Iceland Payroll Information – Deel Global Payroll

Updated on: 2025/08/04 14:03 (UTC)

Overview

Iceland, which officially is known as the Republic of Iceland, is an island nation located in western Europe and is bordered by the Arctic Ocean to the north and the Atlantic Ocean to the south. Iceland is a representative constitutional republic with 72 municipalities. Iceland’s name in Icelandic, which is the country’s official language, is Ísland.

Iceland’s currency is the Icelandic króna.

Employers in Iceland are responsible for withholding income taxes and must pay social taxes. Employers also must comply with compensation and benefit requirements.

Foreign workers in Iceland are required to pay taxes in the same manner as Icelandic citizens and their employers must uphold labor laws as they would for Icelandic citizens. Nonresidents of Iceland are only taxed on their Icelandic-sourced income. Iceland is a member of the European Economic Area (EEA).

Icelandic residents working in the United States are covered by U.S. tax law with possible treaty and work status exclusions applying. Work within the U.S. states and territories is covered by various labor laws.

CURRENCY DETAILS

The currency of Iceland is the Icelandic króna (ISK), also known as the Icelandic crown, and also referred to simply as the króna. The internationally recognized three-letter currency code for the Icelandic króna is ISK, which also is one of the currency’s commonly used currency symbols. The plural form of Icelandic króna is Icelandic krónur, also referred to in Iceland simply as krónur.

When an amount of Icelandic krónur is written using the currency symbol ISK, as is commonly done in English, the symbol precedes the numerical value with a space between the numerical value and symbol.

There is a set of currency symbols applicable to crown currencies, which are currencies whose name contains a word that translates to crown, including the words koruna, krona, króna, and krone. When an amount of Icelandic krónur is written using the currency symbol Ikr. or one of its variants (Ikr, IKr., IKr, IKR., and IKR) to distinguish Icelandic krónur from other crown currencies, and when Icelandic documents use the general crown currency symbol kr. or one of its variants (kr, Kr., Kr, KR., and KR) to refer to Icelandic krónur, the symbol precedes or follows the numerical value with a space between the numerical value and symbol.

One hundredth ( ¹ ⁄ ₁₀₀ ) of an Icelandic króna is referred to as an eyrir, with the plural form of aurar, although transactions involving Icelandic currency do not typically include amounts other than whole numbers of Icelandic krónur.

When amounts of Icelandic krónur are written in Icelandic, the comma that in English separates the thousands place from the hundreds place instead is rendered as a dot (.).

TAXES

The national government generally enacts laws relating to income tax and social taxes. Municipal taxes are withheld along with income taxes at the average rate for that year. Individuals are responsible for applying the correct municipal tax rates in their annual returns.

The tax year in Iceland is the calendar year from Jan. 1 to Dec. 31.

Coronavirus (Covid-19) Guidance: Employers economically affected by the coronavirus can apply to the Directorate of Internal Revenue to postpone up to three income tax withholding and social tax deposits due from April 1 to Dec. 1, 2020, to Jan. 15, 2021. An additional grace period beyond Jan. 15 will be granted to businesses suffering a severe revenue loss, with payments split into installments due in June, July and August 2021. To qualify for the Jan. 15, 2021, extension, the employer must have made all tax payments and returns for three years and have a loss of one-third of monthly revenue compared with the same month in 2019. To qualify for the June, July and August 2021 installments, the employer also must have made all tax payments and returns for three years and have a more substantial loss, which legislative comments deemed to be at least half.

Employers that qualified for the June, July, and August 2021 payments may also apply until June 10, 2021, to make those payments in 48 monthly installments, starting July 1, 2022.

Effective Oct. 27, 2020, Iceland does not consider an employer to have a permanent presence in the country for the purposes of corporate tax if:

the employer’s general place of business is abroad;
the employee has set up at a home or residence without the employer’s help;
the employer does not have access to or control over the employee’s home office; and
the employee works entirely remotely online.

Income Taxes

Income taxes in Iceland are administered and payable to the Directorate of Internal Revenue (Ríkisskattstjóri, abbreviated as RSK).

Coverage: All employers generally must withhold income taxes from employees. Employers are considered all those who make wage payments.

Employees: Employees are defined as those who receive remuneration from an employer.

Tax residents—those who have stayed in Iceland for 183 days in any 12 month period—are assessed taxes on their worldwide income. Nonresidents are only taxed on income that is sourced in Iceland.

