Hiring a new employee is an important step for any company. But here's the reality: there are many employers without a clear understanding of how much an employee really costs their company.
How does the tax system work in this regard?
In this article we'll detail the fixed costs associated with hiring and keeping an employee in Portugal, from the basic salary to less obvious expenses such as insurance and taxes. Are you ready?
The importance of calculating the cost of an employee for the company
Before making the decision to hire a new employee, it is crucial that a company understands all the costs involved in the remuneration process. Why?
Knowing the costs of a job allows a company to plan its finances more effectively, estimate the return on investment in human resources and assess the impact of payroll on the financial health of the business. In the next section, we'll look in detail at the different costs that a new employee entails.
Main costs of an employee for the company
An employee's costs to the company go far beyond their basic salary. Discover the main expenses you should consider:
Base salary
The basic salary is the regular pay that a worker receives. In Portugal, as of today (September 2025), the minimum wage is €870. However, remember that the expected salary varies greatly: depending on the industry and the experience of the employee.
Here's how the calculation works: if an employee has a basic income of €1000 per month, the annual cost to the company will be €1000 x 14 months = 14,000 euros per year. Why 14 months? We'll come to that in a moment.
Gross Salary and Net Salary
We've already understood the question of basic salary and found out how much the minimum wage is in Portugal. But it's important to understand the difference between gross salary and net salary when discussing the monthly and/or annual cost of an employee:
- The gross salary is the total amount agreed between the employer and the employee, before any deductions - such as taxes and social security contributions. This is the amount that serves as the basis
for calculating other contributions and benefits;
- The net salary is the amount that the employee actually takes home, after all deductions. For the employer, the gross salary is the most relevant figure: all the other
contributions and costs associated with the employee will be calculated from it.
Let's take a practical example: if a worker has a basic income (i.e. gross or gross pay) of €1000 per month, after contributing 11% to Social Security and with a personal tax rate of approximately 20%, the net salary he will receive will be approximately €790 (close to the minimum wage).
Vacation and Christmas Allowance
Remember when we multiplied the basic salary by 14 months? That's right: in Portugal, contract workers are entitled to a vacation allowance and a Christmas allowance, each equivalent to one month's salary.
On the other hand, a worker with a green card does not enjoy this benefit. But remember: it is illegal to hire a worker on a permanent basis via green receipts. This mechanism serves the need to hire services on an occasional basis. We'll come back to this topic at the end of this article!
Social Security
And finally we come to the subject of social security contributions. In addition to salary and vacation and Christmas bonuses, both the employee and the company owe so-called social security contributions.
Under the current system, the company's contribution is around 23.75% of the employee's gross salary, while the employee contributes approximately 11% of the total amount payable.
Let's take a practical example: for an employee with a basic salary of €1000, the company's social security contribution would be €1000 x 23.75% and the deductions would then be €237.50 per month (or €3325 per year).
Workmen's Compensation Insurance
It is a legal obligation for all companies that have employees on contract. It protects workers in the event of work-related accidents or illnesses, ensuring that they receive appropriate medical treatment and compensation for any period of inactivity.
It also protects companies against claims and lawsuits that may arise in the event of accidents in the workplace. The costs of Workers' Compensation Insurance vary based on several factors, including:
- Type of industry: companies in sectors with a higher risk of accidents at work, such as construction and manufacturing, generally have higher insurance premiums;
- Number of employees: companies with more employees may have higher insurance costs, although there may be economies of scale;
- Accident history: companies with a clean safety record may be eligible for lower rates;
- Location: depending on local laws and regulations, the cost of insurance may vary!
How is the premium calculated?
Generally, the premium for each insurance policy is calculated as a percentage of the employee's gross salary. Although the rate can vary, consider an average rate of 1.5% of gross salary as a starting point.
Let's take a practical example: suppose an IT company, which is considered relatively safe, pays a rate of 1% of gross salary for occupational accident insurance. If the gross salary is €1000, the monthly cost will be €10, resulting in an annual cost of €120 per employee.
What is covered by the insurance?
Workers' Compensation Insurance covers a wide range of costs, including:
- Medical expenses;
- Compensation for temporary or permanent incapacity;
- Funeral expenses in the event of a fatality;
- Rehabilitation allowance.
Remember: it is crucial to keep this insurance up to date and in compliance with local laws and regulations. Failure to maintain valid insurance can result in significant fines and potential exposure to litigation.
Food allowance
The food allowance is an employment benefit that aims to offset the cost of workers' daily meals. Although it is not obligatory by law - and depending on the job the new employee will be doing - it is a common and often expected practice in formal working environments.
