Finland is the world’s happiest country, and setting up a business in Finland is equally great. The country’s GDP is $267.61 billion, making it the 46th highest global GDP contributor. The Human Development Index of Finland stands at 0.94, making it one of the most developed nations in the world. The country is a part of the European continent, providing easy access to all European markets.
Finland is renowned for having one of the most developed welfare systems in the world, including a free school system and a top-notch healthcare system. The country ranks 20th among 190 nations for ease of doing business in terms of starting a business and protection towards minor investors.
You must establish an effective payroll system when starting a new company in Finland. A payroll system in Finland should address all the payroll needs of the company and the employees. It should also adhere to all the labor regulations in Finland. Read on to learn about the payroll policies and procedures in Finland so that you can set up an effective system for your company.
How is Payroll Calculated in Finland?
Companies usually use a tool or software to implement the payroll system. However, bigger organizations hire a team and complete the process manually. Therefore, the method by which payroll elements are calculated will depend upon the company’s size and budget.
Generally, payroll in Finland involves calculating the gross pay, net pay, allowances, and other elements of the compensation structure. It also includes the calculation of deductions like taxes, social security contributions, etc.
The company should define a standard process to calculate the payroll of all its employees. Also, all of these calculations must adhere to the payroll procedures and policies in Finland.
Important Elements of Salary Structure in Finland
The salary structure in Finland has several components, which include:
- Cost to Company (CTC)
The cost to the company (CTC) shows the aggregate amount that a company bears to onboard an employee. It includes fixed and variable payments, along with bonuses, if any. The CTC of every employee is stated on the letter of employment.
- Gross salary
The employee’s annual earnings are known as the gross pay. It comprises all the elements of the payroll calculation.
- Net salary
The amount credited to the employees’ bank accounts is the net salary. An employee’s net pay is calculated by deducting all the necessary taxes and social security contributions from the gross pay.
- Basic salary
The basic salary or base pay is the primary component of the payroll system in Finland. It accounts for around 30% to 40% of the employee’s total salary. Also, it acts as a base for calculating other components like allowances. The base pay is decided depending on the employee’s designation and the current industry standard.
Finland is an employee-friendly country, providing different kinds of allowances to employees. These allowances help the employees bear the additional cost while working for the company. The kind of allowances the employees get is based on the company’s policy. Some standard allowances offered in Finland include the following:
- Meal allowance
- Fuel allowance
- Telephone allowance
While there is no legal requirement to pay a bonus, holiday bonuses are pretty standard in Finland. If a company decides to pay a bonus to the employees, the clauses governing the payment of the bonus must be clearly stated in the employment contract.
How to Set Up a Payroll in Finland?
To set up payroll in Finland, you can follow the step-by-step approach discussed below:
Step 1: Select the kind of company you want to set up in Finland. Decide on the name of the company and start with the incorporation process.
Step 2: Create essential documents like the Articles of Association, etc., and submit them to the authorities that take care of the incorporation. You must also collect all the incorporation documents from the concerned authorities.
Step 3: Register your new business with all the tax and social security authorities. Mutually decide on the date you will make all the tax payments.
Step 4: Set up a bank account to make all the payroll-related payments. You must set up this account in one of the local banks of Finland.
Step 5: To calculate the employee’s gross pay, check their time sheets to know the number of hours they have worked. The timesheet will also help you calculate overtime payments.
Step 6: Once the gross pay is ascertained, you can calculate all the other salary elements. This step also includes the calculation of deductions like taxes, etc.
Step 7: Choose a payroll system for your company that meets all the needs of the employees. You also need to decide on the payroll procedure in Finland to ensure the payments are made on time.
Step 8: Select a payroll cycle so that you can make all the payroll calculations and payments in time. Also, ensure that you stick to the payroll rules and regulations in Finland to avoid any legal issues.
A Step-by-step Process of Payroll Processing in Finland
The payroll procedure in Finland includes the following steps:
- Choose a system
Finland accepts different kinds of payroll systems. The choice of payroll system depends on different factors. Some typical payroll systems in Finland include the following:
- Manual payroll: This system is opted for by larger companies with a dedicated team to take care of the entire payroll system. A manual payroll system costs significantly more as you must onboard a team and train them for the job.
- Payroll outsourcing: Here, you can choose to outsource your payroll function to an external vendor. They will take care of all the payroll calculations, etc.
- Payroll software: You can also use payroll software to manage the entire activity. The software is the best system for companies who want to automate their payroll.
2. Create a payroll policy
- To standardize the process, you must have a guide that states the payroll policies in Finland.
