In Estonia, taxes are handled by the employer generally (even though legally, income tax is paid by the worker and social tax by the employer - the payments are still all made by the employer’s accountants who have to do the reporting and all the math). Meaning it’s up to the employer to pay you extra income in tax-free ways if they want to give you more while paying the same in tax. Employers do this to be more competitive, so obviously the bad ones don’t, but the good ones do. If you can give someone 20% of their monthly net income as an extra benefit with zero tax attached to it, that has a motivational benefit similar to giving them a 20% raise, but costs you just over half as much as the raise would.
The biggest benefit, unfortunately, is not to regular employees, but people who do their own accounting and taxes.
As an example, I am currently self employed thru an LLC (Estonian equivalent, anyway). I purposefully set myself a low-ish salary so I only have to work 50 hours a month to pay it out, and the rest I can use for compensations and future dividends. This isn’t even me trying to avoid tax as much as possible, I legitimately sometimes have trouble working more than 30 hours a month because I’m also a single dad with a pre-kindergarten age baby AND ADHD.
I’ve already paid myself out sports compensation as a tax-free benefit. 100 euros for 3 months of gym membership. Next year I might just go all out and pay for the whole year because that’s significantly cheaper. But that’s irrelevant.
If I have a busier month anytime soon, with significantly more hours billed to clients, I’ll pay myself the personal vehicle usage benefit for visiting clients. This is up to 550 euros a month (50 cent per kilometer, up to 1100 km), tax free. Saves like 500 euros on tax compared to paying the same money out as regular income. Usage has to be documented though.
In Estonia, taxes are handled by the employer generally (even though legally, income tax is paid by the worker and social tax by the employer - the payments are still all made by the employer’s accountants who have to do the reporting and all the math). Meaning it’s up to the employer to pay you extra income in tax-free ways if they want to give you more while paying the same in tax. Employers do this to be more competitive, so obviously the bad ones don’t, but the good ones do. If you can give someone 20% of their monthly net income as an extra benefit with zero tax attached to it, that has a motivational benefit similar to giving them a 20% raise, but costs you just over half as much as the raise would.
The biggest benefit, unfortunately, is not to regular employees, but people who do their own accounting and taxes.
As an example, I am currently self employed thru an LLC (Estonian equivalent, anyway). I purposefully set myself a low-ish salary so I only have to work 50 hours a month to pay it out, and the rest I can use for compensations and future dividends. This isn’t even me trying to avoid tax as much as possible, I legitimately sometimes have trouble working more than 30 hours a month because I’m also a single dad with a pre-kindergarten age baby AND ADHD.
I’ve already paid myself out sports compensation as a tax-free benefit. 100 euros for 3 months of gym membership. Next year I might just go all out and pay for the whole year because that’s significantly cheaper. But that’s irrelevant.
If I have a busier month anytime soon, with significantly more hours billed to clients, I’ll pay myself the personal vehicle usage benefit for visiting clients. This is up to 550 euros a month (50 cent per kilometer, up to 1100 km), tax free. Saves like 500 euros on tax compared to paying the same money out as regular income. Usage has to be documented though.