Income tax and basic exemption

An employer must pay to an employee for the 4th until the 8th calendar day of sickness, injury or quarantine. According to § 12² of the Occupational Health and Safety Act, an employer must pay to an employee, for the 4th until the 8th calendar day of sickness, benefit of 70 per cent of the employee’s average wages for the last six months. From the 9th day of illness, injury or quarantine, the Health Insurance Fund pays the employee the sickness benefit. More information on benefits for incapacity for work can be found on the website of the Health Insurance Fund.

The sickness benefit paid by the employer is subject to income tax in full extent (subsection 1 of § 13 of the Income Tax Act), but to a certain extent is exempt from social tax.

Social tax

An employer can pay the employee a sickness benefit only subject to income tax for the 1st to 8th day of sick leave up to 100% of the employee’s average wages. Sickness benefit paid on the basis of § 12² of the Occupational Health and Safety Act for the 1st to 8th day of sickness, injury or quarantine of an employee is not subject to social tax, unemployment insurance and funded pension contributions (clause 3 of § 3 of the Social Tax Act, § 40 (2) 4 of the Unemployment Insurance Act, subsection 2 of § 7 of the Funded Pensions Act).

The procedure for payment of sickness benefit provided for in the Occupational Health and Safety Act also extends to a member of the management board or a management body replacing the board of a legal person. Pursuant to the Social Tax Act, sickness benefit payable on the basis of § 12² of the Occupational Health and Safety Act is exempt from tax to a certain extent, therefore the sickness benefit paid to the member of management board pursuant to clause 3 of § 3 of the Social Tax Act is exempt from tax within the average fee of the last six months.

The social tax exemption applies if the employer pays sickness benefit based on a duly drawn up sick leave.

In the case of employment based on other contracts arising from the Law of Obligations Act (contract for services, authorisation agreement), employers are not obliged to pay sickness benefit. The disbursement is normally taxed on all labour taxes.

The tax scheme for sick leaves is the same regardless of whether a sick leave is issued for illness, injury or quarantine. Pursuant to clause 3 of § 3 of the Social Tax Act, the amounts are not taxed if the employer has paid sickness benefit to the employee based on a quarantine leave according to § 12² of the Occupational Health and Safety Act. The amount of benefit in excess of the average wages of the employee (member of the management board) is generally taxed on all labour taxes payable to the employee or member of the management board.

Sickness benefit and TSD

Sickness benefit paid by the employer for the 1st to 8th day of sickness is declared within the limit (only income tax) in Annex 1 to the tax return TSD under payment type 24. The part in excess of the limit is taxed on all labour taxes according to the type of payment (types of payment 10, 11, 12, 13, 21, 22 or 23).

In the case of a non-resident employee, sickness benefit within the limit is declared in Annex 2 to the tax return TSD under payment type 129, the part in excess of the limit under payment type 120, 121 or 122; in the case of a non-resident public servant, under payment type 130, in the case of a non-resident member of the management board within the limit under payment type 157 and in excess of the limit – payment type 156.

examples

1. If the employer pays sickness benefit 70% of the average wages, it is required to withhold only income tax 22% and in the tax return TSD, the type of payment is 24.
2. If the employer pays sickness benefit 100% of the average wages, the benefit is subject to income tax only and payment type is 24.
3. If the employer pays sickness benefit 130% of the employee’s average wages, the benefit of 100% is declared under payment type 24 and income tax must be withheld. The part in excess of the tax-exempt limit (30%) is declared under payment type 10, like wages, and taxed on all labour taxes.

Certificate for sick leave

From 15 May 2024, the employer can compensate the difference between the employee's remuneration and the sickness benefit paid by the Health Insurance Fund (§ 12³ of the Occupational Health and Safety Act) free of social tax (subsection 3 of § 3 of the Social Tax Act) from the 9th day of illness. The employer calculates the voluntary benefit for incapacity for work based on the employee's average remuneration of the last six months.

During the sick leave, the employer can reimburse 30% of the employee's average remuneration free of social tax. This means that if the Health Insurance Fund calculates the employee's sickness benefit based on 70% of the social tax paid in the previous calendar year, the employer can reimburse the remaining 30%. The calculation of the employer's voluntary sickness benefit must be based on the average remuneration of the employee for the last six months.

