🇮🇸 Being a Contractor in Iceland (2025 Complete Guide)
Starting your journey as a contractor in Iceland can be exciting — and a little intimidating. This guide explains registration, taxes, pension, VAT and reporting in plain English. You will also learn how FreelancePay automates the heavy lifting so you can focus on your work.
TL;DR
Being a contractor in Iceland means you’re your own employer. You handle all registrations, taxes, pension, and VAT — which can easily consume 8–12 hours a month and cost over 40 000 ISK in accounting fees. This guide explains each step and how FreelancePay automates the entire process for a fixed 13 900 ISK/month.
1) Registering as a Contractor
- When to register: At least 8 days before you start working or issue your first invoice.
- How to register: Complete the RSK 5.02 form online — RSK 5.02 Registration Form. Choose “individual contractor / self-employed person”.
- Processing: Wait for confirmation email or letter from Skatturinn (usually 1–14 business days).
- Access: Receive your ID number (kennitala) and Income Tax Web Key (staðgreiðslu veflykill) — used to log in to your personal tax account at skatturinn.is.
- Log in to your personal tax account, where you’ll handle income tax and VAT. Pension reporting is done in the pension fund portals.
- Pause or quit: file a closure notice (RSK 5.04) to avoid estimated bills — RSK 5.04 Form.
Typical timeline: ≈ 2–14 days from form submission to full access.
Effort: 1–2 hours (online only, no physical visit required).
Where Every Króna From Your Invoice Goes
If you invoice 400,000 ISK, here’s how that amount flows through the Icelandic system.
1) Employer-side contributions
As a self-employed contractor, you act as your own employer. You must cover all mandatory employer contributions when remuneration is calculated.
| Contribution | Rate | Amount (ISK) | Purpose |
|---|---|---|---|
| Mandatory pension fund | 11.5% | 38,760 | Base pension savings |
| Social security fee | 6.35% | 23,863 | Public social insurance |
| Rehabilitation Fund | 0.1% | 337 | Employee security fund |
Total employer cost: 62,960 ISK (≈ 18.7% of salary)
2–5) From gross to net
- Gross payment (before employee deductions): 337,040 ISK
- Taxes & employee deductions: income tax 31.49% = 101,889 ISK; pension 4% = 13,482 ISK; personal tax credit −68,691 ISK → taxes payable 33,198 ISK. Total deductions ≈ 46,680 ISK.
- Net payout: 290,361 ISK
| Stage | ISK |
|---|---|
| Invoice total | 400,000 |
| – Employer contributions | 62,960 |
| = Gross payout | 337,040 |
| – Income tax + pension | 46,860 |
| = Net payout | 290,361 |
💡 Nothing “disappears” — every króna is allocated to taxes, pension, or mandatory funds required by Icelandic law.
2) Understanding Taxes in Iceland
Contractors must calculate and pay their own income tax. Your income from all sources (employment + freelancing) determines which tax tier you fall into. Reporting is monthly — missing a month means late penalties and interest.
- Report monthly income through your online account at skatturinn.is.
- Reporting deadline: the 15th of each month (for the previous month’s income).
- Log in with your staðgreiðslu veflykill (Income Tax Web Key) or electronic ID.
- Calculate and pay income tax + tryggingagjald together; the portal calculates based on your inputs.
- You receive an invoice to your online bank; you may also pay by bank transfer.
- At year-end, file a tax return and finalize all income and deductions; any differences are adjusted.
2025 tax bracket
31.49 %
up to ISK 472 005 /month
2025 tax bracket
37.99 %
ISK 472 006 – 1 325 127
2025 tax bracket
46.29 %
above ISK 1 325 127
- Typical setup effort: 3–5 h. Monthly reporting: 2–3 h. Annual return: 15 h.
- Accountant cost: 16 000–19 000 ISK + 24 % VAT/hour → ≈ 30 000–45 000 ISK + VAT/month.
- Official brackets: Skatturinn – Official Tax Rates
- Income tax web key: Filing a tax return – Web key info
Penalties
- Missing the monthly report: estimated income + late fee + interest.
- Late payment: 1% per day (up to 10 days) + dráttarvextir (late interest).
3) Pension Fund Contributions
- 4% employee + 11.5% employer = 15.5% total.
- Choose a pension fund (e.g., LV, Gildi, Festa). You can change funds later; accumulated savings typically stay in the original fund.
- Report and pay monthly in the pension fund employer portal. Payments go directly to your fund account.
- You act as both employer (11.5%) and employee (4%).
- Optional extra savings (viðbótarlífeyrissparnaður): save 2–6% of gross payout to increase future pension.
- Payment deadline: last business day of each month. Late payments → interest charges; funds monitor arrears.
- Icelandic Pension Overview
- Effort: ≈ 1 h/month (0 h with FreelancePay automation).
4) Tryggingargjald – Social Insurance Fee
- The social insurance contribution; similar to employer social costs in other countries.
- Rate: 6.35% of your gross income.
- Collected automatically together with your monthly income tax payment through your skatturinn.is account.
- You report and pay it at the same time as income tax (by the 15th of each month).
- Example: For 400,000 ISK invoice → gross payment 337,040 ISK → tryggingagjald 23,863 ISK.
