Payroll Tax and Payroll Tax Credit Explained

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What is payroll tax?
To explain what payroll tax credit is, we first need to explain what payroll tax is. You may already know that payroll tax has to do with taxes. That’s correct. Payroll tax is a general term for the tax and social security contributions that are deducted from your wages.

Everyone in the Netherlands who receives a salary or benefits pays taxes on them. This is called payroll tax. But why do we do that?

Why Pay Payroll Tax?
The Netherlands has a social system. This is also known as the welfare state. Because we pay payroll tax, we can continue to fund healthcare, education, and social services. Payroll tax is therefore important because it ensures that the government has the funds to pay for things we all need, such as hospitals, schools, and benefits.

What is payroll tax credit?
Okay, so payroll tax is the tax you pay on your wages. What exactly is payroll tax credit? There’s only one part of the word left: “credit.” A credit is a portion of an amount that you don’t have to pay.

Payroll tax credit is, therefore, a reduction in your payroll tax. If you’ve told your employer that you want to receive payroll tax credit, this means you’ll pay less tax on your wages. As a result, you’ll have more money in your bank account!

How does the payroll tax credit work?
Your employer withholds tax from your paycheck every week. This is called payroll tax. If you apply for the payroll tax credit, your employer pays less tax on your behalf. This means you receive a higher paycheck.

Whether you claim the payroll tax credit every week or claim a refund for the overpaid tax at the end of the year through your tax return, you’ll save the same total amount. Below, we’ll explain how that works:

• Weekly payroll tax credit: If you claim the payroll tax credit through your employer, your tax will be reduced each week. This means you’ll receive a higher weekly paycheck because less tax is withheld.

• Annual Refund: If you do not claim the payroll tax credit, you will pay more tax throughout the year. At the end of the year, you can claim a refund for the overpaid tax through your tax return.

So in both cases, you'll get the same total amount back. The only difference is whether you receive more money each week or get a larger refund at the end of the year.

Applying for Payroll Tax Credit
Applying for payroll tax credit is simple. When you start a new job with us, you’ll be sent a few forms. One of these documents is the payroll tax form. This form is called the “Model Opgaaf Loonheffingen.” On this form, you indicate whether or not you want payroll tax credit. Fill in your information, check the box of your choice, and you’re done! Your employer will take care of the rest.

Please note: Do you have more than one job? If so, choose which job you want the tax credit to apply to. Apply for the payroll tax credit from only one employer. Otherwise, you’ll receive too much of the employment tax credit. You’ll eventually have to repay the excess amount to the Tax Authority.

Here's a tip from us: Apply the earned income tax credit to the job where you earn the most—that way, you'll get the biggest refund.

Having trouble figuring it out?
Always check your pay stub carefully. It will show whether the payroll tax credit has been applied correctly. Having trouble figuring it out? Feel free to ask your contact person for help. At UBN, we think it’s important that you understand how your salary is calculated. We’re happy to help you so that you know exactly where you stand.

Now that you know what payroll tax credit means, you’re all set to start a new job. At UBN, we have a wide selection of job openings. Check out our job listings online or stop by a UBN branch near you to get to know us.