- You must consider collective agreements in force and the Finland labor act while preparing a payroll policy.
3. Add the employees to the system
- Once you choose a payroll system, you must add all the employees.
- You need to add their details, like name, date of birth, phone number, compensation elements, etc., to the payroll system.
- The payroll system should also define the payroll cycle to make employee payments on time.
4. Verify the timesheets
- You must check your employees’ timesheets to calculate overtime and gross pay.
- Once you have the gross pay, you can factor in all the deductions to calculate the employees’ net pay.
- Payroll reconciliation is a crucial step. You must check all the employee details before making salary payments.
- In this step, you must also look for errors and make necessary corrections in real time.
6. Distribute the payslips
- As soon as the payroll calculations are made, you should issue a pay slip to all the employees based on their compensation structure.
- You can disburse the payslips via email or payroll software.
The payroll contributions are decided based on the payroll rules and regulations in Finland. It is crucial to adhere to these regulations to avoid any legal issues at a later stage. Some significant payroll contributions include the following.
- There is no standard minimum wage for employees in Finland. However, you must pay the employees freely depending on the nature of the work and the sector.
- A few collective bargaining agreements across sectors decide on the minimum wage for a particular sector.
- Employees who work beyond their regular hours, i.e., 40 hours a week, are entitled to overtime pay.
- The employees are compensated an additional 50% for the first 2 hours of overtime. Beyond that, the rate of overtime payments becomes an additional 100% of their regular pay.
Employers make necessary contributions in Finland to ensure the well-being of their employees. These contributions are directly made to the Government authorities who manage these funds.
Rate of Contribution
0.52% if the annual income is up to €2,251,500 annually
2.06% if the annual income is above €2,251,500
Social security contribution
The total contribution percentage depends on the employee’s gross earnings and the federal laws in place.
The employees also make necessary contributions to the social accounts to ensure they have enough funds post-retirement. The contribution amount is directly deducted from the employee’s salary and is paid to the concerned authorities.
Rate of Contribution
7.15% if the age of the employee lies between 53 to 62
8.65% if the age of the employee is under 53 or over 62
Social security contribution
All the employees in Finland have to pay taxes on the income that they earn in the country. These taxes are directly deducted from the employee’s salary and paid to the tax authorities. However, the employees have to file annual tax returns.
Unlike other countries, the employees of Finland are charged a different tax rate on their salary and the benefits they receive from the company.
Tax rate on salary
Tax rate on benefits
Tax rate on pension
While there are no legal requirements for employee bonuses, most companies pay a holiday bonus. The terms of these bonuses are stated in the contract of employment.
The payroll cycle runs from the start of the month to its end, and employees receive their salary on the last day of every month.
Finland Payroll Options for Companies
There are multiple payroll options for companies working in Finland. You must compare these payroll options before choosing one for your company. You must also fix a budget for the payroll system and list all the requirements you want the system to meet. Some standard payroll options in Finland include the following:
- Internal payroll: Large companies with enough resources to hire a specialized team for payroll choose internal payroll. The business takes care of all the aspects of the payroll on its own.
- Remote payroll: If you are a subsidiary company, you can be part of the parent company’s payroll. This is referred to as remote payroll. However, the employees and the salary payments would be subject to the compensation laws in Finland.
- Payroll processing companies: Several payroll processing companies can help you with the payroll process. However, you need to take care of all the compliance-related issues.
- Global PEO: You can reach out to a PEO to pass over the payroll responsibility. You can consult the experts working in a PEO like Multiplier.
Entitlement and Termination Terms
The employment contract should outline the employee’s rights and contain termination provisions to avoid any problems. Compensation, working conditions, leaves, and other benefits are a part of the employees’ rights. The employer must justify an employee’s termination. Employers should have a strong and valid reason for terminating employees:
- Agreement reached by both the employer and the employee
- While employed there, the employee acted dishonestly.
- If the business experiences a significant change
Employers must include the reason for termination in the letter of termination given to the employee. Terminated employees are entitled to severance pay from their employers.
Finland Payroll Processing Company
While expanding your business in a country like Finland is simple, you need to understand all the local laws and norms applicable in the country. You can reach out to experts in the field who can help you understand the process.
Contact a PEO company like Multiplier for details on the local laws and regulations governing Finland’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 Finland. However, you can quickly set up a compliant payroll system with the proper guidance and expert assistance.
You can reach out to a global PEO like Multiplier to understand your payroll requirements. Multiplier has helped several companies worldwide build an effective and efficient payroll system. Our team will help you set up a reliable payroll system that meets all the needs of the company and the employees.