- Tryggingargjald information (Skatturinn)
5) VAT (VSK – Value Added Tax)
- When to register: If your total revenue over any 12 months exceeds ISK 2,000,000.
- Form: Complete RSK 5.02 – VAT Registration Form → RSK 5.02 Registration Form.
- Processing: Typically up to 21 business days. After approval, you receive a VAT number linked to your kennitala.
- Important: Once you exceed the threshold, you should not issue further invoices without VAT until your VAT number is issued.
- After registration: Add VAT to all invoices and file reports every two months; you can deduct input VAT from eligible business expenses.
- Rates: 24% standard / 11% reduced / 0% zero-rated in special cases.
- How reporting works: Six periods per year (Jan–Feb, Mar–Apr, ...); deadline is the 5th of the following month.
- Payment: You receive a bill in your online bank or can pay by transfer.
- Penalties: Late filing 5,000 ISK; late payment 1% daily (capped at 10 days) + late interest (dráttarvextir); missed registration may be back-dated.
- VAT rules in English – Skatturinn
- Effort: Setup 3–4 h / bi-monthly 2–5 h. Typical accountant cost varies by activity: ≈ 16,000–80,000 ISK + VAT per period.
6) Tracking Business Expenses
You can deduct expenses that are clearly and directly related to your business activity. These reduce your taxable income, but all deductions must be verifiable with proper documentation.
What you can deduct
✅ Typical deductible expenses:
- Software subscriptions and digital tools
- Professional equipment and supplies
- Business-related travel (train on plane tickets) and accommodation
- Public transport for business use
- Office rent, coworking, internet, and phone costs
Always make sure the expense is directly tied to earning your business income. Personal or mixed-use items are not deductible. At the end of the day, the tax authority approves or disapproves business expenses.
Vehicle expenses
If you use your personal car for business, the rules are strict:
- You cannot deduct fuel or maintenance monthly.
- Instead, you get a personal vehicle deduction based on the true share (%) of your work mileage of your total mileage (with personal use included) when filing your annual tax return. You get to deduct a % of all your vehicle related expenses and also possibly the same % of the currents year’s wear and tear deduction determined by the tax authorities.
- Use RSK 4.03 form (PDF) to declare car-related expenses with your tax return. RSK 0403 Form (PDF)
- You must be able to prove business use (e.g., mileage log, calendar entries, photos of your odometer) and total use of the vehicle.
- You must keep proof of all your vehicle related expenses.
- This is the only acceptable way to deduct the expenses related to use of your personal vehicle when working as a contractor in Iceland.
⚠️ Beware of “creative” setups
Some accountants or online guides suggest creating “car expense estimates” or claiming monthly car deductions through the business. These practices stretch the rules and are not accepted by Skatturinn. If audited, you may face back taxes, penalties, and interest for incorrect deductions.
💡 In short: if an expense isn’t clearly business-related or lacks receipts, don’t deduct it. FreelancePay will support business expenses at the end of the year.
7) When Things Go Wrong
Skip monthly income tax report and payment
Invoice based on your estimated remuneration + 1 % daily penalty + late interest
Submit VAT report late
5 000 ISK late fee + high estimated payment
Pay VAT late
1 % daily penalty (álagning) + late interest (dráttarvextir)
Forget to close registration
Tax office assumes income and invoices for estimated taxes.
Miss pension payment
Interest from due date
Ignore expenses
Pay tax on gross income
Example: the cost of missing one report
If your monthly gross income is 500,000 ISK, skipping one month could look like this:
- Estimated income tax invoice: 500,000 × 31.49% + 6.35% social insurance fee ≈ 189,200 ISK
- 1% daily penalty for 10 days when not paid on time: +18,920 ISK
- Late interest for ~30 days (15.25% annualized) ≈ +2,400 ISK
➡️ Total ≈ 210,500 ISK — for a month you might not have even worked.
💡 All your customers are required to report your invoiced income to the tax officials at the end of the fiscal year. Even if you did not report your invoiced income, you will get invoiced for taxes and fees afterwards with penalty and interest.
8) Accountant vs. Doing It Yourself
Do it yourself
Monthly cost
0 ISK
Time spent
8–12 h
Risk of mistakes
High
Hire accountant
Monthly cost
≈ 64,000–128,000 ISK
Time spent
4–8 h
Risk of mistakes
Medium
Use FreelancePay
Monthly cost
13,900 ISK or less
Time spent
0 h
Risk of mistakes
Low ✅
9) Why FreelancePay Is the Smart Choice
- Invoicing built-in – create and send professional invoices in seconds.
- Automatic tax calculations and payments – no manual reporting to Skatturinn.
- Pension and social insurance contributions – reported and paid automatically.
- VAT registration and bi-monthly reports – handled on time, every time.
- End-of-year tax summary – ready to attach to your annual return.
- Fast personal service – We help you with your questions every business day!
FAQ
Q: What taxes do contractors pay in Iceland?
A: Contractors in Iceland must pay income tax (31.49–46.29%), 15.5% pension contribution, 6.35% tryggingargjald, and VAT (24% or 11%) if income exceeds 2,000,000 ISK.
Q: How can I simplify contractor taxes in Iceland?
A: Use an automated service like FreelancePay, which handles taxes, pension, tryggingargjald and VAT for 13,900 ISK/month.