Taxes and contributions for the self-employed

Two roles, two kinds of charges

When you work as a contractor you are in effect both a business and its employee. The business (your operation) receives payments and pays payroll costs. The employee (you) receives a salary and pays income tax and pension contributions on it. The money travels like this:

1. A customer pays an invoice excluding VAT (VAT is reported separately).
2. The business pays you a salary, the calculated remuneration, at least the amount for your category.
3. On that salary the business pays an 11.5% pension contribution, 6.35% social security and 0.1% to the rehabilitation fund.
4. From the salary, the 4% employee pension contribution and withholding tax less the personal tax credit are deducted.
5. What remains in the business after salary and expenses is profit, taxed through the tax return.

Withholding tax 2026

The base is salary less pension contributions. The rates include the average municipal tax; your municipality's actual rate is settled at assessment. The personal tax credit of 72,492 ISK per month is deducted from the calculated tax. Example: a taxable income of 600,000 ISK gives 156,859 ISK of tax in bracket 1 and 38,703 ISK in bracket 2, 195,562 ISK in total, less the credit: 123,070 ISK. See tax brackets and the personal tax credit.

Social security 6.35%

Social security (tryggingagjald) funds unemployment insurance, parental leave and part of the social insurance system. The base is salary or calculated remuneration plus the employer pension contribution. On a 500,000 ISK salary the base is 557,500 ISK and the charge 35,401 ISK. It is reported on the same return as withholding. See social security.

Pension contributions 15.5%

Mandatory pension insurance is 15.5% of salary: the employee pays 4% out of the salary and the employer adds 11.5%. As a self-employed person you pay both. Contributions go to the fund you named at registration, and the 4% share reduces taxable income. See pension.

Value added tax

VAT is not a tax on you; it is tax you collect from customers and pass on. On the VAT register you add 24% (or 11%) to invoices, deduct input VAT on purchases and report the difference every two months. Registration is mandatory once turnover exceeds 2,000,000 ISK in 12 months. See VAT.

What comes out

For an 800,000 ISK invoice excluding VAT in a month with the full credit, salary is 674,080 ISK, withholding 140,970 ISK and net pay 506,147 ISK, after payroll costs of 125,920 ISK. The payroll calculator shows this breakdown for any amount.

Filing and due dates

• Monthly: withholding and social security return at skattur.is, final due date the 15th of the next month. Pension contributions per the fund's rules.
• Every two months: VAT return, due on the 5th of the second month after the period.
• Annually: tax return with the business statement (RSK 4.11) in March; wage statements in January.

All dates are in the tax calendar.

Profit and deductions

Business income beyond calculated remuneration and deductible expenses is profit, added to your income tax base in the return. Costs incurred to earn, secure and maintain the income are deductible (Article 31 of the Income Tax Act). That is why keeping expenses and receipts in order all year matters.