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Understanding the Payroll System in Lithuania

Lithuania is one of the most economically strong countries among the Baltic States. The country’s diverse markets, low tax rates, and geographical location make Lithuania a haven for entrepreneurs looking to conduct business there. The country experienced massive industrialization while the Soviets were managing it. Hence, it is now considered a modern economy and a lucrative business destination. 

The nation is a part of the European Union and is regarded as a high human development country. It is an active member of the World Trade Organization (WTO) and the OECD, promoting industrialization and setting up new businesses in the country. Moreover, Lithuania is ranked 11th out of 190 countries for ease of doing business. Companies can smoothly establish their business presence in Lithuania. 

Lithuania has an infrastructure that supports the growth of companies. It is often used for trade, international transportation, manufacturing development, and other European activities. Also, Lithuania has undergone large-scale privatization in the past. Therefore, it is open to inviting companies looking at foreign expansion. If you are a new company trying to expand, you must set up payroll policies in Lithuania before you commence your business operations. 

You must establish a comprehensive payroll system that meets the requirements of all your employees. Additionally, the payroll policies and procedures in Lithuania should adhere to all federal laws. Before developing a strategy, you should try creating a guide that can act as a go-to document for your employees for all kinds of payroll issues. 

Read on to understand Lithuania’s payroll policies and procedures and how to set up a system for your company.

How Is Payroll Calculated in Lithuania?

Payroll is paying the employees, including salaries and other benefits. The payroll considers several factors, like hours worked, overtime, designation, years of experience, etc., while deciding the final payment of a particular employee.

As an organization, it is vital for you to onboard all your employees to the payroll in Lithuania before you make the necessary salary calculations. After onboarding, you can calculate salary components, like basic pay, gross pay, net salary, etc., for all your employees. The employee’s gross pay is the total of all the salary components like basic pay, allowances, etc. However, the employee’s net salary is calculated after all the mandatory payroll deductions are made. 

The entire payroll process in Lithuania is relatively standardized, and the payroll calculations are similar for all employees, irrespective of nationality.  You must consider the minimum payroll requirements in Lithuania, like the minimum pay, etc., while calculating the employees’ pay.

Important Elements of Salary Structure in Lithuania

Like all the other countries that are a part of the European Union, Lithuania also has some standard elements in its salary structure. Some of these elements include:

Cost to Company (CTC)

The Cost to Company (CTC) represents the amount the company bears after hiring an employee. It covers all the aspects of the compensation, like gross pay, net pay, etc. The CTC of an employee is mentioned on the employment letter, giving the breakup of all the other components. 

Gross salary

The gross salary gives the maximum earning potential of the employee’s job post. It is one of Lithuania’s most important components of compensation structure. The employee’s gross salary is the aggregate amount before factoring in any mandatory deductions like taxes, etc. 

Net salary

The net salary is the takeaway salary of the employee that gets credited to their bank accounts. Employees get the net salary after making mandatory deductions from the gross pay. 

Basic salary

The basic salary is one of the most crucial parts of the employee’s gross pay. All the other components of the compensation structure are decided based on the basic salary. It constitutes almost 35-45% of the total salary. It is decided based on factors like the company’s level, designation, industry standards, etc. 

Allowances

The companies in Lithuania pay different allowances to their employees depending upon the designation and industry standards. The clauses of the payment of these allowances are a part of the company’s policy. Some popular allowances paid to employees in Lithuania include

  • Food allowance
  • Rent allowance
  • Mobile allowance
  • Healthcare allowance

Bonuses

In Lithuania, the payment of bonuses is not mandated by Federal law. However, several companies pay an annual bonus to their employees, whose value is stated in the employee’s employment contract. Some employers also give performance-based bonuses to employees.

How to Set Up a Payroll in Lithuania?

