Denmark is one of the most famous European nations, well-known for its business-friendly environment. It also shares its borders with countries like Sweden, Germany, etc., providing accessibility to the neighboring geographies.
With a GDP of $406.011 billion, the nation ranks as the 53rd largest contributor to the world’s GDP. On a scale of 190 countries, Denmark comes in fourth place for business ease in terms of starting a business, protecting minority investors, and trading across borders. Hence, it is one of the best countries if you are planning to start a business or expand an existing business overseas.
When establishing a company in any country, you must develop an efficient and compliant payroll system. Therefore, you must create a payroll system in Denmark that addresses all the employees’ needs and adheres to all the payroll laws as the government decides. Read on to learn everything about payroll policies and procedures in Denmark, so you get a direction for the entire process.
How is Payroll Calculated in Denmark?
Payroll is an integral part of every business in Denmark. Most companies use various software to process the payroll to avoid errors. However, some companies perform the entire activity manually. They set up a dedicated team to look after the payroll policies and procedures in Denmark.
In Denmark, the payroll process comprises figuring out gross pay, net pay, overtime, allowances, etc. You must also refer to the company policy to determine the type of allowances you can give your employees.
The process for calculating payroll is generally the same for all employees. As a result, there is no room for discrimination in the procedure. Adhering to all federal rules is crucial when crafting your company’s payroll policies and procedures in Denmark.
Important Elements of Salary Structure in Denmark
Several essential components are a part of the salary structure in Denmark, including:
Cost to Company (CTC)
The cost to the company is the total cost the company incurs when it onboards a new resource. It is an overall figure that includes the gross pay, deductions, etc. The deductions are added to the figure to show the employee’s overall earnings. Every employee’s cost to the company is stated on the employment letter.
Gross salary is an employee’s monthly or yearly salary without any deductions. It shows the total earning potential of every employee.
The in-hand salary of an employee is referred to as the net salary. Employees get the net salary when employers make all the mandatory deductions, like taxes, social security contributions, etc., from the gross pay.
The basic salary is the primary component of the compensation structure, and you must include it to meet the Denmark payroll requirements. It constitutes around 30 to 40% of the employee’s total pay. The basic salary is used as the base for calculating all the other components of the payroll, including taxes. A company fixes an employee’s basic pay based on internal and industry pay standards.
The employer encourages employees by giving them a few allowances to help them cover expenses above and beyond the standard income. The type of allowances provided to a specific employee is determined by corporate policy. Typical concessions that most businesses in Denmark provide as allowances include:
- Food allowance
- Fuel allowance
- Mobile allowance
While paying the 13th salary is not mandatory in Denmark, companies might give their employees an annual bonus based on the employment contract.
How to Set Up a Payroll in Denmark?
You must follow a few simple steps to set up payroll rules and regulations in Denmark:
Select the type of company you want to establish in Denmark. Depending on your budget and requirements, you can select a public limited or private limited company or go with a partnership firm.
Collect all the important documents, create bylaws and articles of association and submit all the documents to the Danish Business Authority. Collect the registration number and the incorporation certificate from the respective authorities.
You must register the business with the federal tax authorities and social security authorities.
Open a bank account in any local bank in Denmark. You can use the bank account to make all the transactions on the company’s behalf.
Check all the timesheets to calculate the employees’ overtime payments. This will help you arrive at the gross salary.
Calculate the values of all the salary components individually. After that, calculate their tax amount and deduct it from the employee’s salary.
Select a payroll system for your company to help calculate and make payments.
Once the payroll in Denmark is in place, check if it adheres to all the laws laid down by the government.
A Step-by-step Process of Payroll Processing in Denmark
The payroll procedure in Denmark comprises the following steps:
Choose a payroll system
Denmark has several options for a payroll system. With a defined budget and company requirements, you can opt for a reliable payroll system.. Some of the popular payroll systems offered in Denmark are:
- Manual payroll: A manual payroll is an ideal option for a large organization in Denmark. The company can onboard a dedicated team to handle the Denmark payroll requirements.
- Outsourcing: You might even outsource the management of your company’s whole payroll system to a different firm. However, you must ensure the third party complies with all applicable laws and compliance standards.
- Payroll software: You can use payroll software if you want your system to control every element of the payroll system. The ideal option is payroll software that manages payroll with little human intervention.
Draft a payroll policy
- A payroll policy acts like a guiding document for everything related to payroll.
- You can consider all the Denmark Labor Laws and regulations to draft a credible payroll policy.
Add employees to the system
- After choosing a payroll system for your company, you should add each employee to that particular system by registering them. You must add their details, like names, contact information, address, etc., to the system.
