Voluntary retirement: 2% IRPF?

What income tax withholding should be applied to permanent contracts of less than one year?

Discover the key to avoiding mistakes

As a human resources manager, you have probably encountered unforeseen situations. One of them occurs when, after hiring an employee on a permanent contract, that employment relationship does not reach the one-year mark for fortuitous reasons. Perhaps the employee decides to leave or is forced to leave his or her position. Then a doubt arises: what type of IRPF withholding should you apply in this case?

The confusion is understandable. We know that temporary contracts lasting less than one year are subject to a minimum withholding rate of 2%, but when it comes to a permanent contract of less than 12 months, the scenario is not so clear. Should you also apply the minimum 2%, or is another rule followed?

For many HR managers, this type of situation can create uncertainty. After all, tax regulations can be complex and are constantly changing. However, a recent binding consultation from the Directorate General for Taxation (V1820-24) provides clarity on this issue and will allow you to make decisions with confidence.

The regulations: When does the 2% minimum rate apply?

Article 86.2 of the Personal Income Tax Regulations establishes that fixed-term contracts of less than one year must be subject to a minimum withholding tax of 2%. This applies especially in certain sectors, such as the performing and audiovisual arts, where temporary contracts are common. But it also applies to any temporary contract in which the withholding tax rate calculated according to the general procedure turns out to be less than 2%.

However, this rule has led many human resources managers to assume that if a contract, for whatever reason, does not last 12 months, this minimum rate is automatically applied. But this is where the recent clarification by the Directorate General of Taxes comes into play.

Indefinite-term contracts: What happens when they do not reach one year?

In the binding consultation V1820-24, the Directorate General of Taxes clarifies that the minimum withholding rate of 2% is not applicable to permanent contracts, even if they do not last one year. This means that, if you hire a worker with an indefinite-term contract and for any reason the employment relationship is terminated before 12 months, you should not apply the 2% withholding rate. The reason is simple: an indefinite-term contract, unlike a temporary contract, does not have a predetermined duration. From the moment it is signed, its nature is permanent.

Therefore, the effective duration of less than one year in an indefinite-term contract does not automatically make that contract “temporary” for withholding purposes. Even if the employee leaves the company before one year has elapsed, the withholding you must apply is that which corresponds to the general rate, depending on the employee’s income and personal circumstances.

A common mistake: applying 2% for the duration of the contract

One of the most common mistakes in this situation is to think that, if a contract does not reach one year, the minimum rate of 2% should be applied. However, as we have seen, the key factor is not the duration, but the type of contract. Confusion often arises because the regulations are clear for temporary contracts, but less intuitive for open-ended contracts that end prematurely.

Imagine the following scenario: you hire an employee on a permanent contract in January, but in November, for personal reasons, he decides to leave the company. In this case, you might think that, having lasted less than a year, the minimum rate of 2% would be applicable. However, you would be making a mistake. The contract is still indefinite, and the withholding to be applied should be the one resulting from the general calculation, not the minimum rate of 2%.

The importance of avoiding retention mistakes

This type of confusion can not only generate tax problems for the employee, but also for the company. Applying an incorrect withholding can lead to tax inspections and, in the worst case, penalties. In addition, employees who encounter a misapplied withholding may have problems when filing their tax return, which generates dissatisfaction and affects trust in the company.

As a human resources manager, it is vital that you are aware of these details to avoid complications. The tax regulations, although complex, are clear regarding the distinction between temporary and permanent contracts, and their implications for income tax withholdings.

Conclusion

The key to avoid errors in the withholding of indefinite-term contracts that do not reach one year is to understand the nature of the contract. If it is a temporary contract, the minimum rate of 2% may apply. But if it is an indefinite-term contract, even if the employment relationship ends before 12 months, you should not apply the minimum rate of 2%. Instead, follow the general withholding calculation procedure.

Always keep yourself informed about the latest regulatory updates to avoid surprises and ensure proper management of withholding taxes. And remember, in human resources, details count. Every little decision can make a difference for the company and the employees.

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