Rates and Thresholds: Iceland’s income tax rates consist of two components: a national income tax referred to in Iceland simply as the income tax (tekjuskattur) and a local tax (útsvar), also known as a municipal income tax. Effective since Jan. 1, 2020, each of Iceland’s income tax brackets also is known as a step (þrep).

Effective for 2021, Iceland’s personal income tax rates and minimum and maximum amounts of monthly and annual income for each tax bracket are as follows:

Range of Monthly Income (Icelandic krónur)	Range of Annual Income (Icelandic krónur)	National Income Tax Rate	Municipal Income Tax Rate	Total Income Tax Rate	Name of Tax Bracket
Up to ISK 349,018	Up to ISK 4,188,211	17%	14.45%	31.45%	Step 1
More than ISK 349,018 and up to ISK 979,847	More than ISK 4,188,211 and up to ISK 11,758,159	23.5%	14.45%	37.95%	Step 2
More than ISK 979,847	More than ISK 11,758,159	31.8%	14.45%	46.25%	Step 3

Effective for 2020, Iceland’s personal income tax rates and minimum and maximum amounts of monthly and annual income for each tax bracket were as follows:

Range of Monthly Income (Icelandic krónur)	Range of Annual Income (Icelandic krónur)	National Income Tax Rate	Municipal Income Tax Rate	Total Income Tax Rate	Name of Tax Bracket
Up to ISK 336,916	Up to ISK 4,042,992	20.6%	14.44%	35.04%	Step 1
More than ISK 336,916 and up to ISK 945,873	More than ISK 4,042,992 and up to ISK 11,350,476	22.75%	14.44%	37.19%	Step 2
More than ISK 945,873	More than ISK 11,350,476	31.8%	14.44%	46.24%	Step 3

Employees are able to lower their income subject to income tax with a pretax personal deduction, also known as a personal discount (persónuafsláttur). Iceland sometimes refers to this tax deduction as a tax credit, even though it does not function as an elimination of tax liability of an applicable amount and instead functions as a reduction of taxable income.

Effective for 2021, an employee’s taxable income is subject to a pretax personal deduction of ISK 50,792 per month or ISK 609,509 per year. Effective for 2020, an employee’s taxable income was subject to a pretax personal deduction of ISK 54,628 per month or ISK 655,538 per year.

Effective for 2021, the municipal tax withholding rate on employment income is 14.45%, and municipalities generally are able to assess income tax rates from 12.44% to 14.52%, with an employee’s final tax due to a municipality for the year subject to reconciliation via an individual tax return. Effective for 2020, the municipal tax withholding rate on employment income was 14.44%.

The municipalities’ tax rates in effect for 2020 and 2021 are available from the government of Iceland.

Registration: Employers must register with RSK at least eight days before initiating business activities.

Taxable Amounts: Employers generally should include all wages and benefits and deduct pension contributions, approved insurance contributions and approved travel costs in their calculation of wages. Items to be calculated as wages include all types of wages or commissions, paid or unpaid, including severance pay, administrative salaries, wages, food money, leave payments and holiday payments. Items to be calculated as benefits include car benefits, clothing benefits and other benefits.

Withholding Methods: Employers must withhold income taxes from all paychecks. Employers should apply the pretax personal deduction to withholding on an employee’s wages if the employee requests to have the pretax personal deduction applied this way. Deduction rules and tax brackets are available on the RSK website.

Returns and Remittance: Employers must remit the tax withheld from employment income during a month by the 15th day of the following month, and must file a return detailing the withheld tax for the month by the 15th day of the following month. Payments may be made, and returns may be submitted, through the government’s skattur.is portal.

Employee Share Plans: Approved share plans are taxed in the same manner as other retirement income. Taxable amounts are calculated as the difference between the market price of the options and the purchase price at exercise. The option values are taxed as capital gains instead of income tax if:

the same options are made available to all employees;
12 months have elapsed between the time between when the options are optioned and exercised;
the price of the options is equal to or greater than the weighted average of the company’s share transactions for ten days before the issue date;
employees hold ownership of the shares for at least two years after the options are exercised and
options contracts are not transferable.

Recordkeeping: Tax records generally must be kept for a minimum of six years. This time frame may be extended by an additional six years if the authorities begin an investigation of an employer’s tax practices during the original six year period.

