Running Payroll in Azerbaijan: Employment Taxes & Setup

In Azerbaijan, payroll processing centers on four main obligations: personal income tax withholding, mandatory social insurance and unemployment contributions, compulsory medical insurance, and regular payroll reporting to the State Tax Service and the State Social Protection Fund. You need to track different rules for residents and non-residents, as well as special tax regimes for employees in the non-oil private sector and those working in oil and gas or public sectors. Thresholds, contribution caps, and incentives can vary by income level, sector, and whether your business operates in Baku or the regions.

Non-compliance can trigger financial penalties, late-payment interest, blocked bank accounts, and detailed audits that disrupt your operations and damage employee trust if salaries or benefits are delayed. This guide walks you through how to calculate withholdings, apply the correct rates, meet filing and payment deadlines, and set up compliant payroll whether you have a local entity or use an Employer of Record. With clear processes and the right data, your team can run payroll in Azerbaijan confidently and avoid avoidable disputes with authorities or staff.

Fiscal Year in Azerbaijan

1 January - 31 December is the 12-month accounting period that businesses in Azerbaijan use for financial and tax reporting purposes.

Payroll Cycle in Azerbaijan

The payroll cycle in Azerbaijan is usually bi-monthly, with employees being paid intervals between payouts cannot exceed 16 days.

Minimum Wage in Azerbaijan

As of January 1 2026, Azerbaijan's minimum wage is AZN 400 per month. The minimum wage applies uniformly to all workers regardless of age or experience, as Azerbaijan does not differentiate rates based on these criteria. The government reviews minimum wage levels annually, considering factors such as inflation, economic performance, and social needs. This update aims to support low-income workers and maintain social stability within the country.

Bonus Payments in Azerbaijan

A 13th salary is not a requirement in Azerbaijan. Employers can pay it as a benefit or bonus for their employees.

Payroll in Azerbaijan is built around personal income tax, mandatory social insurance and unemployment contributions, and compulsory medical insurance, each with its own rates, caps, and reporting rules. You must calculate these on monthly gross earnings, apply sector-specific incentives where relevant, and remit them to the State Tax Service and the State Social Protection Fund on time to avoid penalties.

Personal Income Tax (PIT)

Personal income tax in Azerbaijan is withheld by the employer from the employee’s gross salary and paid to the State Tax Service. For most non-oil private sector employees, monthly income up to AZN 8,000 is taxed at 0% and income above AZN 8,000 at 14%, while employees in the oil and gas and public sectors are generally taxed at 14% up to AZN 2,500 and 25% above that threshold. PIT is calculated and withheld each payroll cycle and must be reported and paid monthly, with under-withholding leading to back taxes, fines, and interest.

You are responsible for correctly classifying employees under the appropriate regime and applying the right brackets to all taxable earnings, including bonuses and allowances that do not qualify for exemptions. The State Tax Service can audit your payroll records and, if it finds systematic errors, may impose additional penalties and restrict certain tax benefits for your company.

State Social Insurance And Unemployment Contributions

Mandatory state social insurance contributions finance pensions and social benefits and are shared between employer and employee, with the employer bearing the larger share. In the non-oil private sector, employer contributions are typically 22% on the first AZN 200 of monthly salary and 15% on the portion above AZN 200, while employees contribute 3% on the first AZN 200 and 10% on the excess; in the oil and gas and public sectors, a flat 22% employer and 3% employee rate usually applies on the full salary. These contributions are calculated monthly on gross earnings, subject to statutory caps, and reported to the State Social Protection Fund through the tax authorities.

Late or incorrect social insurance payments can result in surcharges, denial of certain deductions, and issues for employees when claiming pensions or benefits. Authorities increasingly cross-check social insurance data with income tax filings, so inconsistencies can trigger targeted audits and requests for detailed payroll reconciliations.

Compulsory Medical Insurance Contributions

Compulsory medical insurance is administered by the State Agency on Mandatory Health Insurance and is funded through payroll-based contributions. Employers in most sectors contribute 2% on the first AZN 8,000 of an employee’s monthly salary and 0.5% on the portion above AZN 8,000, while employees contribute 2% on the first AZN 8,000 and 1% on the excess. These contributions are withheld and paid monthly together with other payroll taxes via the State Tax Service’s electronic system.

Failure to pay compulsory medical insurance on time can lead to penalties and may affect employees’ access to fully funded public healthcare services. Because the rates are relatively low compared with social insurance, some employers overlook them, but the authorities treat non-payment seriously and can apply fines and restrict access to certain government services until arrears are cleared.

Most employees in Azerbaijan are paid by bank transfer in Azerbaijani manat (AZN), and salary payments in cash are increasingly restricted and closely monitored. Employers typically run payroll monthly, with many companies paying salaries between the 1st and 10th of the following month, and employment contracts should clearly state the pay frequency and payday. If you do not have a local entity, you will usually need an Employer of Record or a compliant contractor structure, as paying employees directly from abroad without registration can breach labor and tax rules.

Payslips are not always physically issued, but you should provide written or electronic statements showing at least gross salary, taxable base, personal income tax, social insurance, medical insurance, other deductions, and net pay. You must also show the payroll period, employee identification, and employer details so that employees can reconcile their pay with their contracts and the reports held by the State Tax Service and social insurance authorities. Using a local payroll provider or Employer of Record can help ensure that all mandatory fields and language requirements are met.

