How to manage payroll and tax for remote employees in Portugal

The picturesque landscapes and vibrant culture of Portugal have long made it an attractive destination, and in recent years, its appeal has extended to the realm of remote work. As more international companies embrace distributed teams, the need to understand how to comply with paying remote employees based in Portugal has become paramount.

This article serves as a comprehensive guide, offering insights into salary payments, tax deductions, Social Security obligations, and employer responsibilities, with a specific focus on remote work arrangements.

Hiring remote employees in Portugal: legal basics

Before delving into the intricacies of payroll, it’s crucial to understand the foundational legal aspects of employing remote workers in Portugal.

One of the most common questions international companies have is whether they need to establish a legal entity in Portugal to hire remote employees. The answer is generally yes, if you intend to directly employ them.

Portugal’s labor laws typically require a local presence for direct employment, as this designates you as the legal employer responsible for all local obligations and liabilities. However, there are alternative solutions, such as utilising an Employer of Record (EOR), which allows companies to hire compliantly without setting up their own entity.

It’s a common misconception that remote work somehow exempts employees from the full scope of local labor laws, but this is not the case in Portugal. Remote employees enjoy the same rights and are subject to the same protections as their in-office counterparts.

This includes adherence to minimum wage laws, working hours, overtime regulations, and statutory leave entitlements. Portuguese law even prohibits employers from contacting employees outside of working hours, emphasizing the right to disconnect.

Importance of contract compliance even for distributed teams

Just as with traditional employment, a transparent and compliant employment contract is essential for remote workers in Portugal. This contract, ideally in Portuguese (or bilingual with a Portuguese legal version), should clearly outline:

• Job responsibilities and duties
• Salary and benefits
• Working hours
• Holiday and leave entitlements
• Termination terms
• Specific clauses for remote work, including compensation for additional expenses (e.g., electricity, internet, IT equipment usage), as per recent legislative changes.

Even for distributed teams, these contracts serve as the legal bedrock of the employment relationship, safeguarding both the employer and the employee.

Tax and social security obligations for remote workers

Managing payroll for remote employees in Portugal requires a thorough understanding of the country’s tax and Social Security framework.

Any company employing staff in Portugal, whether remote or otherwise, must register with the Portuguese Social Security system (Segurança Social) and the Tax and Customs Authority (Autoridade Tributária e Aduaneira – AT).

This ensures proper reporting and payment of contributions and taxes. When a company registers in the commercial register, the Tax and Customs Authority automatically notifies the Social Security authority, and a Social Security Identification Number (NISS) is assigned to the company.

Payroll tax deductions for remote workers

IRS (Income Tax)

Personal Income Tax (Imposto sobre o Rendimento das Pessoas Singulares – IRS) is withheld from employees’ salaries by the employer. Portugal has a progressive income tax system, with rates varying depending on the employee’s income level, marital status, and number of dependents. Employers are responsible for accurately calculating and remitting these withheld taxes to the Portuguese tax authority by the 20th of the month following the month in which the taxes were withheld.

Social Security contributions

Both employers and employees are obligated to contribute to Segurança Social. As of early 2025, employers typically contribute 23.75% of the employee’s gross salary, while employees contribute 11%. These contributions fund various social welfare benefits, including pensions, unemployment benefits, healthcare, sick leave, and parental leave. Payments are generally due by the 20th of the month following the salary payment.

Holiday pay, Christmas bonus obligations (13th/14th salary)

A distinctive feature of Portuguese payroll is the mandatory payment of two additional monthly salaries per year, commonly referred to as the 13th and 14th salaries. The 13th-month salary, or “subsídio de Natal” (Christmas bonus), is usually paid in December, and the 14th-month salary, or “subsídio de Férias” (holiday bonus), is typically paid in June, coinciding with holiday periods. Each of these bonuses is equivalent to one month’s standard salary. These are statutory entitlements and are not optional or performance-based.

Employers must maintain accurate and detailed payroll records and submit monthly reports to both the tax authorities and Social Security. These reports detail employee earnings, withheld taxes, and Social Security contributions. Adhering to strict monthly deadlines for submissions and payments is crucial to avoid penalties and fines. The annual IRS declaration for income earned in the previous year typically runs between April and June.

Payroll calculation for remote staff: what’s different?

While the core principles of payroll remain consistent, specific considerations arise when calculating payroll for remote employees in Portugal.

The calculation of gross pay (total salary before deductions) and net pay (take-home pay after all deductions) follows standard Portuguese payroll rules. This involves deducting IRS, Social Security contributions, and any other agreed-upon employee contributions (e.g., private health insurance premiums). The calculation must also factor in the pro-rata accrual and eventual payment of the 13th and 14th salaries.

