How to calculate the basis for payroll withholding tax

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Deductions from the basis for calculating tax.

When all benefits that are subject to withholding tax have been paid and added together, you must deduct the amounts referred to below before you have the final basis from which you should deduct payroll withholding tax. This is called ‘deduction from the calculation basis’ and must not be confused with income deductions, which are deductions which an employee can claim in their tax return. Such income deductions have already been taken into account through the tax office's choice of deduction table and deduction percentage for each person and will not affect the payroll withholding tax.

You must make deductions from the calculation basis for:

  • pension contributions you deduct from salary for which the employee will be entitled to a deduction in connection with their tax assessment
  • trade union fees you deduct from salary for which the employee will be entitled to a deduction for in connection with their tax assessment
  • special allowance for seafarers resident in Norway

Cash benefits

Cash benefits are salary and pension which are paid to the employee in the form of money. Cash benefits cover cash, money deposited in an account, gift vouchers/gift cards which can be redeemed in cash, debt certificates, cheques, travellers’ cheques, giros, foreign currency, etc. Cash benefits are included in the calculation basis for payroll withholding tax with the gross amount.

Specific rules also apply to deductions of payroll withholding tax from salaries and pensions in connection with summer and Christmas holidays. You should not deduct payroll withholding from statutory holiday remuneration, ordinary salary during holiday or disability benefits during holiday. In the case of monthly payments, the deduction exemption applies for one month during the summer and half a month before Christmas. In the case of weekly, daily or hourly payments, the deduction exemption applies for four weeks during the holiday period in the summer and two weeks before Christmas. You are free to decide whether the “half deduction” before Christmas should be made in November or December. If the employee does not have a tax deduction card, 50% must also be deducted during the summer and before Christmas.

You must also deduct payroll withholding tax from pension payments which you make to a former employee who is resident abroad for tax purposes. The amount of payroll withholding tax must be the same as the amount of tax (withholding tax) payable on this pension. You must calculate what the tax on the pension would be under the rate stipulated by the Storting in its tax resolution for the year concerned. Payroll withholding tax must be deducted throughout the year, even during the summer and before Christmas.

Minimum thresholds for payroll withholding tax

If your employees earn less than specific minimum thresholds during the income year, you do not need to deduct payroll withholding tax.

You do not need to deduct payroll withholding tax if there is reason to believe that the total amount deducted for the employee will not exceed NOK 100 during the calendar month.

You also do not need to deduct payroll withholding tax if the total benefits subject to withholding tax for the employee will probably not exceed NOK 500 during the calendar month.

If you are a private employer and make payments for work done on your own home or holiday home, you do not need to deduct payroll withholding tax if the total salary payment made to a person during the income year does not exceed NOK 6,000. The same applies when you make payments for guardianship assignments under the Guardianship Act. If you pay out more than NOK 6,000, the entire amount must be included in the calculation basis for payroll withholding tax.

If you are an employer in the group “tax-free companies, associations and institutions” (defined in Section 2-32 of the Tax Act as an institution or organisation, including companies, congregations, etc. which do not have acquisitions as their object), you do not need to deduct payroll withholding tax when the total salary payment to a person during the income year does not exceed NOK 10,000. If you pay out more than NOK 10,000, the entire amount must be included in the calculation basis for payroll withholding tax.

Payments in kind 

‘Payments in kind’ means any financial benefit earned in any way other than in cash or any other means of payment. Examples of benefits in kind are goods, services, shares, low-interest loans and usufructs. Such benefits will constitute payments in kind not only when they are given free of charge, but also when they are sold at a reduced price. Some payments in kind are tax-free, while others are tax-free. An example of a tax-free payment in kind is free parking at the workplace.

Payroll withholding tax must be deducted from payments in kind if they are taxable.

When you have given your employees taxable payments in kind, you must calculate the value of the benefits. Valuation rules are stipulated for different types of payments in kind.

Specific rates have been set for the value of:

  • subsistence and lodging paid by an employer for its employees
  • private use of an employer’s car (company car)
  • benefit of low-interest loans from employers
  • benefit of cost savings in the home
  • private use of electronic communication funded by the employer

Rules have been established concerning the valuation of residential property owned or leased by the employer which are made available for use by the employees

There are some benefits which you must value as an employer. This applies for example to:

  • self-produced goods and fixed assets
  • goods and services, etc. purchased specifically for the employees
  • services provided by the employer
  • employment-related options.
  • benefits associated with private travel using cards paid for by the employer

For a more detailed description of the valuation rules, see Salary ABC or contact your local tax collector/treasurer.

How to determine the calculation basis

In order to determine the correct payroll withholding tax deduction, you must first calculate the basis for the deduction and then apply the employee's tax deduction card to this. This is called the ‘calculation basis’. The calculation basis is the sum of all benefits that the employee has received from you, determined according to established valuation rules and where applicable after the deduction of certain statutory deductions. Benefits which you pay to your employees can be divided into three categories: cash benefits, payments in kind and expense allowances The general rule is that you must deduct payroll withholding tax from all taxable benefits that you pay to your employees. However, this is only a general rule and there are exceptions. The obligation to withhold tax which you have as an employer does not always correspond with what is taxable for your employees. This could mean that you have to deduct withholding tax from benefits which are tax-free for the employee, or conversely, that you should not deduct withholding tax from benefits which are taxable for the employee.

In summary, you should determine the calculation basis as follows:

  1. add together all cash benefits
  2. calculate the value of payments in kind
  3. calculate the value of expense allowances
  4. add together the benefits and make any deductions from the calculation basis

Once you have determined the calculation basis, check that the amounts are not below the minimum thresholds for payroll withholding tax before you make the deduction in accordance with the employee's tax deduction card. 

Expense allowances

An expense allowance is a benefit which an employer pays, normally in the form of money, to an employee in order to cover a cost which the employee has incurred in their work. Expense allowances therefore do not form part of the employee’s ordinary salary. For example, an expense allowance will be considered to have been paid if an employee is reimbursed for costs linked to special glasses that they need in order to do their job or if an employee is reimbursed for costs attributable to his use of his own bicycle, costs for essential further education or costs for subsistence and lodging associated with living away from home due to work.

In the case of expense allowances, payroll withholding tax should generally be deducted even if they are not taxable. This means that they must be included in the calculation basis in their entirety. However, there are certain exceptions from this.

An expense allowance is not the same as an expense refund. An expense refund takes place when an employee has incurred an expense in connection with the performance of work which the employer refunds based on a receipt or some other original voucher.  Payroll withholding tax must not be deducted from expense refunds.

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