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Being a contractor in Iceland

A contractor sells their work against an invoice instead of receiving a salary from an employer. There is more freedom and more responsibility: you are your own employer, bookkeeper and tax filer. This guide walks through everything that needs to be in place, with the 2026 figures.

Updated
Sources reviewed
Tax year
2026

A contractor (self-employed individual) in Iceland registers on Skatturinn's employer register before starting, pays themselves a monthly salary (calculated remuneration) of at least the amount for their category, pays withholding tax on it in brackets of 31.49–46.29% less a personal tax credit of 72,492 ISK, 15.5% to a pension fund and 6.35% social security, registers for VAT when turnover exceeds 2,000,000 ISK in 12 months, and files an annual tax return with a business statement.

Key figures

Registration
RSK 5.02, 8 days before starting
Withholding tax
31.49–46.29%
credit 72,492 ISK/month
Pension
15.5%
4% + 11.5%
Social security
6.35%
VAT registration
turnover above 2,000,000 ISK/12 months
Tax return
RSK 4.11 business statement
March

Contractor, self-employed, sole proprietorship

The words are used interchangeably. A contractor (verktaki) takes on work against an invoice. Self-employed (sjálfstætt starfandi) is the tax term for an individual running a business on their own ID number. A sole proprietorship (einstaklingsrekstur) is the legal form: no separate legal entity, you carry full liability and the profit is your income. The alternative is a private limited company (ehf.), which suits larger operations, higher risk or several owners.

1. Before you start: registration

Notify Skatturinn of the business no later than 8 days before it begins. With RSK 5.02 you join the employer register and, where relevant, the VAT register. You state your category and calculated remuneration and which pension fund you pay into. Registration is electronic at skattur.is.

2. Calculated remuneration: your salary

Skatturinn expects you to pay yourself a salary for the work in your own business, regardless of how collections went that month. The minimum depends on the reference category (A–H) Skatturinn publishes each year. You may pay yourself more. Taxes and contributions are calculated on this amount. See calculated remuneration.

3. Taxes and contributions on the salary

Charge2026Paid by
Withholding tax (income + municipal)31.49% / 37.99% / 46.29%the employee (you)
Personal tax credit−72,492 ISK per monthdeducted from tax
Employee pension contribution4%the employee
Employer pension contribution11.5%the employer (you)
Social security (tryggingagjald)6.35%the employer
Rehabilitation fund0.1%the employer

All of it is settled monthly: a return to Skatturinn with a final due date on the 15th of the next month, and contributions to the pension fund. The payroll calculator shows what remains from an invoice; taxes explains each charge.

4. Value added tax

Once taxable turnover exceeds 2,000,000 ISK in 12 months, registration is mandatory. You then add 24% (or 11% on certain services) to invoices, deduct input VAT on purchases and report the difference every two months. Below the threshold registration is optional. See VAT.

5. Invoices and bookkeeping

Every sale is recorded with an invoice in an unbroken sequence showing ID numbers, a description and VAT separately. All business expenses are backed by vouchers. Books and vouchers are kept for seven years. See invoicing and expenses.

6. Tax return

Each year you file a tax return with a business statement (RSK 4.11) showing income, calculated remuneration, expenses and profit. Profit beyond calculated remuneration is taxed as your income. The return opens in March. See tax return.

7. The rights that come with the contributions

Social security and pension contributions are not just costs. They earn you entitlement to unemployment benefit, parental leave, sickness benefit, disability pension and retirement pension, but the entitlements are based on calculated remuneration, not on what you invoiced. See rights of the self-employed.

8. Contractor or employee in substance?

If you work for one party, on their hours, with their equipment and under their supervision, Skatturinn can treat the relationship as employment despite the invoices. That has consequences for both sides. See disguised employment.

First-month checklist

  1. Registration on the employer register (and VAT register) approved.
  2. Category and calculated remuneration decided, pension fund chosen.
  3. An invoicing system with an unbroken sequence; a bank account for the business.
  4. First invoice sent with the right fields.
  5. Withholding return for the month filed by the 15th of the next month; pension contribution paid.
  6. Receipts for expenses stored as they arise.

Fustle keeps items 3–6 with you: invoices, expenses and payroll calculations with the year's figures. See how it works.

Frequently asked questions

Do I need to set up a company to be a contractor?

No. A sole proprietorship on your own ID number is the most common form and only requires registration with Skatturinn. A private limited company (ehf.) requires share capital, incorporation at the company registry and annual accounts, and suits larger or riskier operations.

What is left of a 500,000 ISK invoice?

With the full personal tax credit and no other salary, about 349,579 ISK in net salary on the fixed Payroll plan in 2026, after the 11.5% employer pension, 6.35% social security, 4% employee pension and withholding tax. See the payroll calculator for your amount.

Can I contract alongside a full-time job?

Yes. Then your main employer uses the personal tax credit and the lower brackets, and calculated remuneration from your own business is taxed in a higher bracket. The registration duty is the same.

What if I do not have an Icelandic ID number?

You need a kennitala and, if you come from outside the EEA, a work permit to work independently in Iceland. Ísland.is and the Directorate of Immigration explain the process.

Sources

General information, not advice on your situation. Skatturinn and other authorities assess each case. Check the review date and sources before relying on a figure.

Where does Fustle fit in?

Record the work and create the invoice. The service you choose determines the support included.

Explore Invoicing →Try the payroll calculator →