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 taxes and social security contributions deducted from your wages.

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

Why Pay Payroll Tax?
The Netherlands has a social welfare 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.

The payroll tax credit is a reduction in your payroll tax. If you’ve told your employer that you want to receive the 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 each week or request a refund of the overpaid tax at the end of the year through your tax return, you’ll save the same total amount. Below, we explain how this works:

• Weekly payroll tax credit: If you claim the payroll tax credit through your employer, your tax liability is reduced each week. This means you 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 during the year. At the end of the year, you can claim a refund for the overpaid tax through your tax return.

In both cases, you’ll receive the same total amount back. The only difference is whether you receive more money each week or 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 details, check the box of your choice, and you’re done! Your employer will take care of the rest.

Please note: Do you have multiple jobs? If so, choose which job you want the tax credit to apply to. Apply for the tax credit from only one employer. Otherwise, you will receive too much tax credit. You will eventually have to repay the excess amount to the tax authorities.

Here’s a tip from us: apply the earned income tax credit to the job where you earn the most, and 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 believe it’s important for you to understand how your salary is calculated. We’re happy to assist you so that you know exactly where you stand.

Now that you know what payroll tax credit is, 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.