Hiring Your First Employee in Spain: What Foreign Business Owners Must Know

Hiring your first employee is a milestone for any business. In Spain it is also the moment your company stops being just a taxpayer and becomes an employer, with its own set of obligations towards the Social Security system, the tax authority and the worker. The rules are not complicated once you know them, but they differ from many other countries. This guide explains the essentials from scratch.

The real cost of an employee: more than the salary

The first surprise for most foreign owners is that the gross salary in the contract is not what the employee costs you. On top of it, the employer pays its own share of Social Security (Seguridad Social), the public system that finances pensions, unemployment benefit, sick pay and healthcare coverage for workers. The employer’s contribution is a significant percentage of the gross salary, and the exact rates depend on the type of contract, the occupation group and the contribution rules in force for the year, which are updated periodically. As a rough orientation, budget a noticeable surcharge on top of the gross pay rather than assuming salary equals cost.

Other items also belong in your calculation: the right to paid holidays (30 calendar days per year is the usual statutory minimum), the extra monthly payments many contracts include (Spanish salaries are often paid in 12 or 14 instalments), possible severance if the contract ends, and the collective agreement (convenio colectivo). This is a sector-level agreement that can set minimum salaries, working hours and extra benefits for your industry and province. It is binding even if your contract says nothing about it, so always check which one applies before offering a salary.

Registering as an employer and signing the contract

Before hiring, your company needs to be registered with the TGSS (Tesorería General de la Seguridad Social), the body that manages Social Security affiliation and contributions. In practice this means obtaining an employer contribution account code and then registering the worker (alta) before they start work. Registering late is one of the most common and most penalised mistakes, so the order matters: contract and registration first, first day of work afterwards. Registrations are normally done online through the Social Security’s electronic system, using a digital certificate or equivalent electronic ID.

The employee must have a Spanish NIE (Número de Identidad de Extranjero), the tax and identification number for foreigners, or a DNI if Spanish, and a Social Security number. If the worker is not an EU citizen, they also need the appropriate work authorisation, and you should verify this before hiring.

Spanish law favours indefinite contracts. Fixed-term contracts are now restricted to specific, justified situations, such as a genuine temporary production need or replacing an absent worker, so you cannot simply choose a short contract for convenience. A trial period (periodo de prueba) is allowed, with a maximum length set by law and by the collective agreement. Contracts should be in writing, state the job category, working hours and salary, and comply with the applicable collective agreement. Contract details are also communicated to the public employment service.

Payroll, Modelo 111 and who should handle it

Every month you issue a payslip (nómina) showing gross pay, the employee’s Social Security contribution and the income tax withheld. That withholding is the key tax point: you retain a portion of the employee’s income tax (IRPF, the Spanish personal income tax) and pay it to the AEAT (Agencia Estatal de Administración Tributaria, Spain’s tax agency). You report it with Modelo 111, a form filed periodically, normally every quarter for small businesses, listing the amounts withheld from employees and from certain professionals. An annual summary, Modelo 190, follows at the start of the next year. The withholding percentage is not freely chosen: it depends on salary, family situation and other personal data the employee provides.

Social Security contributions are settled separately, monthly, through the TGSS. Missing a deadline in either system triggers surcharges, so a reliable calendar matters.

Finally, a practical question: who should do all this? Labour advice (asesoría laboral) covers contracts, registrations, payslips and Social Security. Tax advice (asesoría fiscal) covers Modelo 111, VAT, corporate or self-employed income tax and the accounts. The two must be coordinated, because the payroll feeds directly into your accounting and your tax returns. Many small businesses choose one firm for both to avoid mismatches and duplicated work.

At Zythos Business we support self-employed professionals and small companies, including many run by foreign owners, so that their first hire is a smooth step rather than a source of surprises: we help you budget the true cost, set up the registrations and keep payroll, withholdings and accounting aligned from day one.