Penalties: Employers who make late payments are subject to a fine of 1% of taxes outstanding per day of delinquency up to a maximum of 10%. Employers whose payments are not paid by the first day of the month following the month in which the payments were due also are fined. Employers who intentionally file incorrect returns, or do so with gross negligence are liable to a fine of up to 10 times taxes that should have been paid.

Social Taxes

Employers must pay social security taxes, also known as payroll taxes. Employees are not required to contribute to social security. Revenue from social security contributions is divided among an Unemployment Insurance Fund, the Occupational Safety, the Maternity/Paternity Leave Fund, Icelandic Standards, the Icelandic Committee on Trade Procedures and e-Commerce and Health Administration and the Social Security Bureau.

Employers and employees must contribute to employee pension plans.

Eligibility conditions related to age and income level affect whether employees are required to pay fees for the Senior Citizen’s Construction Fund and for broadcasting.

Coverage: All employers, including individuals, companies, funds and agencies, governments, foreign contractors and other entities that pay salary or any remuneration for work are required to pay payroll taxes.

All employees generally are covered by the requirement to pay taxes to fund pensions.

Employees also are subject to a fee for the Senior Citizen’s Construction Fund and a broadcasting fee if they are paid at least the year’s threshold amount that causes them to need to pay the fees and if they are 16 to 70 years of age.

Rates and Thresholds: Iceland assesses a variety of social taxes that together are known as the general insurance fee (almennt tryggingagjald), assesses taxes for funding pensions, assesses a fee for the Senior Citizen’s Construction Fund (Framkvæmdasjóð aldraðra), and assesses an annual fee for broadcasting (útvarpsgjald).

General Insurance Fee: The general insurance fee includes a social security tax rate (tryggingagjaldshlutfallið) that funds programs such as old age, disability, and survivors’ social security benefits; a fee for unemployment insurance, which also is known in Iceland as employment insurance (atvinnutryggingagjald); a fee for the wage guarantee fund (ábyrgðasjóð launa); and a market fee (markaðsgjald). In addition to old age, disability, and survivors’ social security benefits, the types of programs funded by the social security tax include, but are not limited to, occupational rehabilitation funds (starfsendurhæfingasjóðir), the Parental Leave Fund (Fæðingarorlofssjóður), and personnel costs of Iceland’s Social Insurance Administration (Tryggingastofnun, abbreviated as TR). Each program funded by the social security tax is allocated a component percentage of the social security tax rate, with these component percentages subject to annual variation.

Effective for 2021, employers generally are assessed a total rate of 6.1% of payroll for the general insurance fee. The total rate of 6.1% for 2021 consists of the following component tax rates:

Social security tax: 4.65%;
Unemployment insurance: 1.35%;
Wage guarantee fund: 0.05%; and
Market fee: 0.05%.

Effective for 2020, employers generally were assessed a total rate of 6.35% of payroll for the general insurance fee. The total rate of 6.35% for 2020 consisted of the following component tax rates:

Social security tax: 4.9%;
Unemployment insurance: 1.35%;
Wage guarantee fund: 0.05%; and
Market fee: 0.05%.

An additional social security tax rate for employers of 0.65% is in effect for employment income paid to employees who are sailors (sjómenn) working as part of a fishing vessel crew, and this is part of the general insurance fee assessed on employment income paid to these employees.

Effective for 2021, the general insurance fee assessed on employment income paid to sailors working as part of a fishing vessel crew is 6.75% instead of the standard general insurance fee of 6.1%. Effective for 2020, the general insurance fee assessed on employment income paid to sailors working as part of a fishing vessel crew was 7% instead of the standard general insurance fee of 6.35%.

Instead of being assessed either the standard general insurance fee or the higher fee for employment income paid to sailors, employers are assessed a reduced fee for employment income paid to employees who are residents of a European Economic Area country other than Iceland, who are hired to work in Iceland for no more than one year, and for whom there is an A1 certificate (A1 vottorð) provided to the Iceland Directorate of Internal Revenue specifying that employment income paid to that employee is primarily subject to the social insurance provisions of an EEA country other than Iceland. When the Directorate of Internal Revenue determines that an employer qualifies for a reduced general insurance fee under these conditions with respect to employment income paid to an employee with an A1 certificate, the general insurance fee assessed on the employer with respect to employment income paid to that employee is 0.425%.