Some steps you must carry out to set up the payroll in Lithuania include

  • Step 1: Select the type of company that you want to incorporate in Lithuania and then acquire all the necessary permits to conduct business in the country.
  • Step 2: Prepare the articles of association and the founding agreement and reach out to the Register of Legal Entities to incorporate the company. 
  • Step 3: You must collect the Company Identification Number and then register with the relevant tax authorities to make all the tax payments on time. 
  • Step 4: Now, set up a bank account for the company, which you can use to make all the salary payments to the employees.
  • Step 5: Calculate the employees’ gross pay for the month by checking the number of working hours and calculating the overtime pay along with all the other salary components.
  • Step 6: Now, factor in the deductions like the social security contributions, taxes, etc., and subtract them from the gross pay to get the net pay. 
  • Step 7: Choose a payroll system for processing payroll in Lithuania.
  • Step 8: Decide on a payment cycle in compliance with federal law and the dates of other vital payments like bonuses, etc. 

It is crucial to set up payroll rules and regulations in Lithuania that adheres to all the local and federal laws. You can contact a global PEO service platform like Multiplier to help you with the whole process and provide a payroll compliance checklist in Lithuania. We have a set of experts who know everything about payroll systems in Lithuania. 

A Step-by-step Process of Payroll Processing in Lithuania

Setting up a Lithuania payroll guide can initially seem challenging. You can follow these steps for an efficient payroll process in Lithuania. 

Select a payroll system

The companies in Lithuania can choose from various payroll systems. You must finalize a budget and figure out your payroll requirements before you choose a budget for the same. 

  • Manual payroll: Several large corporations in Lithuania have a manual payroll system. In this system, you need to onboard employees who will be performing the payroll function manually. You can go with this option if you have the resources to onboard a dedicated HR time and the resources to train them. 
  • Outsourcing: You can also outsource the entire payroll system of the company to a third-party vendor. However, you will have to check if the third party is adhering to all the laws and meeting all the compliance requirements. 
  • Payroll software: If you are looking for an automated payroll system for all your employees, you can also choose payroll software that processes the payroll with little or almost no human intervention. 

Curate a payroll policy

  • Several rules and regulations govern the payroll in Lithuania. You must clearly state these aspects in a document and share them with the employees.
  • Create a payroll policy that covers all the country’s payroll aspects, like the compensation structure, frequency of payments, etc. 
  • Once you have a policy ready, you can share it with all the company employees. You should design a policy that becomes a payroll guiding document for the company. 

Onboard the employees into the system

  • Once you decide on payroll policies and procedures in Lithuania, you must register all the employees in the system.
  • You must include the basic details of the employee, like name, date of birth, etc., while registering the employees. You must also add the compensation structure components and their corresponding amounts in the system.
  • Also, add the details of the payroll cycle. Usually, the payroll frequency in Lithuania is monthly. Employees receive their salaries and other added benefits at the end of the month.

Check the timesheets and calculate the pay

  • Once you register all employees to the system, you must calculate their salary.
  • Check the employee’s timesheets to get the number of working hours and then calculate the overtime payments, if applicable. 
  • Consider all the deductions, payroll tax in Lithuania, and then calculate the net salaries of all the employees. If your company pays any allowance, you must add that too. 

Payroll reconciliation

  • Ensure that you check all the information and the payroll calculation before you make the salary payments to the employees. 
  • You must enter all the crucial details in general ledgers and fix the errors, if any. 

Give out the pay slips

  • You must also generate the pay slips for all your employees. If you use payroll software, the pay slip generates automatically. 
  • You can give the employee a hard copy or a digital copy of the pay slip. The number of pay slips will correspond to the number of salary payments you will receive in a year. 

In addition, employees must have an active bank account to receive the salary payments. Employers can also assist their employees in setting up a bank account for an easy payroll process in Lithuania. 

Payroll Contributions

Several payroll contributions are a part of the payroll system in Lithuania. Some of these contributions include:

Minimum wage

  • All employers in Lithuania must pay employees at least the minimum salary. The government of the country decides this amount. 
  • The minimum wage for all employees in Lithuania stands out at EUR 730 per month. For employees paid on an hourly basis, the minimum wage is EUR 4.47 per hour.

Overtime

  • In Lithuania, all employees are paid extra if they work more than the designated hours. 
  • All the work done by employees above 40 hours a week in overtime. An employment contract regulates these or the collective agreement. 
  • An employee cannot work more than eight overtime hours for seven consecutive days. 
  • In Lithuania, employees receive 150% of their regular salary as overtime payments. However, if the extra work is done during the night shift, the overtime payments become 200% of the standard salary. 

