Tax Rate in Europe vs US – How Do They Differ?

Inna Coker
Talent Mapping Specialist

Tax rates tend to differ from one country to another, which means that Europeans and Americans are subject to very different fiscal regimes. The question is which one is more cost-effective when it comes to setting up your own business and recruiting employees. When it comes to the tax rate in Europe vs US, the first one usually has lower costs when compared to the United States. However, the financial benefits should be weighed carefully against a few aspects, such as income levels, location, and economic and monetary conditions.

The good news is that you do not have to research and compare taxes in Europe vs US yourself because you can always contact a company that knows the ins and outs of tax systems. Our agency’s core expertise is IT outstaffing in European countries for tech product companies. This includes the use of the best practices of hiring experienced offshore developers, managing accounting and payroll functions, and making sure everything is legal.

In this article, you can find all the required information about tax rate in Europe vs US, which should be useful for you if you are willing to understand how it works.

 

Let’s Find Out US Tax Rates

The first thing one should know when figuring out taxes in Europe vs US is that America obtains a complex set of taxation rules that require people and businesses to pay diverse taxes at the state and federal level.

Consequently, where your remote employee is based has an impact on tax liability, as different states come with different tax rules. For instance, in 43 out of 50 states, a personal income tax should be filed if an employee performs their work within their borders beyond a specific but variable number of days.  

One more thing you should know about taxes in Europe vs US, that in USA any company has to pay 21 percent of federal corporate tax and state income tax that can range from 1 to 12 percent. At the same time, some states require no taxes under a specific threshold, while others may impose their own taxes. From 2023, the revenue of businesses that meet certain criteria might also have to pay a minimum 15 percent tax depending on the revenue posted in their financial statement. The average combined tax in the United States is not too high compared to some other countries, staying at the level of 15.3 percent.

Also, when comparing tax rate in Europe vs US, you will see that there is an equivalent to the personal income tax, which is usually levied on the state, federal, and local levels. In most cases, the federal tax is taken from the wages of an employee, and it can range from 10 to 37 percent. The state tax can be anything between 0.25 to 13.3 percent according to a state and tax bracket. The bigger part of employers is also required to pay the FUTA (federal unemployment tax), and it makes up 6 percent of the first $7,000 paid to the worker as salary during the year. In addition to that, the regulations may require them to pay SUTA (state unemployment taxes) and local taxes if applicable.

When you compare taxes in Europe vs US, it is also important to remember that employers need to pay FICA (Federal Insurance Contributions Act) taxes that include Medicare tax and Social Security tax. The FICA tax makes up 12.4 percent, while the Medicare tax is 2.9 percent plus 0.9 percent.

To sum it up, some states may offer better business opportunities, so you should bear this in mind when checking tax rate in Europe vs US.

 

Let’s Find Out the Tax Rate in Europe vs US

Sadly, no-tax countries do not exist. For instance, Monaco obtains a zero personal income tax rate, but the corporate tax makes up 25 percent. At the same time, the Tax Foundation reports that, on average, the corporate tax rate in OECD countries happens to be 21.5 percent.

Even though personal income tax rates differ from one country to another, they can also vary depending on the tax brackets. In general, taxes in Europe vs US tend to be higher. When considering Denmark taxes vs US, the income tax can vary from 8 to 56.5 percent. In the case of German tax rates vs US, it can be anything from 9 to 45 percent plus a 5.5 percent solidarity surcharge if applicable. If you compare UK taxes vs US taxes, you will see that the personal income tax rate is from 20 to 45 percent, while the tax rate in Sweden vs US can range from 30 to 57 percent.

At the same time, when you start comparing US tax rates to other countries, mostly Eastern European income tax rates, you will see that the United States has higher numbers. For example, the Czech Republic obtains a personal income tax rate of 23 percent. Furthermore, the country is not at the top of the list because there are some with even lower income taxes.

When it comes to social security tax, the tax rate in Europe vs US one might seem to be unreasonable. In contrast to the United States’ combined rate of 15.3 percent, the European rates can be anything between 13.97 percent in Switzerland and a huge 65-68 percent in France.

