The Útlendingur’s ongoing guide to getting shit done
Life in Iceland is very expensive. While nothing here has never been affordable, news circulated at the close of 2024 that the cost of groceries was set to increase by 30%, while the cost of electricity is going to rise by 37% this year. We’d laugh, but we’re too busy weeping into our empty wallets.
The situation is only more dire for us Útlendingar, who earn less than our Icelandic counterparts even as 53% of us are overqualified for our positions. But, hey, we don’t have a frændi or frænka to put in a good word, so what can we really expect?
All that said, you may be considering upping your gig game to bring in a little more money on the side with some freelance projects here and there. Great idea! And it’s an idea a whole lot of people had before you, as evidenced by the Side Hustle series we were running here in the Grapevine. Whether you’re a part-time model, a burlesque dancer, a sexy candle maker or a princess for hire, you’re going to want to know how to earn money and not get an end-of-the-year surprise in the form of a big old bill for unpaid taxes or pension contributions.
The 2 Million ISK myth
The first thing that needs to be cleared up here is that no money is tax-free. Unless you’re working “black” (for cash under the table) — which you really shouldn’t do — any money you earn from your main job or from a side gig is taxable and will require a corresponding pension contribution.
“It’s a common misunderstanding that the first 2 million ISK you earn are tax free or that you don’t have to pay taxes on it,” a representative of Skatturinn confirms. “Actually you are simply exempt from the VAT registry if you are earning less than 2 million ISK per year. You still need to pay taxes.”
Accountant Jóel Kristinsson further elaborated that no income is tax-free, but some is exempt from withholding tax. If a contractor, freelancer or gig worker’s annual income is less than 550,000 ISK for the year, it is exempt from withholding tax, so no monthly installments need to be arranged with the tax office. The income still needs to be accounted for on your annual tax return, however. Joel echoed Skatturinn in clarifying that one does not have to pay VAT for self-employment income of less than 2 million ISK in a single year — it is an option, though.
For those earning in excess of these thresholds on their gig work, income tax and social security contributions must be sent to Skatturinn on wages every month. If your income is around the 1 million ISK mark, you may get away with filing one remittance form to Skatturinn and one report to your pension fund, but it’s best to call ahead and confirm the specifics of your case so you don’t inadvertently get yourself into trouble.
Oh yeah, the pension
In addition, a self-employed individual or gig worker is on the hook for making pension contributions. In a standard employee-employer relationship, the employee has a base rate of 4% of their pay deducted as a pension contribution. The employer then pays 11.5% into the employee’s pension. A person working freelance or gig work must pay the entire 14.5% into their pension fund. Failure to file pension reports and make payments could see you slapped with a massive bill from Söfnunarsjóður (SL) pension fund toward the end of the year based on what they calculate as your assumed earnings.
Wait, SL isn’t your pension fund? Maybe not, but they’re the state’s default firm to collect outstanding payments. You can ring up your own pension and arrange to pay the outstanding amount into your existing fund instead to keep things neat and tidy in one place, but the money will still need to be paid. Death and taxes, right?
The morals of the story here is that there’s no such thing as free money and spending a little time calling up Skatturinn and your pension fund before you start earning that sweet, sweet side money will save you from the shock of a big bad surprise toward the end of the year.
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