When you want to assign a salary, you just have to make one or two transfers from your company account to a personal account (in your name) with a specific format.

The first thing you need to know is what salary you are going to assign yourself, board member salary (director of the company or administrator), employee salary (employee), or both. You must also decide on the amount.

Before continuing, we recommend understanding how VAT, taxes, and salaries work under the “Monthly Salary” section.

When you’ve read it, you basically have three possibilities:

  • If you are the only member of the company, and you work as a “freelance” or “freelancer”, that is, you do a very technical job in which you charge for your working hours, and you have no employees, you can decide to assign yourself employee salary only.
  • Otherwise, the general rule is that you assign yourself an 80% employee salary and 20% board member salary. The former is tax-free in Estonia, but the latter pays taxes in Estonia.
  • As a special case, if you live and work in Estonia (meaning, you are an Estonian tax resident), your salary will be considered 100% board member salary and will be subject to taxes in its entirety. That’s because you are receiving health insurance and pension benefits, so you need to pay income tax, social taxes, and also unemployment and pension benefits. Please contact us, in that case, to make sure to calculate your taxes correctly.

Now that you know the amount of salary and percentages, you just need to make a transfer or two from your business account to your personal account. Every month that you want to pay yourself a salary, of course. Important: You must indicate a concept of “Board member salary” for the board member salary and “Employee salary” for the employee salary. All banks allow you to set this concept or subject for the transfer. The concept will allow us to identify the type of salary and calculate taxes accordingly.

It is important that you make different contracts as an employee and as a board member if you have employee and board member salaries respectively. These contracts should simply indicate that the company hires you as an employee or board member respectively, the job description (online marketing expert employee or member of the board of directors, for example), and other details such as salary, hours to work, schedules, etc. Companio, our business management tool, makes it easy for you to generate these contracts automatically in a couple of clicks.

Real-World Examples of Paying Appropriate Salaries

Ana is a web designer and the only member of her company. Although she would be able to pay herself only an employee salary, she decided to pay herself a board member salary. For her, a 20/80 distribution is appropriate. Her monthly salary is 2500 euros, so she makes two bank transfers from her corporate Transferwise account to her personal account in N26:

  • A € 500 transfer with “Board member salary” concept (20% of 2500)
  • A € 2000 transfer with the concept “Employee salary” (80% of 2500)

As she is thinking of assigning a lower or higher salary at times, between € 2,000 and € 3,000 per month, Ana prepares a couple of contracts:

  • One where it is specified that Ana works for her company as a member of the board of directors and receives a salary of € 400 to € 600 per month (with a variable bonus of € 200).
  • Another where it is specified that it performs an employee’s job, as a web designer and developer, with a variable salary (according to productivity) of 1600 to 2400 € per month.

Note that this variability allows her to assign a salary between 2000€ (400€ board member + 1600€ employee) and 3000€ (600€ board member + 2400€ employee), with the right distribution of 20/80 always. Once she writes those contracts, she sends them to us.

Ana’s boyfriend, Paul, also has a company and works as a web developer, but chooses to pay himself employee salary only. His salary is not variable, always 1200 euros per month, so he writes a contract as an employee, describing his work as a web developer, sends it to us, and every month he orders a transfer from his corporate account to his personal one for € 1200 specifying an “Employee salary” transfer concept.

The concepts of transfers are important to help us understand the type of salary paid.
Let’s look at another example:

Erick is the CEO and principal administrator of a three-member startup. As his company has three members, he cannot say he works as a “freelancer”. He also has been living in Estonia for the last 2 years. So he chooses a full board member salary of 1000€. To pay his salary, the company makes one transfer from the corporate account of the company in Transferwise to the personal bank account of Erick:

  • A € 1000 transfer with “Board member salary” concept

Erick will always receive the same salary, so he uses Companio to generate a simple contract for himself with this amount. Then, he talks to the other two members of his startup to help them prepare their contracts.

What happens if the employee is a tax resident of another country?

Permanent Establishment

The e-Residency program of Estonia is designed with location-independent entrepreneurs in mind. However, if you, or any other member of your Estonian company, are receiving a salary from it, and you live and work in a country other than Estonia (meaning, you are a tax resident in another country), you may need to consult a local tax advisor to make sure your employment status is correct and compliant with the local laws.

In some circumstances, additional procedures may be needed to correctly employ this person, depending on the country you live in, you may need to do one of two things:

  • Either your company needs to register a branch or get a tax ID in that other country and pay social tax for you there, or…
  • You may be required to become a freelancer/professional in that country and invoice your company instead of assigning yourself salaries.

Other important legal aspects when hiring employees

When hiring employees in other countries outside of Estonia, including the shareholders or members of the board of the company, you must be careful to observe certain legal aspects. Sometimes, such as when hiring employees in Europe (and other countries), your Estonian company may need to pay social security or some kind of social taxes for those employees. If that happens, you have several options, such as asking the employees to become professionals or freelancers (in that situation, you do not pay them salaries, but they invoice your company every month) or that the company registers as a taxpayer in their countries and pays social taxes in the employee’s country.

In this article, we talk about these legal aspects when hiring employees in detail. It is important that you read it if you are hiring employees who live outside of Estonia.

Additional resources

If you don’t know how to fill in these contracts, or what is the best salary distribution for you, do not hesitate to contact us.