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Flexible Remuneration: Does it Contribute to Social Security?
For an employee, especially someone joining a new company, understanding their actual take-home pay is crucial. When additional forms of compensation, such as Flexible Remuneration, are added to the salary, doubts arise. One of the most common questions is whether Flexible Remuneration contributes to Social Security.
Understanding in detail all the factors to consider when calculating the net income of employees, as well as potential deductions, is essential.
Table of Contents
- 1. Payroll Deductions to Consider
- 2. Flexible Remuneration on the Payroll
- 3. Flexible Remuneration Contributes to Social Security
- 4. How Different Flexible Remuneration Products Contribute to Social Security
1. Payroll Deductions to Consider
Net salary, also known as gross salary, is the money a worker receives as compensation from the company after applying the necessary withholdings and deductions in each monthly payroll.
What are deductions? Anything withheld or subtracted from the base salary to obtain the net salary. Below, we’ll see how these deductions on the payroll can be classified:
Types of Deductions
- Income Tax Withholdings
The Income Tax on Individuals (IRPF) is a direct and progressive tax applied to the earnings of an individual throughout the year. It is based on the individual’s personal situation and wealth, categorized into different income tax brackets. The appearance of IRPF on the payroll is due to the monthly deduction of the portion related to earnings, acting as an advance payment toward the annual income tax return.
Social Security Contributions.
- Social Security contributions are different
To begin with, they are not progressive but establish a fixed percentage subject to the worker’s contribution base. Furthermore, the payment is divided between the employee and the company in different proportions. Contributions for work-related accidents and professional illnesses, as well as to the Wage Guarantee Fund (Fogasa), are solely borne by the company.
In the payroll, items subject to Social Security contribution include common contingencies, work-related accidents and professional illnesses, unemployment, contract type, Wage Guarantee Fund, professional training, and additional contributions for overtime hours.
- Other Deductions: In-Kind Payments
There are other types of deductions, such as in-kind payments or compensation in kind. This includes all the benefits the company provides to the employee, whether through Social Benefits (above the salary) or as Flexible Remuneration (deducted from the employee’s gross salary).
2. Flexible Remuneration on the Payroll
Through Flexible Remuneration plans, the company offers goods and services to its employees at a lower cost than usual. The way to enjoy this reduced price is by consuming directly from the gross salary. Consequently, the income tax to be paid is significantly reduced.
This is because some products and services have significant exemptions when it comes to taxation. In other words, employees allocate part of their gross salary to certain expenses, reducing their taxable income and, therefore, decreasing the tax burden. Examples include meal cards, payment for childcare for children under three, or the purchase of health insurance.
The proportional part of the gross salary that the worker has decided to allocate to services within a Flexible Remuneration plan cannot exceed 30%.
3. Flexible Remuneration Contributes to Social Security
Since January 2014, based on the Royal Decree-Law 16/2013 on improving stable hiring and worker employability, in-kind payments made by a company to an employee are part of the Social Security contribution base. Specifically: “The contribution base […] will be constituted by the total remuneration, in any form and denomination, whether in cash or in kind, that the worker or similar is entitled to receive monthly or actually receives if this is higher, by reason of work performed for others.”
The explanation lies in the fact that the Social Security contribution base is constituted by the total remuneration a person receives for their work, whether in the form of cash or in kind. Therefore, yes, compensation in kind contributes to Social Security as part of the total gross salary.
This is another key advantage of Flexible Remuneration, aside from enjoying partial or total income tax exemption – depending on the product. In essence, Flexible Remuneration only modifies the tax base, not the contribution base.
4. How Different Flexible Remuneration Products Contribute to Social Security
As a general rule, when including in the Social Security contribution base, in-kind compensations are considered at their value.
There are some exceptions, with the most notable being products that involve the transfer of use, such as vehicles or housing. In these cases, special rules for valuing in-kind compensation determine the contribution base.
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