Salary is compensation for work performed, and compensation that you who own a limited company pay to yourself is also counted as this. If you have a sole trader business, your withdrawals are not classified as salary, but as your own withdrawals. Salary is always stated as gross salary, as it is impossible to know exactly which salary gives a certain net salary. This is because tax is calculated on the gross salary, and the tax varies depending on where the person receiving the salary lives and how much salary the person receives in total from different employers during the year.
How payroll tax calculated?
The employer deducts tax on salary either according to the tax table (Skattetabell) or as a 30 percent tax on side income. This tax is only preliminary, the actual, final, tax is calculated when all income for the year is summed up in your income tax return for the year. A tax table is a list of preliminary taxes to deduct at different levels of salary for a month, with the aim of giving as good an estimate as possible of the final tax for the year. The tax table assumes that you only have one employer and that you receive the same salary every month. If this is not true in reality, the final tax will not be the same as the preliminary tax, and you will receive either a residual tax or a tax refund. If you have several different sources of income, there will almost always be residual tax. Which tax table to use depends on the level of municipal tax where you live. Wages that exceed the threshold for state tax are taxed in addition to the municipal tax with 20% in state income tax. In addition to income tax on wages, the employer also pays employer contributions.
Monthly wages and hourly wages
The two most common forms of pay are monthly wages and hourly wages. With monthly wages, you get the same amount of salary every month, no matter how many working days there are in the month. For many salary deductions that are calculated, the calculations are not based on absence in working days but in calendar days. So if you start a job e.g. on January 11th, you get a deduction from the monthly salary for the first 10 days of the month, regardless of how many weekends or holidays there are in that period.
With an hourly wage you instead get paid for the number of hours you work, which means that you get a different wage each month because the number of working days and work schedules varies.
What is a salary period?
Monthly salary can be based on either the current month or the previous month. The current month means that you receive a salary in the same month as you work, and the previous month that you receive a salary for the month before. So, if you start working on February 1st, you will normally receive your first monthly salary on February 25th if the salary period is the current month, and March 25th if it is the previous month. With the current month, you adjust for deviations from the previous month. If you are ill for a week in February, it is then deducted from the monthly salary that is paid in March. This can feel confusing if someone is away for a whole month but still receives full pay, and that person then works for a full month when he or she returns, and then does not receive any pay at all due to the absence the month before.
What is a pay slip?
A pay slip is a summary of the salary paid to an employee for a month. On the pay slip, it must e.g. state who has received salary, the employee’s postal address, how much salary has been received and tax deducted, a clear summary of adjustments to the salary, such as sick pay, holiday pay, overtime pay, etc. The employer is obliged to provide a pay slip.
Employment contracts and collective agreements
Salaries shall be paid in accordance with the terms specified in an employee’s employment contract. If the company is a party to a collective agreement, large parts of the terms of employment are governed by what is stated in the collective agreement. The law also sets certain boundaries for what an employment contract may or may not contain. In Sweden, however, there are no minimum wages governed by law, but it is governed by collective agreements for the companies that have them. If you as an entrepreneur are both an employer and an employee of your company, you are free to agree on pretty much anything you want with yourself. You do not need to have a written agreement with yourself, and you do not need to have a fixed salary. You can pay whatever salary you want to yourself each month. If you are several owners, you decide together which salaries should apply.
How does vacation pay work?
Vacation pay is a compensation that accumulates with at least 12% of the gross salary paid, and to which everyone is entitled according to law. If it is not stated in the employment contract that the agreed salary includes vacation pay, it is assumed that it does not. In the case of shorter employments, the compensation is normally paid every month in connection with the salary. For longer employments, it is usually paid either at the end of the employment, or at the end of the vacation year, whichever comes first. The vacation year ends on March 31st unless otherwise agreed, so then the vacation pay is paid in connection with the salary payment in April. It is the same tax on all salaries, including holiday pay.
How does sick pay work in your own business?
The employer is normally responsible for the sick pay for the first 14 calendar days of a sick period. After that, the Swedish Social Insurance Agency takes over and pays sick pay. At the beginning of the period of illness, a qualifying period deduction of up to 20% of a normal weekly salary is made. If you work five days a week, this means that you receive a qualifying period deduction for an entire working day. This replaced a few years ago the old “qualifying day” that is no longer used. If you only work three days a week, the qualifying period deduction will be equivalent to 0.6 days of work. Unless an employment contract or collective agreement states otherwise, the sick pay from the employer is at least 80% of the normal salary.
Sick pay is taxed in the same way as regular pay, so there are no tax benefits for you with your own company to register sick leave when you are ill. However, if you are ill for more than 14 days, the Swedish Social Insurance Agency can request a pay slip, and then it is good if your sick leave is included in the pay slip. There is also compensation for high sick pay costs for smaller companies, so even if you have many shorter periods of illness, it may be worth registering sick leave.
Can I pay salary to another family member?
If the family member works in the company, you can pay a market-based salary. You may not pay salary to a family member just to lower the tax in your household.