This allowance can be paid in cash or through meal vouchers, depending on the
agreement between the employer and the employee.
Values and limits
The value of the meal allowance can vary, but the minimum value set by the state is €5.20 per meal for those who work more than 5 hours a day. Note that if the amount of the allowance exceeds a certain limit (€7.63 in 2021), the excess is subject to taxation.
Here's how it works: a company decides to offer a meal allowance of €6 per working day; if the employee works 22 days a month, the cost to the company would be €6 x 22 days x 12 months = 1,584 euros per year.
Payment methods
The meal allowance can be paid in different ways:
- Money: Paid together with the monthly salary;
- Meal vouchers: Vouchers that can be used in predetermined establishments;
- Meal card: A prepaid card that can be used as a debit card in restaurants and supermarkets.
Tax Implications and Contributions
It's important to note that the cash meal allowance is subject to Social Security contributions
, while vouchers and meal cards are not - as long as
they don't exceed the limit set by law.
What about Coverex? I've heard of it but I don't know what it is!
Coverex is a business solution designed to simplify and optimize the benefits and compensation system for employees. This platform allows companies to create customized compensation packages that go beyond the basic salary, encompassing a range of benefits such as:
- Meal allowances,
- Health and wellness insurance,
- Reform plans,
- Among others.
Top3 Advantages of Using Coverflex
- Tax savings: the platform has been designed to maximize the tax advantages associated with different types of compensation and benefits;
- Simple management: all benefits can be managed from a single dashboard, saving time and resources that would otherwise be spent on administration;
- Atratividade para Talentos: oferecer um pacote de benefícios robusto e flexível pode fazer a diferença na atração e retenção de talentos qualificados!
Practical examples of using Coverflex
Case #1 - Small IT company
Imagine a technology startup with 20 employees. With Covefrex, the employer can offer a basic health plan and an above-average meal allowance. Each employee has the freedom to opt for the health insurance they like best or to reverse the value for another benefit, such as a fitness plan.
Case #2 - Multinational
In a company with hundreds of employees, human resources face the challenge of managing a wide range of benefits. With Coverex, the company can allow employees to choose between different levels of insurance cover or health insurance, various meal allowance providers or even wellness benefits such as yoga classes or gym memberships.
Case #3 - Advertising agency:
In this scenario, the agency can use Coverex to offer a range of benefits that reflect the company's young and dynamic culture. These could range from subsidies for public transport to vouchers for cultural experiences such as concerts or art exhibitions.
Employment Legislation: What's Important to Know?
This article isn't about the legal side of contracting, but when it comes to costs, there are legal aspects that come into play. So that you have all the elements you need to make a good decision, let's go through the most important ones.
Compensation Fund
Like social security or occupational accident insurance, the Compensation Fund (FCT) belongs to the family of social charges to be considered. In a nutshell, it is a mechanism designed to protect workers in the event of termination of the employment contract by the employer.
This fund was established as a response to changes in labor legislation, seeking to offer greater security to workers - without overburdening employers.
In Portugal, the FCT is fed by monthly contributions made by the employer and aims to partially cover the compensation amounts to which workers are entitled in the event of unfair dismissal.
But how does it work?
The employer is obliged to make monthly contributions to the TCF, which must correspond to a percentage of the employee's basic salary.
As of today, this contribution is 0.925% of the basic salary. This amount is accumulated in the fund and can be redeemed by the worker in specific situations, such as termination of the employment contract on the employer's initiative.
Let's take a practical example: suppose an employee has a basic salary of €1,000. The company will have to contribute €10 a month to the FCT. At the end of a year, there will be €120 in the fund for that employee
In what situations will I use the FCT?
The Compensation Fund is used in various situations, including:
- Unfair dismissal;
- Termination of employment contract by mutual agreement;
- Company insolvency or bankruptcy.
Collective agreement
The Collective Bargaining Agreement (CBA) is an agreement between employers' associations and workers' unions, with the aim of establishing working conditions, including wages, working hours, benefits, among other aspects.
How important is the Collective Bargaining Agreement when calculating a worker's costs?
The Collective Bargaining Agreement can be very relevant when discussing the costs of an employee for a company. This is because the conditions agreed in the agreement often go beyond the minimum legal obligations. Let's look at some practical examples:
- Wages: the CCT can establish basic wages above the legal minimum wage;
- Allowances and benefits: in addition to salary, collective agreements often include other types of compensation and benefits, which can represent additional costs for the company;
- Overtime and Working Conditions: the CCT may have specific rules on overtime pay, working conditions and other factors that affect the employee's total cost!
