The calculation of tax-exempt income changed in 2018. To avoid the obligation to pay additional income tax on the basis of tax returns, more attention must be paid to which categories of income are counted toward taxable annual income. One taxable type of income is the parental benefit, which will be calculated under new principles starting 1 September of this year.
For parents who become entitled to receive the parental benefit before 1 September 2019, nothing will change and the income earned in 2018 will be the basis for calculation of the parental benefit. Thus, it is relatively simple to estimate the amount of the parental benefit and how it will affect taxable income.
For parents who become entitled to receive the parental benefit starting 1 September 2019, the period used as the basis for calculation of the parental benefit will change. According to the new procedure, the nine full calendar months preceding the child’s birth month will be deducted and income for the 12 calendar months prior to those 9 months will be used as the basis for calculation of the parental benefit. For example, if a child was born in September 2019, the 12 calendar months preceding December 2018 are considered and the amount of the parental benefit will be calculated on the basis of the income earned during the period from 1 December 2017 to 30 November 2018.
Parental benefit can be received immediately after the end of maternity leave
If a mother was employed prior to the child’s birth, she has the right to go on maternity leave and receive a maternity benefit for 140 calendar days. The right to receive the parental benefit starts on the day after the last day of the pregnancy and maternity leave. Thus, if the maternity certificate leave started on 13 April 2019 or earlier, the parental benefit is calculated on the basis of the current procedure. For those who started their maternity leave on 14 April 2019 or later, the parental benefit is calculated on the basis of the new procedures.
Days spent on sick leave are deducted from the parental benefit
In the case of both the existing and new procedure, the amount of the parental benefit depends on the amount of social tax declared on the income earned. Regardless of whether the parental benefit is calculated based on the new or old procedure, the calculation is adjusted by the number of days that the recipient of the parental benefit was on sick leave or pregnancy/maternity leave during the period that is the basis of parental benefit.
If the recipient of the parental benefit was not employed throughout the period that is the basis for the calculation, the calculation is adjusted based on the number of months actually worked. For example, if a person worked a total of 10 months out of 12 months, the average wage for the 10 months is calculated, multiplied by 10 and divided by 12.
Non-employed parents are also entitled to parental benefit
If the monthly income of the applicant for parental benefit during a 12 month period was lower than minimum wage, the parental benefit is paid out at the minimum wage level. The minimum wage in 2019 is 540 euros.
If a person had no income subject to social tax, the parental benefit is paid out at the level of the minimum wage in force as of 1 January of the previous calendar year. In 2019, the benefit rate is thus 500 euros.
The ceiling of the parental benefit is three times the Estonian average wage in the year before last. In 2019, the parental benefit is capped at 3319.80 euros.
What does the duration of parental benefit depend on?
If a child’s mother is entitled to go on pregnancy and maternity leave and maternity benefit, parental benefit is paid for 435 days. If a child’s mother was not entitled to receive the maternity benefit, the parental benefit is paid for 545 days.
Starting in July 2020, the parental benefit can be used until the child turns three years of age. It can be paused and resumed a month at a time. Starting in 2022, the benefit can be used for individual days. Thus, the parent can spread out the parental benefit for a longer period, while working alongside raising the child.
As said, the recipient is permitted to earn other income while they are receiving the parental benefit. The amount of the parental benefit does not decrease as long as the income subject to social tax received in a month is lower than one-half of the maximum benefit. As the maximum benefit amount in 2019 is 3319.80 euros, a person may earn up to 1659.90 in a month without the benefit amount decreasing. The above principles also apply to the parental benefit paid to the child’s father.
An application must be submitted in order to receive the parental benefit
The application for the parental benefit can be submitted to the Social Insurance Board already during the pregnancy and maternity leave after the birth of the child. The application may also be submitted later at any time during the period that the parent is entitled to the parental benefit. If the application is submitted later, the benefit is paid retroactively but not for more than the last six months.
Budget your income!
In summary, it cannot be said that the new procedures will make the calculation of the parental benefit more complicated. At the same time, for those who make maximum use of the basic income exemption each month, the change may result in the need to adjust the use of the tax exemption. Thus, if you already know that you will become entitled to the parental benefit from 1 September and your income varies each month – e.g. because of a bonus or additional income in certain months that increases the average income – it would be a good idea to file paperwork with your employer (in the case of salary) or the Social Insurance Board (in the case of parental benefit) to reduce the amount of tax-exempt income declared or to not claim any exemption at all. This will help prevent unexpected additional income tax obligations.