# Net Salary - How Take-Home Pay Is Calculated in Estonia

Net salary is gross salary after withholding the funded pension contribution (II pillar), the employee unemployment insurance contribution and income tax. Net salary — the “take-home pay” — is what lands in the employee’s bank account. The calculation is based on the [Income Tax Act (TuMS)](https://www.riigiteataja.ee/akt/TuMS), the [Unemployment Insurance Act](https://www.riigiteataja.ee/akt/TKindlS) and the [Funded Pensions Act](https://www.riigiteataja.ee/akt/KoPS).

## How net salary is calculated

The employer withholds the following from gross salary:

-   **Funded pension (II pillar)** – 0%, 2%, 4% or 6% of gross at the employee’s choice. The selected rate can be verified in the [Pension Centre lookup](https://www.pensionikeskus.ee/raamatupidajale/ii-sammas/liitumiskontroll/).
-   **Employee unemployment insurance** – 1.6% of gross. The employer adds another 0.8%; see [Unemployment insurance](https://www.palgakalkulaator.ee/en/teadmiseks/tootuskindlustus).
-   **Income tax** – 22% of taxable income. Taxable income = gross − II pillar − unemployment insurance − tax-free allowance. See [Income tax](https://www.palgakalkulaator.ee/en/teadmiseks/tulumaks).

## Full worked example

**Input:** gross salary **€1500**, II pillar **2%**, tax-free allowance **€700/month**.

| Line | Calculation | Amount |
| --- | --- | --- |
| Gross salary | – | **€1500.00** |
| Funded pension (2%) | 1500 × 2% | −€30.00 |
| Unemployment insurance (1.6%) | 1500 × 1.6% | −€24.00 |
| Taxable income | 1500 − 30 − 24 − 700 | €746.00 |
| Income tax (22%) | 746 × 22% | −€164.12 |
| **Net salary** | 1500 − 30 − 24 − 164.12 | **€1281.88** |

You can reproduce this in the [calculator](https://www.palgakalkulaator.ee/en/). The total employer cost for this example is **€2007** (gross + 33% social tax + 0.8% employer unemployment insurance).

## Tax-free allowance

Each employee decides whether and how much of the tax-free allowance to apply. It can be used at only one payer at a time and requires a written application from the employee. [TuMS § 42](https://www.riigiteataja.ee/akt/TuMS)

Every employee has the same **€700 per month** tax-free allowance regardless of income. For people of old-age pension age it is **€776 per month**. More detail: [Tax-free allowance](https://www.palgakalkulaator.ee/en/teadmiseks/tulumaksuvaba-miinimum).

## What is not part of the standard net salary calculation

The following are not part of the statutory payroll taxes and contributions the employer withholds automatically each month:

-   **Child support and enforcement officer claims** – when an enforcement order exists the employer may withhold these from pay separately, reducing the amount actually paid out, but they are not part of the regular payroll tax calculation
-   **III pillar (voluntary pension)** – the employee usually contributes personally, e.g. by bank transfer
-   **Trade union fees, voluntary donations** – personal obligations, not statutory withholdings

In the ordinary payroll calculation the employer withholds only [income tax](https://www.palgakalkulaator.ee/en/teadmiseks/tulumaks), [unemployment insurance](https://www.palgakalkulaator.ee/en/teadmiseks/tootuskindlustus) and the funded pension contribution.

## Net salary and holiday pay

Holiday pay is taxed by the same rules as ordinary salary: II pillar, unemployment insurance and income tax are withheld. The tax-free allowance is monthly — when holiday pay and regular pay are paid in the same calendar month, the allowance applies once to the combined total.

## Self-employed (FIE) vs employee

Taxes for a sole proprietor (FIE, füüsilisest isikust ettevõtja) differ substantially from an employee’s:

-   The FIE **pays their own** social tax (at least the minimum), income tax and funded pension
-   The FIE does **not** pay unemployment insurance and is not eligible for [Töötukassa](https://www.tootukassa.ee/en) unemployment benefit
-   The FIE’s taxable income is calculated as annual business revenue minus business costs, not monthly

An employee’s net pay is predictable and withheld automatically; a FIE pays most taxes themselves and files an annual tax return. See the FIE taxation guide on [emta.ee](https://www.emta.ee/en).