Pension Funding: Employers and employees also are required to pay contributions for employee pension funds (lífeyrissjóði). Exact rates and distributions generally are established through collective agreements. The total contribution rates for employers and employees must be at least the standard pension plan contribution rates.

Effective July 1, 2018, the standard pension plan contribution rate for employers is 11.5% of payroll and the standard pension plan contribution rate for employees is 4% of salary. Effective from July 1, 2017, to June 30, 2018, the standard pension plan contribution rate for employers was 10% of payroll and the standard pension plan contribution rate for employees was 4% of salary.

In addition to the standard pension plan contributions, employees may choose to contribute to a private pension fund (séreignarsjóð). When an employee chooses to contribute to a private pension fund, the employee must contribute 4% of the employee’s employment income into the fund and the employer must provide a supplemental contribution to the fund of 2% of the employment income paid to the employee.

Fees for Senior Citizen’s Construction Fund and Broadcasting: Employees who are 16 to 70 years of age and who are paid at least a threshold amount during a year are required to pay an annual fee for the Senior Citizen’s Construction Fund and an annual fee for broadcasting.

Effective for 2021, employees who are paid more than ISK 1,870,828 during the year and who were 16 to 70 years of age were required to pay a Senior Citizen’s Construction Fund annual fee of ISK 12,034 and an annual broadcasting fee of ISK 18,300. Effective for 2020, employees who were paid more than ISK 1,833,671 during the year and who were 16 to 70 years of age were required to pay a Senior Citizen’s Construction Fund annual fee of ISK 11,740 and an annual broadcasting fee of ISK 17,900.

Registration: Employers must register their employees and themselves with RSK as described under income taxes.

Returns and Remittance: As is the case with income taxes, social tax remittances and reports regarding the remitted taxes may be submitted through the government’s skattur.is portal. Employer and employee portions of social taxes assessed on employment income paid during a month are due by the 15th day of the following month. Reports of social taxes assessed on employment income paid during a month are also due by the 15th day of the following month.

Recordkeeping: Tax records must generally be kept for a minimum of six years. This time frame may be extended by an additional six years if the authorities begin an investigation of an employer’s tax practices during the original six year period.

Penalties: Employers who make late payments are subject to a fine of 1% of taxes outstanding per day of delinquency up to a maximum of 10%.

Employers who intentionally file incorrect returns, or do so with gross negligence are liable to a fine of up to 10 times taxes that should have been paid.

Other Taxes

Iceland’s national government does not assess any taxes on employment income other than those covered in the Income Taxes and Social Taxes sections of this primer.

State/Jurisdiction Taxes

Sixty-nine of Iceland’s 72 municipalities assess a municipal income tax on employment income earned by residents of those municipalities. If an individual is resident in more than one municipality in a given year, each municipal tax is assessed according to the period of residence in that municipality. While tax rates vary across municipalities, subject to a minimum rate of 12.44% and a maximum rate of 14.52%, employers must use the average rate of all municipalities for withholding purposes. An employee’s final tax due to a municipality for the year is subject to reconciliation via an individual tax return. Effective for 2021, the average municipal tax rate is 14.45%, and effective for 2020, the average municipal tax rate was 14.44%. A list of municipal tax rates in effect for 2021 and 2020 is available from the government of Iceland.

COMPENSATION AND BENEFITS

Labor laws in Iceland set some requirements relating to hours of work, holidays, leave and retirement plans. Other compensation and benefit requirements in Iceland are set through collective agreements, as more than 85% of the workforce is unionized, according to the Icelandic government. This includes minimum wages, overtime, wage payments and termination pay. Workers compensation generally is fully financed by social security.

The major labor laws in Iceland are the Holiday Allowance Act, the Act on Mandatory Pension Insurance, and the Activities of Pension Funds.

Coronavirus (Covid-19) Guidance: Employers may apply to the Directorate of Internal Revenue for a wage-replacement program that partially replaces the wages of employees who are temporarily laid off because of the new coronavirus. Eligible employees must have been hired before May 1, 2020. Eligible employers must have had their average monthly income decrease by 75% from April 1, 2020, to the date of layoffs, compared to one of the following periods:

the same period in 2019;
June, July, and August 2019;
Dec. 1, 2019, to Feb. 29, 2020; or
April 1, 2019, to March 31, 2020.