• Payment Method: Use bank transfers in AZN to employees’ local accounts, as this is the standard and most compliant method.
• Pay Frequency: Set a monthly pay cycle and specify the exact payday in employment contracts and internal policies.
• Entity Requirement: Register a local company or work with an Employer of Record if you want to hire employees rather than independent contractors.
• Payslip Content: Include gross pay, taxable income, each statutory deduction line, net pay, and the payroll period on every payslip.
• Exchange Rate Management: If you agree salaries in foreign currency, document the AZN conversion method and date used for payroll calculations.
• Bank Compliance: Ensure your corporate bank account is configured for tax and contribution payments with correct payment references.
• Record Keeping: Store payroll records, payslips, and bank confirmations for at least the statutory retention period in case of audits.

Getting payroll set up correctly in Azerbaijan is essential because tax registration, social insurance accounts, and employment contracts all feed into your monthly filings. If you operate through a local entity, you will manage registrations and filings directly, while a no-entity approach usually means partnering with an Employer of Record that becomes the legal employer and runs compliant payroll on your behalf.

With your own entity, you control payroll policies and systems but also carry full responsibility for calculations, submissions, and audits. With an Employer of Record, you focus on funding payroll and managing performance while the provider handles registrations, payslips, and statutory payments under Azerbaijani law.

• Incorporation: Register a legal entity with the Ministry of Economy and obtain a Taxpayer Identification Number from the State Tax Service.
• Social Insurance Registration: Open employer accounts with the State Social Protection Fund and the compulsory medical insurance system.
• Bank Account: Set up a local AZN corporate bank account capable of making salary and tax payments with correct references.
• HR Documentation: Prepare compliant employment contracts in Azerbaijani, including salary, benefits, working hours, and pay frequency.
• Payroll Policies: Define internal rules for overtime, bonuses, allowances, and expense reimbursements and how they are treated for tax.
• Payroll Software: Implement a payroll system or provider that supports Azerbaijani tax brackets, contribution caps, and electronic reporting.
• Data Collection: Gather employee IDs, addresses, bank details, tax residency status, and any applicable incentives or exemptions.
• Employer Of Record Option: If you do not want a local entity, select an Employer of Record to hire staff and run payroll compliantly in Azerbaijan.
• Compliance Calendar: Build a monthly calendar for salary processing, tax filings, and payment cut-offs aligned with statutory due dates.
• Audit Trail: Establish a process to archive contracts, payslips, declarations, and payment proofs for future inspections.

Example Of Salary Tax Calculation

Imagine a non-oil private sector employee in Baku with a monthly gross salary of AZN 3,000 in 2026. You would first calculate employee social insurance and medical insurance contributions, then determine the taxable income and apply the relevant personal income tax rate, and finally compute employer contributions on top of the gross salary. This structured approach ensures that both net pay and employer cost are transparent and traceable.

While exact figures depend on current caps and any applicable incentives, the steps remain consistent: determine the contribution base, apply employee and employer rates, and reconcile totals with the amounts reported to the State Tax Service and the State Social Protection Fund. Documenting each step in your payroll system helps you explain payslips to employees and respond quickly to any queries from authorities.

• Step 1: Determine Gross Pay: Confirm the monthly gross salary, including fixed allowances that are subject to tax and contributions.
• Step 2: Calculate Employee Contributions: Apply the employee social insurance and medical insurance rates to the relevant salary bands.
• Step 3: Compute Taxable Income: Subtract employee social and medical contributions and apply the correct personal income tax brackets.
• Step 4: Calculate Employer Contributions: Apply employer social insurance and medical insurance rates to the salary base to find the employer cost.
• Step 5: Derive Net Pay And Total Cost: Subtract all employee deductions from gross salary to get net pay and add employer contributions to see the full employer cost.

Submitting Employee Tax In Azerbaijan

In Azerbaijan, payroll taxes and contributions are typically filed electronically through the State Tax Service’s e-tax portal, with payments made via bank transfer from your corporate account. To submit correctly, you need your company Taxpayer Identification Number, social insurance registration details, the payroll period, and a breakdown of PIT, social insurance, and medical insurance amounts. Many employers use integrated payroll software or a local provider to generate the required electronic declarations and payment orders.

• Electronic Portal Filing: Log into the State Tax Service e-tax portal to submit monthly payroll declarations for PIT and contributions.
• Bank Transfer Payments: Initiate AZN payments from your corporate bank account using the correct budget classification codes and references.
• Integrated Payroll Software: Use software that can generate XML or portal-ready files and reconcile declared amounts with payments.
• Third-Party Provider: Engage a local payroll bureau or Employer of Record to handle filings and payments under their registrations.
• Supporting Data: Keep employee registers, calculation sheets, and signed contracts available to support the figures in your submissions.

Payroll Tax Due Dates In Azerbaijan

Understanding the tax obligations for both employers and employees is crucial when operating in Azerbaijan's business landscape. This section explains how taxes and statutory fees affect payroll and individual earnings in Azerbaijan.

Employer Tax Contributions

Employer payroll contributions are generally estimated at an additional 24% – 28% on top of the employee salary in Azerbaijan. The exact percentage depends on the sector, salary level, and how much of the salary falls within the lower or higher contribution bands for social insurance and medical insurance.

Employee Payroll Tax Contributions

In Azerbaijan, the typical estimation for employee payroll contributions cost is around 5%.

Individual Income Tax Contributions

Individual income tax in Azerbaijan is withheld at source by employers using progressive or preferential rates depending on the employee’s sector and income level. Residents are taxed on their worldwide income, while non-residents are generally taxed only on Azerbaijan-sourced income.

Pension in Azerbaijan

Pension contributions in Azerbaijan are primarily funded through mandatory state social insurance payments shared between employers and employees and administered by the State Social Protection Fund. Employees accrue pension rights based on their contribution history and insured earnings, and some employers offer additional voluntary pension or savings plans to enhance retirement income.