Speaking about European income tax rates in the future, the European Union is willing to achieve tax fairness, which means that they are going to bring the corporate tax to 15 percent for all countries. It means that more international businesses will be attracted thanks to a lower rate. At the moment, the work is still in progress because the countries with the lower CIT oppose the decision.

 

Taxes in Europe vs US: Where the Taxes are Lower and Where Is the Best Place to Hire a Remote Team?

When comparing the tax rate in Europe and the one in the United States, you might find the information overwhelming because there are a lot of aspects to consider, along with numbers. At the same time, the Eastern European income tax rates are the best if you are willing to hire offshore team of professionals from a different country.

The table provided below comprises the tax rate in Europe vs US comparison, so it can help you understand and clearly see what you will be required to pay

Country Taxes for B2B (private entrepreneur) personal income tax + Social Security Contributions + VAT Taxes for direct employment
USA no VAT . Income taxes: 15,3 % ( federal, state,local); FICA tax: Social Security: 12,4% Medicare: 2,9% +0,9% (add. medicare tax) 10%-37% (pre-tax income= 15,9%; employee payroll taxes=7,1%)
Great Britain Personal income tax rate of 20-45%
VAT is 20%
The main rate of corporation tax is 19%
Romania Personal income tax rate of 10%
VAT is 19%
Standard CIT (taxes on corporate income) rate is 16%
Pension insurance contribution: 25%.
Health insurance contribution: 10%.
The monthly assessment base is the gross income derived from dependent activities.
Ukraine Personal income tax rate of 5%+social insurance tax
VAT rates: 20%, 14%, 7%, and 0%
The social security contribution in Ukraine is 18%
Military tax – 1.5%
Sweden Income tax: from 30% to 57%
Social Security Contributions 31.42%
VAT 25%
The municipal rate is 32.28%.
The national rate tax rate is progressive: from 0 to 20%
Employees must pay 7% of their income for the state pension.
Norway Income tax: from 22% to 46,8%
national insurance contribution of 11.1%
VAT 25%
Employee in Norway pays around 38.5% of their income in taxes
Denmark Income tax from 8% to 56.5%
VAT is 25%
AM tax is 8%
The corporate tax rate is also maintained at 22%.
AM tax is 8%
employees in Denmark may also need to pay other taxes, such as:
Church tax: Church tax is a voluntary tax that is paid to the Church of Denmark. The rate of church tax varies depending on the municipality in which the employee lives.
Municipal tax: Municipal tax is a local tax that is paid to the municipality in which the employee lives. The municipal tax rate varies depending on the municipality.
Germany Income tax from 9% to 45%
Trade tax is around 14%
VAT is 19%A solidarity surcharge of 5.5% is also possible.
A church tax of 8% or 9% can also be taken.
Social security contributions: Social security contributions are paid by both the employer and the employee. The employer pays 20.3% of the employee’s gross salary, while the employee pays 19.93%.
Solidarity tax is 5.5%
Spain Income tax from 19% to 47%
Social security tax (SS): SS tax is a flat rate tax of 29.9% on income up to €4,964 per month. Above this amount, the SS tax rate is 6.35%.
VAT is 21%
Employer contribution 29.90% (Social Security 23.60%, 5.50% Unemployment, 0.20% Salary Guarantee Fund, 0.60% Professional Training)
Employee contribution 6.40% (4.70% Social security, 1.55% Unemployment, 0.10% Professional Training)
Poland The difficulty is that each type of activity has its own rate and its spread is quite significant: from 17% to 24%
8.5% – services that are not directly defined in other groups of single tax rates;
12% – activities related to programming;
monthly social deductions (ZUS) are not fixed for an entrepreneur, but may depend on several factors, such as: the chosen taxation system, the duration of business activity, the amount of profit (or income) received, etc.
Personal Income Tax (PIT) determined according to a tax scale, under which the salary may be either taxed at 12% or 32% rates. The 12% rate applies to the annual salary up to PLN 120,000, and the 32% rate is used for the annual salary exceeding PLN 120,000. the employment contract involves the remittance of social security contributions that constitute up to 35% of a developer’s salary: the employer pays between 19.21% and 22.14% (depending on the amount of work accident insurance), while the rest is deducted from the developer’s salary.
Bulgaria Sole-traders are subject to a 15% tax on their incomes.
VAT is 20%
Income tax 10%
The total amount of social security contributions is 32.70%-33.40% on gross remuneration, with the employee contributing 13.78%. The percentage is distributed as follows:
Mandatory state pension fund: 6.58%
Additional mandatory pension insurance: 2.2%
General illness and maternity fund: 1.4%
Unemployment fund: 0.4%
Health insurance fund: 3.2%
For 2023 thе maximum monthly amount of the contributory income in Bulgaria remains at 3 400 BGN (= 1 738,39 €).Тhe minimum monthly amount of the contributory income for self-insured persons is 710 BGN (= 363 €).
Georgia 1% tax on turnover
3% if you exceed GEL 500k in a tax year
Tax is 20%.

The employer is required to pay pension contributions for employees who are citizens/permanent residents of Georgia. The withholding tax on salaries is also charged with a 2% contribution to the pension funds made by the employee and a 2% rate made by the employer;

Finland Finland’s income taxes for sole traders are progressive, with capital gains taxed at 30% up to EUR 30,000 and 34% for amounts exceeding that threshold.VAT – 24%

Social Security Contribution:
Pension – 24.1% for contractors under the age of 53 or between 63 and 67; 25.6% for those aged between 53 and 62; only applicable to the contractors whose annual income exceeds EUR 8 261,71
Unemployment insurance – 1.4%
Church tax – 1 – 2.10%

Employee Contributions:
TyEL Insurance (Pension): Employees contribute 7.15% of their wages, or 8.65% if aged between 53 and 62.
Health Insurance: Employees contribute 1.96%, inclusive of a daily allowance for earnings above €15,703.
Unemployment Insurance: Employees contribute 1.50% of their wages.
National progressive personal income tax – 0 – 31.25%(35% for non-residents)Employer Contributions:
TyEL Insurance (Pension): Employers contribute an average of 17.37% of employees’ wages for TyEL insurance (pension).
Health Insurance: Employers contribute 1.53% of the employee’s salary for health insurance.
Unemployment Insurance: Contribution is 0.52%, increasing to 2.06% on salary portions exceeding 2,251,000 EUR per year.
Accident Insurance: Varies based on salary and job risk.
Group Life Insurance (Optional): Varies by industry and company.

B2B (Private Entrepreneur) Tax Rate in Europe vs US

Direct Employment Tax Rate in Europe vs US

In general, when it comes to tax rate in Europe and the US, they are similar in the United States and some Western European countries, such as Germany and the United Kingdom. However, company and personal income tax rates are much higher in America than in low-income tax countries, such as Romania and Hungary.

Regarding the social security tax rate in Europe vs US, the figure is lower in Denmark, for example, than in America, but all other numbers are higher. Overall, tax rates in Eastern European countries are a bit lower, but you should consider that the final difference depends on state taxes.

One more important aspect about tax rate in Europe vs US is that the United States obtains a quite complicated tax filing system. It means that in addition to the tax rates, employers must not forget about the additional cost of preparation.

If you look closely at all the differences of tax rate in Europe vs US, you will see that Eastern European countries deliver more benefits for personal income taxes, but corporate income taxes and social security taxes in America are rather reasonable. To sum it up, starting a business in Western Europe or the United States may seem feasible, but Eastern European countries are superior when it comes to remote recruitment, outstaffing or offshore software development. This idea becomes even more attractive if you remember that there are more than one million people in the IT talent pool.

 

Conclusion

In general, the tax rate in Europe and the US is just one part of the enormously complex equation of hiring and working internationally. Employees have to tackle issues with culture shock, visa, and language barriers. At the same time, companies must contend with issues of benefits, payrolls, and compliance.

Tax rate in Europe and the United States may be hard to understand if you have no experience. There are a lot of aspects to consider, making sure that everything is done properly. Obviously, you can find out more about the tax rate in Europe yourself and find out that the Eastern part is more beneficial for your business. However, it is always better to contact a reliable outstaffing agency that knows everything about all taxes. Thanks to this, you will receive the most beneficial option according to your preferences.

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Inna Coker
Talent Mapping Specialist
I believe that the IT sector is one of the most promising fields in the world. That’s why I have been researching for skilled IT professional and analyzing different IT markets and tech hubs worldwide for more than 3 years. I enjoy analyzing information and creating it into sapid articles.