The Directorate of Internal Revenue determines and applies the option that is most favorable to the employer. Employers must also be up-to-date on tax payments and cannot have paid dividends, bought their own shares, or made other payments that do not contribute to the acquisition or maintenance of operating income after March 15, 2020. The deadline for applying for each month is the 20th of the following month.

The amount of the subsidy is 85% of the employee’s wages according to their terms of employment on May 1, 2020, with a maximum of ISK 633,000 per month for wages and of ISK 85,455 per month to cover employer public and private pension contributions.

Minimum Wage

Iceland does not have a national minimum wage. Minimum wages for specific businesses generally are set through collective agreements.

Overtime

Iceland does not set overtime compensation regulations. Overtime pay generally is set as part of collective agreements.

Hours of Work

The average work week over a four-month period may not exceed 48 hours per seven-day period. Employers must provide employees with 11 hours of consecutive rest in each 24-hour period.

Holidays

Iceland makes two different classifications of holidays: major holidays and general holidays. Both are considered mandatory paid holidays. Work on major holidays must be compensated at rates above overtime pay and work on general holidays must be compensated at overtime pay. Overtime pay rates are set by collective agreement.

The following holidays are considered major holidays:

Jan. 1: New Year’s Day
Good Friday
Easter Sunday
First day of Whitsun
June 17: Independence Day
Dec. 24: Christmas Eve
Dec. 31: New Year’s Eve

The following holidays are considered general holidays:

Maundy Thursday
Second day of Easter
First day of summer
Ascension
May 1: International Labor Day
Second day of Whitsun
First Monday of August: Shop and Office Workers’ Holiday
Dec. 26: Second day of Christmas

Leave

Employers generally must provide employees with 24 days of paid leave per year. This leave generally accrues progressively, with employees earning two paid days of leave per month of work based on the preceding vacation year (May 1 to April 30).

Sick leave: Employers must provide employees with two days of paid sick leave for every month worked. Paid sick leave generally increases for more senior employees.

Paid parental leave: Employers must grant employees with a period of paid leave in connection with the birth or adoption of a child that may be used up to the time when the child becomes two years of age. Employees seeking to have paid parental leave must apply with Iceland’s Parental Leave Fund (Fæðingarorlofssjóður) to receive parental leave payments. An employee must be continuously employed for at least six months to be eligible for paid parental leave.

Effective since Jan. 1, 2020, each of a child’s parents is individually entitled to four months of paid parental leave and the parents are collectively entitled to an additional amount of two months of paid parental leave that can be entirely used by one of the parents or divided among the parents, with these two periods of four months an additional period of two months totalling 10 months of paid parental leave per childbirth or adoption up until the child becomes two years of age. Effective until Dec. 31, 2019, each of a child’s parents was individually entitled to three months of paid parental leave and the parents were collectively entitled to an additional amount of three months of paid parental leave that could be entirely used by one of the parents or divided among the parents, with these three periods of three months totalling nine months of paid parental leave per childbirth or adoption up until the child becomes two years of age. Employers must grant new parents with four months of leave paid for by social security. An additional four months may be used between both parents.

The aforementioned months of the paid parental leave entitlement do need to be continuously taken and may be subdivided into periods of leave separated by work, but each period of paid parental leave must be for at least two weeks. A mother of a newborn child must take two weeks of paid parental leave for the first two weeks immediately following the childbirth.

Unpaid parental leave: In addition to the periods of paid parental leave for which they are entitled, each parent is eligible to take up to 16 weeks of unpaid leave to care for a child up until the child reaches eight years of age. Employees must notify their employer at least six weeks before their intended start date of a period of unpaid parental leave that they intend to take unpaid parental leave for that period.

Wage Payment

Collective agreements generally mandate employees be paid on the first day of every month after the month when wages were earned. Wages generally are directly deposited into employees’ bank accounts but may be paid in cash or checks.

Bonuses and Special Benefits

Iceland does not require employers to provide bonus payments to employees but it is customary for employees to receive Christmas and holiday bonuses. The Christmas bonus generally is paid in December and the holiday bonus generally is paid between May 1 and Aug. 15.

Retirement Plans: In addition to the contributions to social security, which provides all employees with a pension, employers must purchase occupational pensions for their employees.

Coverage: All employers must purchase pension plans for their employees. The pension plans must be approved by the Ministry of Finance. Plan details generally are agreed upon in collective agreements.

Rate: Employer and employee contribution rates for pension plans are identified in the Social Taxes section.

