The true costs of paying your own employees

Proper management of employment wages is no simple task. Wages are not just a number you and your employees determine before their start date: they involve complex calculations and hidden costs not visible from the salary slip.

Payroll management is a challenge, especially for growing firms. Firms that pay their own employees still must absorb the “costs for compliance” that generally accompany countries with strong living standards. If you’re weighing the options between employing people on your own payroll or outsourcing it to an expert, it’s important to understand how payrolling works in the Netherlands.

Social contributions and tax

When having employees on the payroll, the cost price of an employee is often higher than expected. It is not only the net wages that you have to consider, but also payroll taxes, social contributions, and other obligations. On average, employers should expect to spend a 50-65% premium on wage-related direct costs in addition to gross wages.

Accounted for in this premium include the majority of the robust social programs that benefit employees in the Netherlands. Including the national Unemployment Insurance Act, Work Capacity Act, Return to Work Fund, and Sickness Benefits Act. 

Holiday allowance

In addition to the gross salary, as an employer, you are obliged to pay an allowance to your employees that contributes to their vacation expenses. As a standard, this allowance should be 8% of the gross monthly salary. If your business works with a collective labor agreement (CAO), this amount may be higher. Read more about the Dutch Holiday Allowance Scheme on our blog here.

Sickness payments

Dutch employers are responsible to cover the risk of employees if they fall ill or are injured. The average illness rate in the Netherlands is approximately 4.2% — but could be much higher or lower depending on your business sector. 

If an employee is injured or ill, employers are obliged to continue paying from 70 – 100% of an employee’s salary for at least 2 years. While you may be spending less on gross wages on these employees than usual, you lose out on their contributions to your business and may have to spend on hiring and training a replacement. 

Administration costs

All in all, the costs of an employee are much more than just net wages and payroll taxes. On average, as an employer there is a premium of 50-65% wage-related direct costs on top of the gross wages, depending on the collective labor agreement or sector. Indirect costs such as back-office systems, accountant and insurance costs (liability, etc) are not included in here.

Breakdown of employer costs

We’ve created a breakdown of all the costs involved when paying an employee in the Netherlands. Click here to see the full image.

Payroll or hiring?

If you are unsure whether you should hire an employee or outsource your employment, it is advised to take a good look at a payroll construction. Outsourcing of employment can have a lot of benefits:

• More flexibility;
• Clear and simple costs overview – just one invoice per month;
• No hidden additional costs;
• Possibility to ensure not paying an employee during sickness;
• A significantly lower risk!

Temporary payroll solutions

Octagon Professionals is a full-service HR solutions provider with extensive experience facilitating payroll solutions for International businesses. If you are a growing or foreign business, Octagon Professionals can help you hire from abroad and ease your HR workload. 

If you’d like to learn more about how Octagon Professionals’ payroll solutions can benefit your business, schedule a consultation. https://www.octagon.nl/payroll-services/