Employer Contribution

Lithuanian employers contribute to different social security accounts for their employees. The company makes direct payments to the authorities managing these retirement and social security funds.

Contribution

Rate

Social Insurance

1.77%

Employee Contributions

It is mandatory for Lithuania employees to make payroll contributions. These contributions are deducted from the employee’s salary and directly paid to the institutions handling these funds.

Contribution

Rate

Pension Social Insurance

8.72% (A ceiling of EUR 90,246 is applicable)

Health Insurance

6.98%

Sickness Insurance

2.09%

Motherhood social insurance

1.71% (only for female employees)

Hence, the employees in Lithuania contribute 19.5% to social insurance. 

Taxes

Paying income taxes for the income earned within the country is mandatory in Lithuania. The companies deduct the tax amount and pay it to the tax authorities directly. Two flat tax rates are applicable in Lithuania based on income level. 

Income Slab

Tax Rate

Up to EUR 90,246

20%

More than EUR 90,246

32%

Payroll Cycle

All companies in Lithuania must follow a payroll cycle to pay salaries to all employees. Most companies in Lithuania follow a monthly payroll cycle where the employees are paid once a month for their work. The salary payments in Lithuania are made on the 10th of every month, and employers must specify this date in the company’s payroll policy.

Lithuania Payroll Options for Companies

Companies in Lithuania can weigh all their choices before finalizing a payroll option for their company. Before finalizing a payroll option, you must ascertain a budget and determine the company’s payroll needs. Some of these options include

  • Internal payroll: Most large firms with human resources departments use internal payroll to manage payroll processes in Lithuania. The company runs the entire system in-house and employs more personnel to speed up the procedure.
  • Remote payroll: A remote payroll is a popular choice for branches and subsidiaries of a parent company. In this case, the subsidiary employees are listed on the main company’s payroll system. While paying employees in Lithuania, the parent firm must abide by Lithuanian legislation.
  • Payroll processing company: You may manage your payroll in Lithuania with the aid of a payroll processing business. However, the business will handle all payroll-related legal matters.
  • Global PEO platforms: A PEO firm can easily manage any business’s entire payroll operation. You can contact a global PEO platform like Multiplier to free yourself from the responsibility of overseeing your company’s payroll system.

Entitlement and Termination Terms

The employment contract should include information about an employee’s entitlements and termination clauses to prevent future disputes. 

Employee entitlements include wages, working hours, leaves, and other benefits. When terminating an employee, employers need to give a valid reason for the same. You may fire a worker for the following reasons:

  • Discussion and agreement between the organization and the employee
  • The employee engaged in dishonest behavior while working there.
  • If the company undergoes a significant structural change

Employers must state the cause for termination in the termination letter given to the employee. The employer must also give the worker severance pay to support themselves while looking for a new position.

Lithuania Payroll Processing Company

Expanding the business may seem difficult if you are new to Lithuania and unsure of the payroll regulations and rules that apply to businesses. As a result, you might seek the assistance of professionals to guide you through the entire procedure.

To get advice on the regional regulations and other rules that control the payroll systems in Lithuania, get in touch with a PEO business like Multiplier. To receive the best assistance with payroll processing at the organization, keep all your alternatives open.

How Multiplier Can Help With Global Payroll

Setting up a payroll system in Lithuania may seem difficult. However, you may quickly set up a compliant payroll system with the right advice and professional assistance.

You can contact global PEO platforms, like Multiplier, which can assist you in determining your payroll needs. Multiplier has helped businesses set up payroll systems in 150+ countries. All our personnel is familiar with Lithuanian federal regulations, and they will assist you in setting up a payroll system that complies with those rules and accommodates the needs of all employees.

Frequently Asked Questions

Yes, all employees receive paid leaves in Lithuania. The standard number of paid leaves is 20, which increases with the employee’s years of experience.

An employer can terminate an employee if they have been involved in fraudulent practices. They can also be terminated if there is a structural change in the company.

All employees in Lithuania who voluntarily leave the organization must serve a notice period of 30 days.

Need help hiring in Lithuania?

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