Being an employer
The standard obligations of an employer consist of several elements: The employer withholds tax on wage payments to employees, and additionally pays the employer's social security contribution, which is proportional to the sum total of the wages of the payroll. Both amounts are remitted to the Tax Administration. In addition, the employer makes the arrangements for required insurance contracts for the employees, including a statutory pension insurance contract and other insurance contracts.
This instruction is intended for all companies, organizations and other entities that are in the role of employers.
Employment contract or other contract?
To be aware that an employer/employee relationship exists is important. If it exists, it means that the company will have employer obligations. Both tax law and labor law implement the same criteria to determine whether an employer/employee relationship exists. One of the important markers is the answer to the question whether the employer has a direction or control right with respect to the performance of labour. If an employer/employee relationship exists, the employer has the authority to give detailed orders as to how work should be performed. If an employer/employee relationship exists, the employer also has the right to control and follow up the performance of work.
The entire situation should be examined carefully. If the markers of an employer/employee relationship are present, the arrangement is deemed an employer/employee relationship, even if the concerned parties have made no employment contract.
Wages through the payroll system or nonwage compensation?
Tax rules usually treat any remuneration paid for the performance of work, labour or personal services as wages or nonwage compensation. The tax obligations of the payer are different in each of the two alternatives. Sometimes it is difficult to determine whether the payment should be regarded as wages or as nonwage compensation. In this case, the primary examination should focus on whether the markers of wage payment can be seen. If the answer is negative, the remuneration is a nonwage compensation.
Wages are paid for the performance of work within an employer/employee relationship. Additionally, several fees that are listed in Prepayment Act are to be treated as wages even if no employer/employee relationship is formed. These fees include personal fees paid for lectures and for attendance in a conference. The compensation given by the employer to the employee may partly consist of fringe benefits (including company car, company telephone or accommodation), not only of cash. Wages are subject to tax withholding, and additionally, subject to payment of the employer's social security contribution.
Nonwage compensation is payable for the performance of work, a one-off assignment, or for the rendering of a service. The obligation of the payor to withhold tax is in force only in case the beneficiary is not entered in the Prepayment register (Finnish: ennakkoperintärekisteri;Swedish:förskottsuppbördsregister). No payment of the employer's social security contribution is associated with the payment of a nonwage compensation.
For more information on evaluating the nature of an employee, self-employed and the compensation paid, see the official instruction in Finnish Palkkaa vai työkorvausta (Ohje Dnro 2118/31/2004, 21.6.2005).
Entry in the register of employers of the Tax Administration
The tax authorities consider an employer either as a regular or a casual employer. If the employer has a regular payroll function it is expected to seek registration as a regular employer in the Tax Administration's register of employers. Use Form Y1 to submit a request for entry.
The markers of an employer paying wages regularly:
- Two or more employees are being paid regularly;
- At least 6 wage earners are receiving wage income simultaneously even if their employment contracts are temporary with short lengths of duration.
Employers who are not regular are casual, and they usually have no registration in the Tax Administration's register of employers. However, a casual employer has the option to seek registration.
The markers of a casual employer:
- Only 1 permanently employed wage earner is employed; or
- The number of employees is 1–5, and their contracts are shorter than one year.