Remote worker entitlements: paid leave, health cover, work hours

Remote workers in Portugal are entitled to the same benefits as their in-office counterparts. This includes:

• Paid leave: Statutory annual leave is generally 22 working days.
• Health cover: Employees are covered by the national health service, Serviço Nacional de Saúde (SNS). Many employers also offer private health insurance as an additional benefit.
• Work hours: The standard workweek is 40 hours. Overtime is permitted but regulated, with specific rates for additional hours and work on weekends or public holidays.
• Meal allowance (Subsídio de Alimentação): Many companies provide a meal allowance, which can be paid in cash or through meal vouchers. This is also applicable to remote workers.
• Right to disconnect: As mentioned, employers cannot contact employees outside of agreed working hours, safeguarding their rest periods.
• Compensation for remote work expenses: Recent legislation requires employers to compensate remote workers for additional energy usage, internet, and IT costs incurred due to remote work. Specific daily limits apply to IRS and Social Security exemptions for these compensations.

For companies with remote employees who may not be tax residents in Portugal (e.g., digital nomads spending less than 183 days in the country), the tax implications can be more complex. Generally, non-residents are only taxed on income sourced in Portugal.

However, establishing tax residency often depends on the “183-day rule” (spending more than 183 days in Portugal within a fiscal year) or having a permanent home available. Double taxation agreements between Portugal and other countries may also come into play to prevent individuals from being taxed on the same income twice. Professional tax advice is highly recommended for such cross-border scenarios.

Challenges in managing remote payroll

Managing remote payroll in a foreign country like Portugal presents several challenges for international companies.

The most significant risk is non-compliance. Without in-depth knowledge of Portuguese labor laws, tax regulations, and Social Security obligations, companies can face severe penalties, fines, and legal disputes. Misclassifying an employee as a contractor, for example, can lead to significant retrospective liabilities.

Foreign companies without a legal entity in Portugal often lack the local representation required to handle tax and Social Security registrations, submissions, and communications with authorities. This can lead to delays, errors, and a breakdown in compliance.

The unique statutory benefits in Portugal, such as the 13th and 14th salaries, and specific rules for tracking various types of leave (annual leave, sick leave, parental leave) can be complex for international payroll systems not accustomed to these nuances.

As an EU member, Portugal adheres to the General Data Protection Regulation (GDPR). When using international payroll systems, companies must ensure that the processing, storage, and transfer of employee personal data comply with GDPR requirements and Portugal’s national data protection laws. Non-compliance can result in substantial fines.

How an Employer of Record simplifies remote payroll in Portugal

Given the complexities, many international companies turn to an Employer of Record (EOR) to manage remote payroll in Portugal.

An Employer of Record (EOR) is a third-party organisation that legally employs workers on behalf of another company, thereby assuming the responsibilities of the hiring company. While the EOR becomes the legal employer for payroll, tax, and compliance purposes, the client company retains complete management of the employee’s day-to-day work, tasks, and performance.

A Portuguese EOR specialises in managing the local regulatory landscape, providing comprehensive services that include:

• Employment contracts for remote staff: The EOR drafts and manages compliant employment contracts tailored to Portuguese labor law, ensuring all mandatory clauses and remote work specific provisions are included.
• Local payroll calculations and deductions: The EOR handles all aspects of payroll calculation, including gross-to-net pay, ensuring accurate deduction of IRS, Social Security contributions, and any other statutory withholdings.
• Social Security contributions and tax submissions: The EOR registers with Segurança Social and the Tax Authority, makes timely and accurate Social Security contributions, and submits all required tax reports on behalf of the client company.
• Benefit compliance (holiday pay, insurance, pensions): The EOR ensures all statutory benefits, including the 13th and 14th salaries, paid leave, and Social Security-funded benefits (healthcare, unemployment, pensions), are correctly administered. They can also assist in setting up supplementary benefits like private health insurance.

For example, a UK startup encountered challenges in hiring remote developers in Portugal due to the country’s complex labor laws and tax obligations. They partnered with a Portuguese Employer of Record who handled all legal employment, payroll, tax filings, and benefits administration, including the mandatory 13th and 14th salaries. This allowed InnovateTech to quickly onboard staff compliantly and focus on business growth without setting up a local entity.

Final best practices for remote payroll in Portugal

To successfully manage remote payroll in Portugal, consider these best practices:

• Maintain clear and compliant contracts: Always use written, legally compliant employment contracts that clearly define all terms of employment, including details specific to remote work arrangements.
• Track all statutory obligations and deadlines: Be diligent in monitoring and adhering to all deadlines for tax payments, Social Security contributions, and reporting.
• Partner with an EOR or local payroll provider if no legal entity exists: This is often the most efficient and risk-averse approach for companies without a direct presence in Portugal.
• Keep updated with Portuguese tax and labour law changes: Laws can change, and staying informed is critical for ongoing compliance. Regularly consult with legal and payroll experts specialising in Portuguese regulations.

Manage remote employees with ease

Managing remote payroll from abroad can be a complex and challenging endeavor, fraught with risks of non-compliance if not handled correctly. This is where the expertise of a Portuguese Employer of Record becomes invaluable. By partnering with an EOR, businesses can confidently expand their remote teams into Portugal, ensuring complete legal adherence, streamlining administrative processes, and mitigating potential risks, all without the need to establish a local legal entity.

Looking to pay remote employees in Portugal without setting up a local entity? Contact us to discover how a Portuguese Employer of Record can help you stay compliant and reduce risk, allowing you to focus on growing your global team.