Calculating Taxable Labor Income: Gross, Net, and Deductions

Understanding Labor Income

Gross Income

Gross income is considered the full consideration or all benefits, regardless of their name or nature, whether monetary or in-kind, arising directly or indirectly from personal work or an employment relationship, and which are not classified as income from economic activities.

Income from Employment

This includes the most common forms of employment income, whether received directly (such as wages and salaries) or indirectly (such as pensions), in cash or in-kind. The law specifies the following types of income:

• Wages and salaries
• Unemployment benefits
• Expense reimbursements
• Travel allowances, except for normal commuting, maintenance, or lodging expenses. These amounts are not taxed as they are intended to offset work-related costs. The law establishes specific conditions and limits for these tax-exempt amounts.
• Contributions paid by sponsors to pension plans or alternative formulas.
• Employer contributions to dependency insurance.

In-Kind Income (Benefits in Kind)

This is defined as the personal use or consumption of goods or services provided for free or at a price significantly below market value. Examples of in-kind income include:

• Use of a dwelling
• Use of motor vehicles
• Loans with an interest rate below the legal minimum
• Insurance premiums, excluding liability and occupational accident insurance
• Educational expenses

The following are not considered in-kind remuneration:

1. Social benefits, such as goods supplied at discounted prices in company stores or dining facilities, and social and cultural services.
2. Shares or units provided to active employees, either free of charge or at a price below market value.

The valuation of in-kind benefits is determined by:

• The value specified by law
• The price offered to the public
• The market value

Net Income

Net income is calculated by subtracting deductible expenses from gross income. Although net income is typically calculated as a whole, the following reductions may apply:

Applicable Reductions

• Income generated over a period of more than two years.
• Income from social security systems.

Deductible Expenses

Deductible expenses are limited to:

• Social Security contributions
• Pension contributions
• Contributions to orphan schools or similar institutions
• Union dues
• Mandatory fees paid to professional associations (up to a limit of €500)
• Legal defense expenses related to disputes between the taxpayer and the payer of the income.