Taxable Wages: Amounts subject to the provision include all types of wages or remuneration for work subject to income taxes.

Registration: Enrollment and registration procedures vary between pension funds.

Returns and Remittance: Employers must make remittances and payments by the 10th day of every month.

Penalties: Violations are subject to fines and imprisonment for up to a year, as prescribed by the Ministry of Finance.

Termination Pay

Icelandic law does not require any notice period or severance pay prior to termination. Generally, termination pay is established as part of collective agreements.

Workers’ Compensation

Workers’ compensation is fully financed by employers as part of social security.

Recordkeeping

Effective Jan. 1, 2018, some employers in Iceland are required to obtain certification of their payroll systems to demonstrate that women and men receive equal pay for equal work.

The changes were scheduled to take place in four phases.

Employers with at least 250 employees must have completed the certification process by Dec. 31, 2018.
Employers with at least 150 but fewer than 250 employees must have completed the certification process by Dec. 31, 2019.
Employers with at least 90 but fewer than 150 employees must have completed the certification process by Dec. 31, 2020.
Employers with at least 25 but fewer than 90 employees must complete the certification process prior to Dec. 31, 2021.

Employers are required to renew equal pay certification every three years. The certification is based on the equal pay standard, which provides requirements and guidance for employers to establish a payroll management system that meets standards for job classification and salary analysis. The full text of the equal pay standard is only available from the Icelandic Standards Council at a cost of ISK 10,730.

To receive certification, employers are required to demonstrate to accredited certification bodies that all of the requirements of the standard have been met. Certification documentation is to be kept on file with Iceland’s Center for Gender Equality.

Employers may be subject to per diem fines of up to ISK 50,000 per day for failure to sufficiently report on compensation.

FOREIGN WORKERS

Foreign workers are entitled to the same rights as Icelandic citizens and are generally covered by the same tax and workplace laws.

Visas: Foreign workers wishing to stay in Iceland for longer than three months generally must apply for a residency permit for employment and a work permit. Foreign workers must apply for residence permits and work permits simultaneously before arriving in Iceland. Residence permits are divided between three categories: residence permits based on temporary shortage of laborers, residence permits for qualified professionals, and residence permits for athletes. Foreign workers must submit proof of approved health insurance coverage during their stay in Iceland, along with their application to the Icelandic Directorate of Immigration.

Effective Oct. 27, 2020, non-European Economic Area nationals who do not normally require a visa to enter Iceland and have permanent employment with a foreign employer may apply for a visa to work remotely in Iceland for up to six months. In addition to other requirements for foreign workers, the individual must demonstrate that they earn the equivalent of ISK 1,000,000 per month.

Individuals from Denmark, Finland, Norway, Sweden and the European Economic Area do not need limited permits to work in Iceland. Foreign workers from other countries must have a work permit to work in Iceland. To apply for a work permit, employers must apply for a limited work permit.

Taxes: Income taxes and social taxes generally apply to foreign workers as they would to Icelandic workers. Nonresidents are only assessed income tax on their Icelandic-sourced income.

Effective for 2021, unchanged from 2020, employers of foreign workers who are citizens of member countries of the European Economic Area and who work in Iceland for up to one year pay a reduced social security rate of 0.425%.

Wages/Payments: Wages generally must be paid in Icelandic krónur, but there are no restrictions on salaries paid outside of Iceland.

WORKING IN THE UNITED STATES

Foreign workers from Iceland must meet general visa requirements and be certified to be employed in the U.S. General visa requirements for the U.S. are included in the separate

Iceland is eligible for the visa waiver program for business visitors, which allows Icelandic citizens to travel to the U.S. for 90 days or less for business-specific purposes without having to obtain a B-1 business visa. Stays longer than 90 days will require a visa. Individuals may return to the U.S. under the visa waiver program if a “reasonable length of time” has passed. The determination for a reasonable length of time is at the discretion of the Department of Homeland Security.

Icelandic workers are eligible to work in the U.S. under H-2B visas, which cover labor or services of a temporary or seasonal nature in occupations other than agriculture or registered nursing. The number of H-2B visas issued each year is limited by U.S. law.

U.S. employers also must check the names of all new-hires and employees against the Specially Designated Nationals and Blocked Persons List, administered by the Treasury Department’s Office of Foreign Assets Control (OFAC). Because OFAC prohibits financial transactions with individuals on the list, employers cannot employ them and may face fines for failing to comply.

For tax purposes, Icelandic citizens are subject to U.S. employment-based taxation on income earned in the U.S. unless they can claim an exemption under certain tax treaty provisions or they work under specific visa types that exempt earnings from taxes. Iceland has a tax treaty and a totalization agreement with the U.S.

State and local taxation of Icelandic workers also can apply, although some states within the U.S. recognize international tax treaties that can eliminate that income tax liability for foreign workers.

The U.S. labor laws apply to all workers employed and providing services in the country.

Work eligibility as an employee is contingent upon Department of Homeland Security and Labor Department approval and the employee receiving a U.S. Social Security number from the Social Security Administration.

Tax Residency: In general, employees working in the U.S. on a temporary basis are considered nonresidents for tax purposes unless they qualify for resident status. Employees can be granted permanent resident status through the so-called green card test or if they meet the substantial presence test under the U.S. tax code. More information on these requirements is in the

Permanent residents are subject to U.S. tax requirements the same as U.S. citizens and are taxed under the U.S. system on their worldwide earnings.

Income Taxes: Generally, nonresidents in the U.S. who are from Iceland and are working in the U.S. are subject to U.S. taxes based on their U.S.-sourced income. Income is taxed differently based on whether it is categorized as wage income or nonwage income, which includes interest and dividends.

A Form W-4, Employee’s Withholding Certificate, must be filed by each employee with their employer. All nonresidents in the U.S. who are from Iceland and are working in the U.S. must claim “single” in Step 1c, regardless of marital status; write “Nonresident Alien” or “NRA” in the space under Step 4c of the form; and may not claim “exempt” in the space under Step 4c.

Nonresident alien employees may adjust withholding using Step 2b or 2c of the Form W-4; certain employees also may be able to use Steps 3, 4a, or 4b. More information about Form W-4 requirements for nonresident alien employees is available in the

Although the versions of Form W-4 issued in 2020 or later significantly differ from the versions issued in 2019 or earlier, nonresident employees that filed a valid version of Form W-4 from 2019 or earlier with their employer do not need to file another Form W-4 with the employer unless they need to implement a change for their withholding. On Forms W-4 issued in 2019 or earlier, nonresident alien employees were required to check the “single” box on line 3, regardless of marital status; write “Nonresident Alien” or “NRA” above the dotted line on line 6; and were not permitted to claim “exempt” on line 7 of the form.

An additional amount is added to a nonresident alien employee’s wages for calculating federal income tax withholding, with the amount based on pay period frequency and the date of the employee’s most recently filed Form W-4. The table of additional amounts applicable to Forms W-4 from 2020 or later and the table applicable to Forms W-4 issued before 2020 are available in the

Nonwage income and self-employed foreign workers can be subject to income tax withholding at a flat rate of 30%.

Additionally, foreign workers may be taxed differently based on the specific type of visa they hold.

Tax treaties: Iceland and the U.S. have a tax treaty with provisions addressing host country taxation of the nonresident workers. A summary of those benefits is listed in the Tax Treaty Exemption Comparison Chart. To claim the treaty benefit, the nonresident must file Form 8233, Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual, with the employer.

Students and trainees in particular must include a statement with Form 8233 to claim a tax treaty exemption from withholding of tax on compensation for dependent personal services. This statement affirms that the student or trainee is temporarily in the U.S. for purposes of studying or has accepted an invitation by the U.S. government (or by a political subdivision or local authority) for the purpose of studying or engaging in research for a period not expected to exceed five years by a university or other recognized educational institution in the U.S. It also must affirm that the individual will receive compensation for services performed in the U.S. The student exemption is not to exceed $8,000 a year for Icelandic residents.

Examples of the statements necessary to claim a treaty exemption from U.S. taxes are included in Internal Revenue Service Publication 519, U.S. Tax Guide for Aliens.

Social Taxes: Most foreign workers are subject to paying into the U.S. Social Security system. Foreign nationals who are exempt from paying income tax and who do not have the eligibility to receive a social security number may not be required to pay social taxes. Foreign workers contributing to Social Security for a certain time period may be eligible to receive benefits.

