment, and balances opportunities in the labor market. It is often possible to negotiate with your employer to extend your parental leave, but this will proportionally lower your income each month.


Standard maternity and paternity leave payments are 80% of your average income, capped at ISK 600,000 per month (before taxes).

In the case of a primary adoption or permanent foster care, both parents can start maternity/paternity leave when a child enters the home. If there is a trial period before the primary adoption or permanent foster care of a child, or if the child is adopted from abroad, it is permitted to start the maternity/paternity leave before that time, providing that The Child Welfare Committee or the relevant authorities have given confirmation. Entitlement to maternity/paternity leave expires 24 months after the child enters the home.

Increased parental leave entitlement

For each child born alive or stillborn after 22 weeks of pregnancy, the parents’ joint entitlement to maternity/paternity leave is extended by three months. The same applies to primary adoption or permanent care of each additional child at the same time.

Paternity Leave

Extending the same benefits to mothers and fathers regarding maternity and paternity leave is an essential step toward gender equality in Iceland.

Parental Leave

A parent in the domestic labor market is entitled to parental leave for four months to take care of their child.

The right to parental leave is established upon the birth of a child.

Each parent is entitled to unpaid independent parental leave for four months to care for his/her children. This right is non-transferable. Parental leave is not accompanied by payment from the Maternity/Paternity Leave Fund. The right to parental leave ends when the child reaches the age of eight years.

A worker acquires the right to parental leave after completion of work for six consecutive months by the same employer. A worker who intends to exercise his right to parental leave has to notify his employer thereof in writing, as soon as possible, and at the latest six weeks prior to the first day of the intended leave. The worker has to state the starting day of the intended leave, its length and its structure.

The employer shall record the taking of parental leave, enabling the worker to obtain a certificate stating the number of days of parental leave if he/she wishes to do so.

When adopting or taking a child into permanent foster care, the time when the child enters the home is considered, as long as the child protection committee or other competent parties confirm the measure. If a parent has to pick up the child in other countries, parental leave can start at the start of the trip, provided that the relevant authorities or organization have confirmed that the child can be adopted.

The right to parental leave ceases when the child reaches the age of eight. If the right to parental leave has lapsed unused in part or in whole at the child's eight-year-old age, that right will become active again if the child is later diagnosed with a serious and chronic illness or serious disability, but before he turns eighteen.

Bereavement Leave

If the surviving spouse is aged 67 or younger, he/she may be entitled to death benefits for up to six months. If there is a child under 18 years of age in the household, the death benefits may be paid for up to 12 months. In continuation thereof, the death benefits may be extended for an additional 36 months if particularly difficult financial and social circumstances exist. To be entitled to a child pension, the deceased and his/her children must have been domiciled in Iceland for at least three years. The widower or widow may use the tax card of his/her spouse for nine months after his/her death. The spouse may be entitled to support from unions, the social services of municipalities or insurance undertakings.


Notice Period

Both employers and employees are required to provide notice three months before resignation or termination unless otherwise specified in the employment contract.

Severance Pay

There is no legally mandated severance pay, but unions can negotiate a mutual rate applicable to their members.



Foreigners who wish to take up employment in Iceland need to apply for a work permit followed by a long-stay D visa. Applications for work permits must be submitted, including the necessary supporting documentation, to the Directorate of Immigration, who then forwards the application to the Directorate of Labor if the conditions for the issuing of a residence permit for the relevant foreign national are met. Usually, within the first three months, upon arrival in Iceland, you need to register and apply for a residence permit on the basis of this visa.

All work permit applications should be submitted to The Directorate of Immigration, which will then forward your application to the Directorate of Labour, where all work permit applications are processed and issued. To avoid processing delays of your application, please ensure that all the requested information and supporting documents are included in the original application package. Ensure that your documents are in order and that both you and your employer have signed your application.

Temporary Work Permit

As a foreign expert from outside the EEA, EFTA or Faroe Islands, you are required to apply for a work permit on these grounds in Iceland. The prerequisites to obtaining this work permit are:

  1. You have expert knowledge
  2. The potential employer was unable to find someone locally or within the EEA, EFTA states, and the Faroe Islands with your education, skills, and expertise
  3. Your experience is essential to the company
  4. You have a signed contract with your potential employer

Documents Required

Your application for a temporary work permit for a job that requires expert knowledge. Please check that the application form is completely filled out and that the relevant Icelandic trade union has confirmed the terms and conditions of employment conform to Icelandic collective agreements in section IV of the application form. Please ensure that the application has been signed by you and your employer. 

A contract of employment between yourself and your employer that includes information about your job title, description, and the pension fund you will be contributing to. The terms and conditions of your employment must be similar to those of other experts in your sector.

A certified copy of your diploma(s) in Icelandic or English.

If your expert knowledge is based on extensive experience, you must include evidence of previous employment regarding your positions, duties, and employment duration. Please note that generally, at least seven years of relevant work experience matches a university degree.

Information regarding your employer's attempts to hire an Icelandic, EEA, EFTA, or Faroese national before hiring you is to be submitted by the employer.

Confirmation that your employer will pay for your return travel to a specified country if your contract is cut short due to reasons beyond your control or if you become disabled due to illness or accident.

When you apply to extend your expert work permit, only items 1 and 2 must be provided. Temporary work permits for a job that requires specialist knowledge can be the basis for an unrestricted work permit.

Employee Background Checks

Legal and Background Checks

In Iceland, all of these checks are permissible for new candidates. Education, criminal records, credit, and medical screening checks are all permissible, while adverse media and union membership checks may be restricted in some cases. Candidates must also have a certain address in order to be eligible for employment.

  1. Criminal records: Employers can ask applicants and employees to provide their criminal records or allow the employer to access their criminal records.
  2. Medical history: Employers are generally prohibited from asking about the health of an applicant or employee unless this is justified by an occupational requirement. Employers can ask employees to provide a doctor's note for absences due to illness.
  3. Drug screening: Drug tests can be carried out in limited circumstances – for instance, where working under the influence of drugs or alcohol could give rise to health and safety considerations (e.g. staff who drive or operate machinery), or seriously damage the employer's business. Applicants and employees must consent to drug and alcohol testing.
  4. Credit checks: Credit reporting agency Creditinfo collects credit history and offers credit reports in Iceland. Only the individual, banks, other lending companies, and attorneys in relation to debt collection can access information on his or her credit history through the agency. However, employers can obtain an employee’s credit rating with his or her consent.
  5. Immigration status: Employers can obtain information on an employee’s immigration status with his or her consent.
  6. Social media: Information on social media is considered public. Icelandic legislation does prohibit employers from looking up public information.
  7. Other: Employers may ask applicants or employees to provide proof of qualifications to drive specific vehicles (eg, forklifts or trucks), depending on the job and required duties.

In relation to the above background checks, it is important that all information that an applicant or employee is asked to provide is appropriate, relates to the job in question, and does not discriminate or discourage people from applying for the job. There must be a justifiable reason for every check and why an applicant or employee is being asked to provide such information.

Last updated on August 24, 2023

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