How to pay international contractors in Croatia [2024]
Croatia’s economy is one of the strongest in Southeast Europe. And the labor market is expected to grow slightly through 2030, with office professionals, teaching professionals, and legal and social professionals projected to be the fastest-growing occupations.
There are plenty of opportunities to find skilled contractors in Croatia, whether in the capital of Zagreb or in the next largest cities, Split and Rijeka. But many foreign companies aren’t aware of the country’s labor and tax laws. What steps do you need to take to comply with European and Croatian labor laws when paying contractors?
We’ve got you covered. This guide outlines how to correctly classify, onboard, and pay Croatian contractors—with tips on how to automate parts of the process.
Step #1: Classify your workers in Croatia
Correctly classifying your Croatian workers as contractors or employees is a crucial first step. If you don’t correctly classify Croatian workers, you run the risk of fines, back taxes, and penalties from Croatian courts. Moreover, misclassification could harm your company’s reputation among contractors, employees, and potential customers.
There are several factors to consider when classifying workers, as listed in the table below:
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High level of autonomy. Contractors have more control over when and how they complete their work. They manage their own schedules, projects, and pricing.
More guidance from the company. Employees are subject to more direction from their employer, who will provide guidance on when, how, and where to perform the work.
The worker owns their tools and equipment.
The employer provides work tools and equipment.
Less linked to the company. Contractors tend to work independently and with multiple clients—they are not in a superior-subordinate relationship with the employer.
Closely connected to the company. Employees are integrated into the employer's organization and generally report to a manager or group of managers.
No company benefits. Contractors don’t get the same benefits and protections as employees.
Entitled to employee benefits. Employees get benefits like minimum wage, paid holidays, sick leave, and parental leave.
Time-bound contracts. Contractors usually work on specific projects for a fixed period of time.
Indefinite contracts. Employees are usually hired for an indefinite period of time, with guaranteed severance pay upon termination.
Risk of loss. Contractors typically assume more risk and liability for the work they perform.
No risk of loss. Employees are generally protected from liability for work-related issues.
Subcontracting allowed. Contractors can subcontract part of their work to be performed by another person or business.
No subcontracting. Employees can’t subcontract their work; they’re expected to perform tasks themselves.
Step #2: Determine the best way to pay your contractors in Croatia
Before you work with Croatian contractors, you need to figure out how you’ll compliantly pay them. With the rise of remote work and global workforces, there are many payment options you can choose from, including:
- Bank transfers: You can set up an account in a Croatian bank to deposit money into the contractor's account. Or you can go through your bank to send a wire transfer to Croatia.
- International money orders: This traditional payment method is slower and more expensive since you have to buy the money order physically, and the contractor has to deposit it in person. It also comes with heftier fees and exchange rates.
- Digital wallets or payment platforms: Some digital payment platforms like Wise work for cross-border money transfers, but not all are accessible in Croatia. Exchange rates can fluctuate day to day, impacting your total costs.
- Global payroll services: Contractors usually send invoices for their work instead of being part of the payroll like regular employees. However, with a solution like Rippling, you can pay Croatian contractors alongside the rest of your global workforce.
Step #3: Use global payroll software to process payments for Croatian contractors
While there are several ways you can send paychecks to Croatian contractors’ bank accounts, the simplest way is using global payroll software.
Rippling lets you pay your Croatian contractors in the same system as your other international contractors. Here’s a sneak peek into how Rippling’s global payroll system works:
Step #4: Find out whether you need to withhold taxes from Croatian contractors
Independent contractors can operate as freelancers in Croatia without opening a company. If you hire a contractor in Croatia without their own company, you must deduct their taxes, healthcare, and pension contributions according to their city regulations.
However, many Croatian contractors open a company to make it easier for employers to work with them. A popular option for contractors is to open a “paušalni obrt” (sole proprietorship), which can be established under the Croatian Crafts Act. Contractors can also open a d.o.o. (limited liability company) or a j.d.o.o (simple limited liability company). If you work with contractors who have their own company, you do not need to deduct their taxes or social security contributions. Contractors will pay their own taxes to the Croatian Tax Administration, which operates within the Ministry of Finance.
Many contractors file taxes via self-employment (“paušalni obrt”) and need:
- An OIB (which stands for “osobni identifikacijski broj”) Croatian identification number
- PDV registration (value-added tax in Croatia) if their business income exceeds 40,000 euros per year. The PDV tax rate for most goods and services is 25%, although there are certain exceptions.
Croatian taxpayers who earn self-employment income need to make monthly tax prepayments in accordance with their annual tax returns. Self-employed workers in Croatia also need to make social security contributions in compliance with special rules.
Note: If your company is based in the US, you’ll need to have the Croatian contractor complete a W-8BEN form, which certifies their contract status for the US government.
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Frequently asked questions about running payroll for contractors in Croatia
Do you need to withhold taxes when paying contractors in Croatia?
If you work with Croatian contractors who do not have their own company, then yes, you need to withhold payroll taxes when paying them.
If you work with Croatian contractors who do have their own company (obrt, d.o.o., or j.d.o.o.), then you don’t need to deduct payroll taxes. These independent contractors are expected to deduct taxes and social security contributions from their pay themselves.
Does the Croatian minimum wage apply to independent contractors in Croatia?
No, the minimum wage in Croatia does not apply to independent contractors. Minimum wage regulations apply to employees under employment contracts, but contractors negotiate their compensation on their own terms.
Do Croatian contractors get benefits?
No, Croatian contractors are not entitled to benefits provided to employees, such as severance pay after at least two years of service, maternity leave, paternity leave, and retirement benefits.
Every Croatian citizen, however, is covered by a basic health insurance plan (“obvezno”), which is administered by the Croatian Health Insurance Fund (HZZO).
Can you pay contractors in Croatia in your home currency?
It's typical to pay Croatian contractors in their local currency, which, as of 2023, is the euro. You can choose to pay them in your currency, but they'll need to agree to it in writing.
Many international payment providers, like Rippling, support contractor payments in either euros or your currency.
Can you manually pay contractors in Croatia?
Yes, you can manually pay contractors in Croatia, but you’re better off using more secure and reliable payment methods. Manually processing payments comes with some big risks:
- Compliance: By manually running payroll, you’re more likely to make errors and omit crucial data. Global payroll software, on the other hand, automatically enforces compliance with all applicable local laws.
- Security: If you’re using a compilation of spreadsheets or old-school paper records, you’ll face more security risks, as sensitive contractor information can be lost, stolen, or misused.
- Contractor experience. Manual payments can be slow and lack the transparency that contractors need. This creates a frustrating experience for contractors trying to understand their income and when they'll get paid.
How do you turn a contractor into an employee in Croatia?
Converting a contractor into an employee in Croatia involves changing their legal status and employment terms. You need to terminate the contractor agreement and provide a new written employment contract (“ugovor o radu”). According to the Croatian Labor Act, an employment contract is considered open-ended, permanent, and indefinite (unless specified otherwise). Fixed-term employee contracts are allowed only for legitimate reasons—such as temporarily replacing a permanent employee or completing a specific project—and cannot exceed three years.
Additionally, you'll need to decide whether to establish your own legal entity or hire through an employer of record (EOR). The latter is usually more efficient and affordable.
In the new employment relationship, you and your employee will need to comply with the Croatian Labor Act and other laws, collective agreements, and working regulations.
Rippling and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any related activities or transactions.