Totalization Agreements: Social Security totalization agreements can allow foreign workers and U.S. nationals working abroad to avoid paying into two social security systems while being subjected to losing benefits for their home country system. Under totalization agreements, generally, foreign workers will only pay into one of the social security systems, either the home or the foreign system, but not both. Foreign nationals, utilizing a totalization agreement, also can count years of contributions paid to different social security systems to all of the systems they have contributed to in order to be eligible for benefits in one country.

The bilateral totalization agreement between Iceland and the United States took effect March 1, 2019. A summary of the agreement’s provisions is included in

Wage Payment: Under certain visas for certain types of employment, employers are required to pay foreign workers the higher of either the prevailing wage or the actual wage that is paid to U.S. workers that have similar skills and qualifications.

There are no particular requirements that employees be paid in U.S. dollars.

TREATY ARRANGEMENTS

Iceland has entered into more than 40 income tax treaties, including an income tax treaty with the United States. Iceland also has a totalization agreement with the United States.

The countries with which Iceland has a bilateral income tax treaty in effect are Albania, Austria, Barbados, Belgium, Canada, China, Croatia, Cyprus, the Czech Republic, Estonia, France, Georgia, Germany, Greece, Hungary, India, Ireland, Italy, Japan, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Mexico, the Netherlands, Poland, Portugal, Romania, Russia, Slovakia, Slovenia, South Korea, Spain, Switzerland, Ukraine, the United Kingdom, the United States, and Vietnam.

A multilateral income tax treaty, the Convention Between the Nordic Countries for the Avoidance of Double Taxation with Respect to Taxes on Income and on Capital, is in effect for Iceland and four other countries: Denmark, Finland, Norway, and Sweden. This multilateral treaty also is in effect for the Faroe Islands, which is an autonomous, self-governing constituent country of the Kingdom of Denmark. The treaty also is known as the Nordic Convention or Nordic Double Taxation Treaty (NDTT).

Iceland also has an income tax treaty in effect with Greenland, which is an autonomous, self-governing constituent country of the Kingdom of Denmark.

Additionally, Iceland has income tax treaties in effect with Guernsey, the Isle of Man, and Jersey, the three of which are crown dependencies of the United Kingdom; and Bermuda, the British Virgin Islands, and the Cayman Islands, the three of which are territories of the United Kingdom.

Iceland has entered into eight totalization agreements for social tax purposes. Other than the U.S., Iceland has agreements with Austria, Canada, Denmark, Finland, Luxembourg, Norway, and Sweden.

RESOURCES

All resources in English unless otherwise noted.

General

Icelandic Government

CIA World Factbook: Iceland

U.S. State Department: U.S. Relations With Iceland

Currency Details

Unicode Consortium: Currency Symbols

International Organization for Standardization: Currency Codes - ISO 4217

United Nations: United Nations Terminology Database: Iceland

Taxes

Directorate of Internal Revenue (Icelandic)

Directorate of Internal Revenue, Payroll Taxes (Icelandic)

Government of Iceland, 2021 Tax Rates and Thresholds (Icelandic)

Law No. 4/1995, On Local Government Revenue Sources (Icelandic)

Regulation 1094/2020, Amending Regulation 1165/2016 on a Permanent Establishment (Icelandic)

Law No. 36/2021, Amending Various Laws to Meet the Economic Impact of the Coronavirus Pandemic (Icelandic)

Compensation and Benefits

Act on Mandatory Pension Insurance and on the Activities of Pension Funds (Icelandic)

Directorate of Labor

Holiday Allowance Act (Icelandic)

The Pension Act (Icelandic)

Law No. 50/2020, on Support from the State Treasury for the Partial Payment of Wage Costs During the Notice Period (Icelandic)

Directorate of Internal Revenue, Wages During the Notice Period (Icelandic)

Foreign Workers

Directorate of Labor

Directorate of Immigration (Icelandic)

Invest in Iceland

Regulation 1048/2020, Amending the Regulation on Foreigners

Working in the United States

U.S. Department of Labor:

Foreign Labor Certification
Hiring Foreign Workers

U.S. Internal Revenue Service:

IRS Notice 1392, Supplemental Form W-4 Instructions for Nonresident Aliens
IRS Publication 15, Circular E, Employer’s Tax Guide
IRS Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities
IRS Publication 519, U.S. Tax Guide for Aliens
IRS Publication 901, U.S. Tax Treaties

U.S. Department of State, Visa Waiver Program

Treaty Arrangements

Directorate of Internal Revenue, Double Taxation Avoidance Treaties (Icelandic)