Check the collective agreements for your sector here
Let's take a practical example: let's suppose that a company operating in the construction sector has a Collective Agreement that establishes a basic salary of €1,200 for workers, compared to the national minimum wage of €740. The meal allowance is also set at €7 per working day, above the recommended minimum. These are conditions that increase the cost of the worker for the company, which the owner may not be aware of!
Cost of an Employee to the Company: How to Calculate?
To calculate the total cost of a new employee for your company, simply add up all the costs included in the sections so far:
- Salary (gross)
- Vacation and Christmas Allowance
- Social Security
- Workmen's Compensation Insurance
- Food allowance
- Compensation Fund
- Contingencies imposed by the Collective Agreement
Shall we take another practical example?
Average cost of a worker in Portugal
Determining the average cost of a worker in Portugal is not a simple task due to the variation in the number of workers:
- Salary,
- Positions,
- Sectors,
- Regions.
However, even taking the minimum wage as a starting point, it's important to remember that many professions require high salaries, especially in the areas of technology, health and engineering.
In 2021, the average gross salary, taking all bonuses into account, was around 1,200 euros per month in Portugal. Taking into account all the factors mentioned in this article, the annual cost of a worker with an average salary of 1,200 euros would be approx:
- Salary: 1,200 x 14 months = 16,800 euros
- Social Security: 285 x 14 = 3,990 euros
- Workman's Compensation Insurance: 18 x 14 = 432 euros
- Meal allowance: 5.20 euros x 22 days x 11 months = 1,254.40 euros (excluding the month of vacation)
Approximate total annual cost: 16,800 euros (salary) + 3,990 euros (Social Security) + 336 euros (Insurance) + 1,254.40 euros (Meal Allowance) = 22,380.40 euros. Cost to which must be added amounts relating to the CCT and FCT.
Different types of employee recruitment
Understanding the different types of employee contracts in Portugal is crucial for any employer. Each type of contract has its own rules, advantages and disadvantages - and these factors will have a direct impact on the company's financial burden.
Shall we take a look at the various options available?
Open-ended contract
The open-ended contract, or contract for an indefinite period of time, offers the most stability for the worker. It is the most common type of contract and does not have a specific end date.
The employee is entitled to all the benefits prescribed by law, such as vacations, Christmas bonuses and meal allowances. In addition, the employee is better protected against dismissal, as the company needs to follow certain strict procedures and legally justify any action to terminate the contract.
Cost to the company: in addition to the salary, social security contributions and others we've seen throughout this article, this type of contract usually involves costs in terms of long-term benefits. The cost of termination can also be significant!
Fixed-term contract
A fixed-term contract is an employment agreement that has a defined beginning and end. It is often used to cover temporary work needs, such as a seasonal increase in demand or to replace workers who are on leave (for example, sick leave or paternity leave).
It is imperative that the employer clearly states the reason for the fixed-term contract. After expiry, the contract can be renewed up to three times, but the total duration cannot exceed three years.
Cost to the company: less than an open-ended contract, but beware: there may be additional costs if the contract is terminated prematurely!
Temporary Employment Contract
In this case, the worker is hired through a temporary agency for a specific assignment and for a limited period. The employee does not have a direct link with the company, but with the agency.
This type of contract is often used in situations where there is temporary or uncertain demand. It is a type of contract that can be particularly useful for companies that have seasonal peaks in activity (such as agriculture during harvest periods).
Cost for the company: in addition to the salary paid to the worker, the company must also pay the agency a certain fee. However, the company saves on administrative costs related to hiring and firing!
Partial Employment Contract
The Part-time Work Contract implies that the worker provides services for a number of hours less than the normal working period. The hours can be set according to the needs of the company and the employee.
This type of contract is very flexible and can be used for a variety of purposes, from student work to employees who need flexible hours to reconcile with other activities or responsibilities.
Cost to the company: costs are generally proportional to the hours worked. However, some fixed charges - such as occupational accident insurance - may apply!
Freelancers and Service Contracts
In this type of employment relationship, there is no contract of employment, but rather a contract for the provision of services.
Freelancers or autonomous professionals are hired to carry out a specific task, without being subject to the rules of subordination typical of an employment contract. They issue an invoice to the company for the service provided and are responsible for their own tax and social security costs.
Cost to the company: there are no compulsory social charges or benefits, but hourly or project rates may be higher to compensate for this lack of benefits
Conclusion
Now that you have a clear idea of the tax regime for hiring, I'm going to give you a tool that does all this calculation for you: our free salary simulator. Find it here in the Tools tab. It's free!