Example

The employee is on sick leave for 30 days and the employer wants to pay her voluntary benefit. To calculate the employer's voluntary sickness benefit, it is necessary to find the employee's average fee per calendar day. The average fee per calendar day was 30 euros.

For the first to eighth day, the employer can pay 100% voluntary sickness benefit free of social tax, i.e. 240 euros (8 days × 30 euros).

For the ninth to the thirtieth day, the Health Insurance Fund pays 70% of the sickness benefit, and the employer can compensate the remaining 30% of the average remuneration, i.e. 198 euros (22 days × 30 euros × 30%), free of social tax.

Certificate for care leave

During care leave, the employer can compensate the difference between the employee's remuneration and the care benefit paid by the Health Insurance Fund (§ 12³ of the Occupational Health and Safety Act) free of social tax (subsection 3 of § 3 of the Social Tax Act). The employer calculates the voluntary benefit for incapacity for work based on the employee's average remuneration of the last six months.

The employer can reimburse 20% of the average remuneration free of social tax, i.e. if the Health Insurance Fund pays the employee care benefit based on 80% of the social tax paid in the previous calendar year, the employer can reimburse the remaining 20%. The calculation of the employer's voluntary benefit for incapacity for work must be based on the average remuneration of the employee for the last six months.

The Health Insurance Fund pays the care benefit from the 1st day (more details on the Health Insurance Fund's webpage “Care allowance”).

Example

The employee is on care leave for 20 days and the employer wants to pay him voluntary benefit. To calculate the employer's voluntary benefit for incapacity for work, it is necessary to find the employee's average fee per calendar day. The average fee per calendar day was 25 euros.

For the first to the twentieth day, the Health Insurance Fund pays 80% of the care benefit, and the employer can compensate the remaining 20% of the average remuneration, i.e. 100 euros (20 days × 25 euros × 20%), free of social tax.

Voluntary benefit for incapacity for work and form TSD

Voluntary benefit for incapacity for work paid by the employer is declared up to the limit (30% of the average remuneration in the case of sick leave and 20% in the case of care leave) in Annex 1 of the tax declaration form TSD with payment type 24 and is taxed only with income tax.

In the case of non-residents, the voluntary benefit for incapacity for work paid by the employer is declared in Annex 2 to the tax declaration TSD with payment type 129, in the case of a non-resident official with payment type 130 and is subject only to income tax.

The part exceeding the limit is taxed with all labour taxes according to the type of payment (payment types 10, 11, 12, 13, 21, 22 or 23).

As of 15 May 2024, it is possible to work during a long-term sick leave (starting from the 31st day of the sick leave) under adapted working conditions that depend on one's state of health and ability. The duration of the sick leave must be at least 90 days. Working during a long-term sick leave requires the consent of three parties (attending physician, employee, employer).

The salary paid by the employer must correspond to the workload of the employee. For example, if they work with a 70% workload, their salary must be 70% of their average pay for the calendar month before they became ill. The difference will be reimbursed to the employee by the Health Insurance Fund for up to 122 working days.

The employer may not pay salary for working on the basis of a certificate for sick leave less than 50 per cent of the salary applicable on the day preceding the day of release from the performance of employment or service duties as indicated in the certificate for sick leave (subsection 4 of § 12⁴ of the Occupational Health and Safety Act). The Estonian Health Insurance Fund compensates the employee for the difference in salary compared to the salary prior to the sick leave, up to 50% (subsection 4 of § 54 of the Health Insurance Act). More information on the website of the Estonian Health Insurance Fund.

Based on the prescriptions of the attending physician, three different compensation scenarios are possible.

1. If an employee can continue working in adapted conditions that do not result in a smaller work contribution, the employer must continue to pay salary to the previous extent and in such case the Health Insurance Fund will not pay compensation.
2. If the adjustment of conditions results in a reduction of the workload (regardless of the previous workload of the person), the employer can reduce the wages of the employee by up to 50%. In such a case, the Health Insurance Fund compensates the difference in wages, which covers 100% of the difference between the employee's salary applicable before sick leave and after workload reduction. It is important to stress that the Health Insurance Fund does not compensate more than 50% of the salary applicable before the start of sick leave.
3. If the adjustment provides for the performance of tasks of a different nature (easier tasks), the employer can reduce the employee’s salary by up to 50%. The Health Insurance Fund pays compensation for difference in salary up to 50% of the salary applicable before sick leave, which means that the employee receives 100% of the salary in place before the sick leave.

