Do I Need a Local Entity to Hire in Iceland?

In Iceland, a "local entity" typically means having a recognized employing presence, such as a subsidiary or branch office, which allows you to be acknowledged as an employer. This setup enables you to manage payroll, comply with tax obligations, and fulfill employment regulations effectively.

Without a local entity, you may struggle to register as an employer, manage mandatory social security contributions, run compliant payroll, and issue employment contracts that meet local legal standards. Iceland's Directorate of Internal Revenue outlines employer responsibilities for tax and social security contributions, which are essential for lawful employment.

What is Required to Employ Someone in Iceland?

• Local employing entity required to directly employ? Yes (You need a local entity to register as an employer.)
• Payroll registration required? Yes (You must register with the Directorate of Internal Revenue.)
• Withholding/tax remittance required? Yes (Employers must withhold income tax and remit it to the tax authority.)
• Social contributions required? Yes (Employers are responsible for social security contributions.)
• Local employment agreement required? Yes (Written contracts are mandatory under Icelandic law.)
• Mandatory benefits to budget? Yes (Includes paid leave, pensions, and other statutory benefits.)
• Works council/collective agreements considerations? Usually (Many sectors have collective agreements impacting employment terms.)

Best Options If You're Hiring in Iceland

Can I Hire Contractors Instead of Setting Up an Entity?

Yes, but you should be cautious about the nature of the relationship.

While hiring contractors can be a viable option, Iceland has strict regulations regarding worker classification. If a contractor's work resembles that of an employee, you may face legal risks. Here are some key points to consider:

• Ensure the contractor operates independently and is not integrated into your business.
• Be cautious if you control their work hours, location, or methods.
• Misclassification can lead to penalties and back taxes if the contractor is deemed an employee.

How Long Does Entity Setup Take And What Does It Cost?

Typical entity setup timeline: It often takes 4–8 weeks to establish an entity in Iceland, depending on the type of business and required registrations.

Ongoing cost categories (entity route):

• Accounting, bookkeeping, and statutory filings: Estimated 50,000–150,000 ISK per month ($380–$1,140)
• Payroll provider: Estimated 10,000–30,000 ISK per employee per month ($76–$228)
• Employer registrations and recurring compliance: Varies by complexity
• Corporate tax filings and annual reporting: Estimated 100,000–300,000 ISK per year ($760–$2,280)

EOR cost components (no-entity route):

• A per-employee EOR service fee (from $399 p/month with Playroll)
• Pass-through statutory costs (e.g., employer social security contributions, typically around 11.5% of gross salary)
• Any optional benefits you choose to provide beyond statutory minimums

How an Employer of Record Can Help You Hire in Iceland

Hiring in Iceland can be complex, but it doesn’t have to require setting up a local entity or taking on long-term overhead. With an Employer of Record like Playroll, you get a simple, predictable way to hire compliantly while keeping costs transparent and under control. We help you:

• Hire employees in Iceland quickly without establishing a local entity, eliminating incorporation costs, ongoing administration, and exit complexity.
• Stay fully compliant with local payroll, tax, and employment regulations with Playroll’s managed payroll services.
• Control your total employment costs, with a clear monthly EOR service fee (from $399 per employee).
• Focus on growing your business, while we manage contracts, payroll, compliance, and labor law obligations end to end.
• Scale up or exit the market easily, without the financial or legal burden of closing a local entity.