Ég sef lengur þegar ég er í fríi.

A word-for-word breakdown is:

• Ég = I
• sef = sleep / am sleeping
  
  • this is the 1st person singular present form of sofa (to sleep)
• lengur = longer
• þegar = when
• ég = I
• er = am
• í fríi = on vacation / on holiday

So the sentence is built as:

• Ég sef lengur = I sleep longer
• þegar ég er í fríi = when I am on vacation

Because sofa is the infinitive, meaning to sleep.

In a full sentence with I, Icelandic needs the conjugated verb form:

• að sofa = to sleep
• ég sef = I sleep

This verb is irregular, so the stem changes:

• sofa → sef

That is something learners simply need to get used to with common strong verbs.

Here, lengur is an adverb, not an adjective.

It describes how you sleep:

• Ég sef lengur. = I sleep longer.

It comes from the adverb lengi:

• lengi = for a long time
• lengur = longer

So this is like English:

• I sleep a long time
• I sleep longer

Because the sentence is making a comparison.

• Ég sef lengi. = I sleep for a long time.
• Ég sef lengur þegar ég er í fríi. = I sleep longer when I’m on vacation.

So lengi is the basic form, while lengur is the comparative form.

Here, þegar means when.

It introduces a time clause:

• þegar ég er í fríi = when I am on vacation

Be careful, because þegar can also mean already in other contexts.
But in this sentence, it is clearly the conjunction when.

Because after a subordinating word like þegar, Icelandic normally keeps the order:

• subject + verb

So:

• þegar ég er í fríi = when I am on vacation

not:

• þegar er ég í fríi

This is different from main-clause Icelandic, where verb-second word order is very important.

Because fríi is the dative singular form of frí.

The preposition í takes:

• dative for location/state
• accusative for motion into

Here the meaning is a state:

• ég er í fríi = I am on vacation

So Icelandic uses the dative: fríi.

This is a very useful contrast:

• að vera í fríi = to be on vacation
  
  • state/location → dative
• að fara í frí = to go on vacation
  
  • motion/change into that state → accusative

So:

• Ég er í fríi. = I am on vacation.
• Ég fer í frí. = I’m going on vacation.

English does not show this kind of case difference, so it often feels new to learners.

Yes. You can also say:

• Þegar ég er í fríi, sef ég lengur.

That means the same thing.

Notice what happens in the main clause after the fronted subordinate clause:

• sef ég
• not ég sef

That is because Icelandic main clauses usually follow verb-second word order.

Because it expresses a general habit or something that is usually true.

• Ég sef lengur þegar ég er í fríi. = I sleep longer when I’m on vacation.

This is like English present tense in sentences such as:

• I sleep better in winter.
• I drink more coffee when I work late.

So the present tense here does not mean only right now. It can describe a repeated or usual situation.

Yes. It can match either, depending on the variety of English:

• on vacation = common in American English
• on holiday = common in British English

So Ég er í fríi can naturally be understood as either:

• I’m on vacation
• I’m on holiday

The Icelandic phrase itself is very standard and natural.