Wages paid off the books, or ‘envelope wages’
- Payment and acceptance of wages off the books, or so-called ‘envelope wages’, is illegal.
- In Estonia, 10–15% of wage earners receive part or all of their wages as envelope wages.
- Payment of envelope wages does not exempt the recipient of the wages from income tax.
Wages paid off the books, or ‘envelope wages’
Every 100 euros of taxpayers’ money is a 100-euro investment in Estonia
Taxes are our common fund, which we use to manage Estonia and through which each one of us contributes to the provision of public services. Social affairs, education, and security alone account for 57% of public spending. The money collected through taxes additionally goes towards supporting culture, road construction, environmental protection, the courts, agriculture, and so on.
Not paying taxes would deprive us of the following:
- schools, kindergartens, and universities (education);
- hospitals and health insurance (family physicians, first aid, prescription drugs);
- security and safety (Police and Border Guard Board, Rescue Board, Defence Forces);
- public transport (buses, trams, trolleys, trains);
- highways and street lighting, water supply;
The benefits of our society are partaken of by each and every one of us, but if some people decide not to contribute to paying taxes, there will be less money for public goods, and the quality of services will inevitably decline or services will become inaccessible.
Payment of envelope wages is one of the most widespread expressions of the black economy, leaving tens of millions of euros uninvested in public services every year.
What you need to know when accepting envelope wages
Envelope wages are illegal, and paying and accepting them not only undermines your personal sense of security but also the development of our country as a whole. Tax revenue is the most important source of revenue for the state budget. Taxes give the state the money it needs to function and to offer benefits and services to its citizens.
Usually, the reason given for accepting envelope wages is that you get more money. This may be true in the short term, but what is not taken into account is that accepting envelope wages deprives the employee of several important benefits.
What employees deprive themselves of by accepting envelope wages:
- sickness benefit,
- unemployment insurance and compensation for accidents at work,
- the possibility of receiving a fair parental benefit,
- the possibility of obtaining a bank loan,
- the possibility of receiving a higher pension.
If an employee knowingly accepts envelope wages, then both the employer and the employee inevitably become subject to the tax liability arising therefrom, and payment of envelope wages does not exempt the recipient from income tax. In such a case, the individual must declare their wages in a natural person’s income tax return.
How to prevent and identify payment of envelope wages?
- For employees, it is advisable to enter into a formal employment contract, which sets out the duties and the full amount of the wages. An employment contract provides a stronger backing in case the employer breaches their obligations.
- Whether the employer has registered the person’s employment and properly declared the wages can be checked under the subsections ‘My employments’ and ‘My income’ of the section ‘Employments and payments’ in the e-Tax/e-Customs environment.
Why work officially?
- Accompanying rights (holiday and holiday pay, possible dispute resolution/support, etc.).
- Natural person’s income tax return: enables one to receive an income tax refund if one has not worked for the full calendar year.
- You will not need to be afraid if an authority (Tax and Customs Board, Labour Inspectorate, etc.) asks you about your employment relationship.
If you are working in Estonia
Employers are obliged to calculate income tax and withhold the employer’s unemployment insurance premium and the contribution to the mandatory funded pension from wages. This means that employees do not have to worry about paying taxes. However, you should still verify whether your employer has fulfilled their obligations so that you can be sure of your guarantees.
Your net pay:
- Basic exemption refers to an amount of wages on which no income tax is calculated. From 1 January 2018, all income qualifies for a universal basic exemption of up to €6,000 per year, or €500 per month.
- The employer pays 33% social tax.
- Unemployment insurance premium: employee pays 1.6%, employer pays 0.8%.
- The rate of the contribution to mandatory funded pension is 2% – the sum is transferred to the employee’s pension account in a pension fund to build up the person’s pension.
If you are working abroad
Each country has its own tax legislation. Be sure to familiarise yourself with the legislation of the country where you are working. Information is available from the embassy of the country of employment in Estonia and from the tax authority of that country.