Transfer to easier work

Only persons working on the basis of an employment contract and a contract of service may continue to work under adapted conditions. The difference in salary will not be compensated for a person providing services on the basis of a contract under the law of obligations, a member of the management board or a self-employed person.

The Health Insurance Fund bases its compensation calculation on the salary applicable on the day preceding the date of going on sick leave as indicated by the employer on the sick leave certificate, as well as on the salary paid during the period of performance of work adjusted to the state of employee’s health.

Working during long-term sick leave and tax return form TSD

An employer declares the salary paid for working during sick leave in Annex 1 to the tax return form TSD according to the type of payment (payment types 10, 11) and pays all labour taxes.

In the case of a non-resident employee, salary is declared in Annex 2 to the tax return form TSD according to the type of payment (payment types 120, 121; non-resident official 126, 128) and the payments are subject to all labour taxes.

The Health Insurance Fund declares the salary difference compensation in Annex 1 to the tax return form TSD with payment type 40 or in Annex 2 to the TSD with payment type 176 and pays income tax. No basic exemption is applied to the compensation of the Health Insurance Fund.

On the basis of the Occupational Health and Safety Act (§ 12⁵), both pregnant women and persons entitled to maternity leave have the right to easier working conditions and wage difference compensation. Transfer to easier work is allowed based on a certificate for sick leave only for a pregnant woman, who has medical insurance and is working under an employment contract, and according to her health condition. For this purpose, a doctor or midwife issues a certificate for sick leave to a working pregnant woman or a woman with the right to maternity leave with the reason “assignment of work corresponding to the state of health or transfer to an easier position”.

The employer pays a wage of at least 50% of the wage valid as of the day before the sick leave (subsection 4 of § 12⁴ of the Occupational Health and Safety Act) and the Health Insurance Fund compensates the employee for the difference in wage compared to the wage before the sick leave.

The wage difference compensation paid by the Health Insurance Fund, in the event of a transfer to an easier job, is the difference between the wage in effect on the day before the sick leave and the wage received during the easier job.

In a situation where a pregnant woman refuses to work or is released from work due to the lack of easier work, the Health Insurance Fund pays compensation from the 2nd day at a rate of 70% from the wage agreed before the start of the pregnant woman's primary sick leave in the employment contract.

If a person has several employers and one employer can offer easier work and the other cannot, the employer who cannot offer easier work can release the person and the other employer can offer easier work.

More information on the website of the Health Insurance Fund.

A pregnant woman working during a sick leave and declaration of taxes on form TSD

The employer declares the wage paid for working during a pregnant woman's sick leave in Annex 1 of the form TSD according to the type of salary income payment (payment types 10, 11, 12, 13, 21, 22 or 23) and pays all labour taxes.

In the case of a non-resident employee, the salary is declared on Annex 2 of the TSD according to the type of wage income payment (payment types 120, 121 or 122; non-resident official 130) and is taxed with all labour taxes.

The Health Insurance Fund declares the pregnant woman’s wage difference compensation on Annex 1 of the TSD with payment type 40 or Annex 2 of the TSD with payment type 176 and pays income tax. No basic exemption is applied to the benefit of the Health Insurance Fund.

From 15.04.2024, the Cultural Endowment of Estonia pays fees for creative work instead of benefits in accordance with subsection 3 of § 2 of the Cultural Endowment of Estonia Act.

The Cultural Endowment of Estonia concludes an authorisation agreement with the recipient of the fee for creative work and registers the fee recipient in the employment register.

Fee for creative work is divided by the number of months of the creative period and is paid in each month. Fee for creative work is paid to the recipient as a salary, and the payment is declared on the tax declaration form TSD. Fee for creative work is taxed with all labour taxes, including income tax, social tax, unemployment insurance premiums and, in the case of a registered person, mandatory funded pension contributions.

The Cultural Endowment of Estonia submits a declaration of income and social tax, unemployment insurance premiums and contributions to mandatory funded pension (form TSD) by the 10th of every month.

The application for and payment of the fee for creative work is regulated by the Cultural Endowment of Estonia.