In everyday accounting practice, situations often arise where an employee’s tax residency status directly affects how their salary is taxed.
A recent case raises an important question:
✔️ Does the employer have to recalculate the salary if the employee’s tax residency status changes retroactively after the salary has already been paid?
The case
When the July salary was calculated and paid (on 5 August 2025), the employee was classified as a non-resident of Estonia. Accordingly, taxes were calculated, and TSD Annex 1 was submitted based on that information.
On 12 August, the employee’s tax residency status changed, and they became an Estonian resident. However, when submitting the August TSD, a warning message appeared — the Estonian Tax and Customs Board (ETCB) records showed that the person had been listed as a resident starting from 2024, not 2025.
Why did this happen? You’ll find the explanation below.
The question
Should the employer recalculate the July salary because of the retroactive change in the employee’s residency?
The answer
No. The employer is not required to recalculate taxes.
At the time the salary was paid, the employee was a non-resident, and tax calculations were made correctly based on the data that was valid at that moment.
Although a warning message may appear during TSD preparation, it does not prevent submission of the declaration.
Any income tax recalculation will be made through the employee’s personal income tax return, not by the employer.
Likewise, mandatory funded pension (II pillar) contributions are withheld only from payments made after the date when the employee’s residency status officially changes.
Why does the residency change show as starting in 2024?
An individual can submit a residency determination application (Form R) to the Estonian Tax and Customs Board. In the form, they provide details such as their place of residence, workplace, and other relevant information.
If the supporting documents show that the person has actually been an Estonian resident earlier than initially registered, the ETCB can record the residency change retroactively.
In practice, this means that even though the change is entered into the system in 2025, the start of residency might appear as a date in 2024.
Key points to remember
✔️ Employers must act based on the information valid at the time of payment.
✔️ A retroactive change in residency does not create any new obligations for the employer.
✔️ If necessary, the individual can adjust income tax through their personal income tax return.
Such cases highlight how important it is to document all data used for tax calculations and ensure that these match the information valid at the time of payment.
Retroactive updates may trigger warnings in the e-Tax/e-Customs system, but they do not automatically mean errors or require corrections from the employer.