The details of the tax authorities of other countries can be found on the website of the Tax and Customs Board.
Stories of payment of envelope wages from real life
Kalle, a construction worker in Viljandi, suffered from heart palpitations for months. The 36-year-old male became tired at work quickly and had fainted while on a work site repeatedly after dizziness. At the request of co-workers and his wife, Kalle finally turned to a doctor. He was diagnosed with an aortic valve disorder, which is common in males aged 35–50. Aortic valve disorders can only be fully resolved by surgery, at a total cost of at least €11,000. In the case of persons who have health insurance, this would be paid for by the Health Insurance Fund. However, Kalle did not have health insurance. Four years and three months ago, he had told his boss that he was willing to accept his wages entirely off the books. When Kalle said yes to these ‘envelope wages’, he never once thought that he would have to save at least €215 every month for 4 years and 3 months to have the €11,000 of disposable income he now needed for the life-saving surgery.
When Anna started working as a shift manager, she was initially supposed to receive €800 gross in wages. She talked to her employer about the possibility of receiving part of the money off the books, because envelope wages would mean she gets more money – the fact that it was undeclared did not bother her.
When Anna became pregnant, she and her partner wanted to buy a two-room apartment in a new urban development area near the city. At the bank, they found out that their options for obtaining a loan were quite limited, as Anna’s official wages did not increase the loan amount available to them by much, and the monthly extra sum of unknown origin was no argument for the bank. Thus, Anna had to critically review her options and instead buy a one-third cheaper apartment in an older large-panel system building.
When Anna went on maternity leave before the birth of her child, the amount of the maternity benefit was similarly calculated on the basis of her official income, as was the amount of the subsequent parental benefit. In total, Anna lost more than €4,500 during her parental leave.
Aivar turned 63 this spring. When the Estonian pension system was reformed back in the day and some people started accumulating money in the different pension pillars to ensure a more secure old age, Aivar, who had ten years left until retirement, believed that he would be able to save more than enough money on his own. Around the same time, he started accepting envelope wages because his employer was experiencing financial difficulties.
Aivar didn’t worry about his future at first: he had already officially worked the 15 years needed to qualify for retirement. He knew that his employer was also saving a lot of money by not paying taxes, meanwhile he was still receiving wages and was even able to set some aside for himself.
Then the economic crisis hit and Aivar had to start dipping into the money he had saved for rainier days. And soon enough, there he was: with a pension qualifying period that was ten years shorter than it could have been, receiving €50 less pension per month and thus losing over €600 each year.
Statistics on envelope wages
- In Estonia, 10–15% of wage earners receive part or all of their wages off the books, or as so-called ‘envelope wages’.
- Slightly more than half of them receive envelope wages on a regular basis.
- Every third person in Estonia knows someone whose wages are paid partly or fully off the books.
- With the introduction of the employment register, the number of employees receiving envelope wages has decreased; however, the problem of employment that is completely off the books has now been overtaken by partial envelope wages. Only 5% of envelope wage earners are paid the entirety of their wages off the books, for the rest, envelope wages form part of their wages.
- Envelope wages are most common in the trade, transport, catering, agriculture, and construction industry.
- 78% of envelope wage earners are not actually happy with it – dissatisfaction with envelope wages has been growing over the last three years.
- 70% of the population does not view the payment of envelope wages favourably, because:
- payment of unreported wages is unfair to other taxpayers;
- recipients of envelope wages have either no or limited health and pension insurance.
- According to the latest data, the damage caused by envelope wages amounts to a total of €149 million.
Source: study conducted by the Estonian Institute of Economic Research on the consumption and trade of illegal alcohol and cigarettes and payment of envelope wages in Estonia in 2017.
- Say no to envelope wages!
- Registration of employment and proper declaration of wages can be checked under the subsections ‘My employments’ and ‘My income’ of the section ‘Employments and payments’ in the e-Tax/e-Customs environment.
Employees can monitor their employer’s tax behaviour via public data: