Non-taxable payments to employees in Croatia: what an employer can pay free of tax and contributions
Part of what an employee receives can be paid free of tax and contributions, up to prescribed amounts. An employer who uses this deliberately gives the employee noticeably more for the same cost.
A raise of EUR 100 net costs the employer about EUR 190, because contributions and tax are paid on the additional salary. A non-taxable payment of EUR 100 costs EUR 100. That difference is the reason non-taxable payments are worth thinking about in advance, not in December.
The amounts in this article are given under the rules in force at the time of writing. They are changed by ordinance, sometimes during the year, so check them before paying.
What non-taxable payments are
They are payments an employer can make to an employee on which, up to a prescribed amount, neither income tax nor contributions are paid. For the employer they are a business expense, and the employee receives the full amount.
Three things apply to all of them:
- The upper amount is prescribed. Anything above it is treated as salary and taxed as salary.
- They are not an obligation of the employer, unless required by a collective agreement, the employment rules or the employment contract.
- They cannot replace salary. Reducing the contracted gross salary while introducing non-taxable payments of the same amount carries tax risk.
The most commonly used payments
| Payment | Non-taxable up to |
|---|---|
| Occasional bonuses (Christmas, holiday and similar) | EUR 700 a year |
| Performance bonuses | EUR 1,120 a year |
| Meals, flat rate | EUR 100 a month |
| Gift to a child under 15 | EUR 140 a year |
| Gift in kind | EUR 133 a year |
| Supplementary and additional health insurance | EUR 500 a year |
| Sport, recreation, hospitality and tourism | EUR 400 a year |
| Working from home | EUR 4 a day, at most EUR 70 a month |
| Support for a newborn | EUR 1,400 |
| Severance on retirement | EUR 1,500 |
Alongside these there are payments recognised on the basis of actual cost and documentation:
- Travel to and from work, at the level of actual expenses based on public transport prices.
- Meals and accommodation against invoices, instead of the flat rate, when the employer pays the provider directly.
- Kindergarten, on the basis of authentic documentation from the institution.
- Business travel: per diems, accommodation costs and a per-kilometre allowance for using a private car for business.
- Jubilee awards, in amounts that rise with years of service with the employer.
What it means in money
Take an employee to whom the employer pays the three most common payments in full during the year:
| EUR a year | |
|---|---|
| Meals, EUR 100 × 12 | 1,200 |
| Occasional bonuses | 700 |
| Performance bonus | 1,120 |
| Total | 3,020 |
The employee received EUR 3,020, and it cost the employer EUR 3,020.
Had the same net amount been paid through a salary increase, the cost to the employer would have been about EUR 5,700, at the rates from our example in the article on what an employee really costs the employer. The difference is about EUR 2,700 per employee per year. In a company of thirty people, that is about EUR 80,000.
What to watch out for
Totals across several employers. Annual amounts apply per employee, not per employer. If the employee has already received an occasional bonus from a previous employer during the year, the new one can pay only the difference. That is why a statement is requested on hiring, or the information is checked through the tax administration’s system.
Documentation. Payments based on actual cost need invoices, travel orders and records. A travel order with no route, purpose and calculation is not accepted in an inspection, and the amount paid then becomes salary, with tax, contributions and interest.
The employer’s decision. A payment should have a basis: a management decision or a provision in the employment rules, with clear criteria. This is particularly important for performance bonuses.
Equal treatment. A payment received only by some employees, with no objective reason, raises employment law questions.
Flat rate or invoices. For meals, one method is chosen. The flat rate is simpler; paying against invoices allows a higher amount but requires a contract with the provider and tidy records.
Benefits in kind are not the same. A company car used privately, a flat or an unlimited mobile phone are not non-taxable payments, but benefits in kind that are taxed.
How to plan it
- List what you already pay and in what amounts. Many companies use two or three payments and do not know about the rest.
- Work out the room. How much more you can pay per employee up to the prescribed limits.
- Spread it over the year. Paying in several instalments is easier on cash flow than one large payment in December.
- Write down the rules. Who is entitled, under what conditions and when. That protects both the employer and the employees.
- Include it in the budget. Non-taxable payments are a labour cost and belong in the plan together with salaries.
Who benefits most
- Companies that want to increase what employees receive but have a limited budget.
- Companies with lower salaries, where a fixed amount such as meals makes up a large share of total pay.
- Companies that reward by results and want the reward to reach the employee in full.
Check the amounts and conditions in the current Income Tax Ordinance before paying. If you would like to go through what you pay and where there is still room, we do that as part of tax and business advisory. Get in touch.