- You must expand the system to incorporate all components of the payroll contributions. Also, define the payroll cycle to make the calculations on time
Verify the timesheets
- You must verify the employees’ timesheets to determine their overtime and calculate their gross pay.
- Once you have the gross pay, you can make the necessary deductions to earn the employee’s net salary.
- You should double-check each information entered into the payroll system before making any salary payments.
- Before entering the company’s ledger, make an effort to check for inaccuracies that you might encounter in the process.
Distribute the payslips
- Once you have the ledger, you can start with the payslip generation process.
- Share payslips with employees via e-mail, or they can download them directly from the payroll software.
The employer must ensure that all the employees have an active bank account in a Denmark bank to receive these payments.
The payroll rules and regulations in Denmark include several payroll contributions complying with the minimum standards and payroll laws decided by the government. Let’s look at some of the significant payroll contributions in Denmark:
- There is no minimum wage in Denmark.
- Usually, the minimum wage is determined through bargaining between employer associations and employee unions.
- The average minimum wage is usually considered 110 DKK per hour.
- The expats, however, have a predetermined minimum wage of DKK 448,000 under the pay-limit program.
- Overtime compensation is due to employees working more than 37 hours weekly. Any applicable collective agreements determine the overtime compensation.
- Depending on the collective bargaining agreement for the industry, the employees receive overtime pay ranging from 150% to 200%.
Employers in Denmark make social security contributions for the welfare of the employees. The company deducts these funds and pays them directly to the assigned authorities.
Mandatory social security
DKK 2,271.60 annually
Public social security schemes
Industrial injuries insurance
Employer contribution to Maternity Leave Fund
The employees in Denmark also make social security contributions towards different social accounts to safeguard themselves from any externalities. These contributions are deducted from the employee’s gross pay and are paid directly to the concerned authorities.
Mandatory social security
DKK 1,135.80 annually
While Denmark follows a linear taxation system, employees pay different taxes to the concerned tax authorities. Let’s look at these components of income tax.
Top tax (15% on income up to DKK 544,800, remaining on the surplus)
Labor market tax
27% for up to DKK 56,500
42% on DKK 56,500 and above
The church tax only applies to the Danish State Church members.
Almost all companies in Denmark follow a monthly payroll system where the payments are made to the employees every month on the same date. However, if the employer wants to make weekly or bi-weekly payments, they must state the same on the employment letter for that particular employee.
Denmark Payroll Options for Companies
Denmark has many payroll options to meet the ever-evolving needs of the companies. The employer should set a budget and compare these options to decide on a suitable payroll option for their company. Some of the payroll options in Denmark include
- Internal payroll: Larger organizations usually opt for internal payroll and have the bandwidth to onboard employees to facilitate the payroll process.
- Remote payroll: If the parent company has a payroll system, you can add your employees and handle their payroll. However, the payroll components for your employees will be decided based on the Denmark payroll laws.
- Payroll processing companies: You can hire a payroll processing company to take care of your payroll system. However, you will be responsible for the legalities involved in the process.
- Global PEO: A PEO company may handle the payroll procedure for any enterprise. Use a worldwide PEO platform like Multiplier to free yourself from the burden of managing the payroll system for your business.
Entitlement and Termination Terms
The employment contract should outline the employee’s rights and contain termination provisions to avoid any problems. Compensation, working conditions, leave, and an employee’s rights to other benefits should all be a part of the employment contract. The employer must justify an employee’s termination. Employers can terminate the employees on the following grounds:
- Agreement reached by both the employer and the employee
- While employed there, the person acted dishonestly.
- If the business experiences a significant change
Employers must include the reason for the termination in the termination letter given to the employee. Employees are entitled to severance pay from their employers to meet their living expenses while looking for new employment.
Denmark Payroll Processing Company
Expanding your business may be challenging if you are new to Denmark and need clarification on the rules and regulations that apply to businesses in this European country. You can ask for help from experts who can guide you through the process.
Contact a PEO company like Multiplier for details on the local laws and regulations governing Denmark’s payroll systems. Keep your options open if you want the best payroll aid support.
How Multiplier Can Help with Global Payroll
Complying with local labor rules and regulations is necessary while setting up a payroll in Denmark. However, you can quickly set up a compliant payroll system with the right guidance and expert assistance. You can contact a global EOR platform like Multiplier to assist with your payroll requirements.
In more than 150 countries, Multiplier has assisted businesses in developing compliant payroll systems. Our trained staff will assist you in becoming familiar with the applicable Denmark-specific federal regulations. They will work with you to set up a payroll system that complies with all federal regulations and meets every employee’s needs.