As a freelancer you have to make a choice on how to sell your services, which consequently determines your tax liability. I’m fully aware in some countries and in certain circumstances you can get away with paying no taxes but it is illegal pretty much everywhere, so we won’t be covering this.
Legally, you should choose between these two options:
- Sole trader. You're running your business as an individual person.
- Private limited company. You are an owner and a managing director of the company that sells your service.
These options differ in a number of ways:
- Name on an invoice— when you are a sole-trader, the name is yours. When you run everything through a company, a company is an entity that receives the money.
- Responsibility — sole-trader is equivalent to you as a person. In circumstances when something goes wrong and clients go to court - say, NDA was compromised and you’re asked to pay out a huge sum... Well, this is your personal debt. When you use a company, the company as a legal entity accounts for it. And you as an owner have responsibility limited for amount of unpaid share capital.
- Money ownership — when you're a sole-trader, the money is yours. You may use your personal bank account to keep it (and gain a lot of pain with accounting), but you could use the funds as soon as you want to. When using a company, before you pay for that glass of wine, you should withdraw it - by paying yourself a salary or dividends.
What is the best option? It depends on. I personally use a company because I prefer better lability control.
Also, not every country has an option to register as a sole-trader and authorities may suggest that you register as a one-euro-company instead. Furthermore, some countries won’t allow you to register as a sole-trader if you aren't already their resident. Sometimes to receive this status you’re required to sign a long-term rental contract. While other countries have a special visa for sole-traders which you should receive before you enter the country - some will allow you to change your status, but others will not..
Let’s simplify this to a question: what is the cheaper option in your next country?
Sole-trading is pretty clear - this is your personal money, you own it and you pay taxes on it. In case you operate through a company, there are three options to withdraw the money:
- Dividends. A single payment made annually out of accumulated profits.
- Salary. A fixed monthly income you pay yourself to cover your living expenses.
- Salary + Dividends. A combination of a fixed monthly income with a bonus at the end of the year.
Do tax rates differ for these options? Absolutely! Besides, some of the countries require a minimum salary for each employee, others only for a managing director.
When your company pays you a salary, it should:
- deduct personal income taxes
- deduct social contributions
- pay additional social contributions
Sounds like a sole-trader must be a cheaper option? I’m afraid not. Usually you must pay the same amount of social contributions as the company. Plus a little extra if you didn’t earn enough to pay a salary, which could be an issue.
As a general rule, the cheapest option are dividends, and sole-trader comes close to paying a salary. However, some countries we currently support have a few exceptions:
- Austria. Taxes on dividends are lower. Sole-trader rate is 3%-5%, and there is a reduction for income below €3'000 per month.
- Belgium. Each company should pay a minimum of €45'000 per annum as a salary to a managing director, or at least use this amount as a threshold for social contributions and taxes. This makes company-based setup impossible for turnover below €4'000 per month. Salary is the most expensive option (up to 70%!), and a sole-trader is the cheapest for income of up to €7'000 per month. Above that dividends may save you around 5%.
- Bulgaria. There is no difference for income above €6'000 per month. Below €6'000 dividends are the cheaper option.
- Czech Republic. Sole trader is cheaper than salary by 10-15%, and matches dividends at €9'500 per month. For anything above a sole-trader would be a better option.
- Cyprus. Dividends are the most expensive option for income of up to €4'500 per month. For anything above the difference is close to 5%.
- Denmark. Dividens are more expensive than both salary and sole-trading. However, for income over €2'700 per month dividends match a salary, and for over €3'000 per month the difference between sole-trading and a salary is close to nothing.
- France. Sole-trader is the cheaper option which saves you 15% or more.
- Germany. Dividends are the most expensive option, by far.
- Georgia. Sole-trader pays just 1% in taxes for income of up to €12'000 per month.
- Hungary. Sole-trader will save you around 12%. Dividends and salary have a similar tax rate.
- Ireland. Sole-trader is a cheaper option for income of up to €9'000 per month. For anything above dividends are your best option.
- Latvia. You will pay lower taxes if you register a microenterprise. For turnover below €50’000 per annum you don’t have to pay social contributions.
- Macedonia. For income of up to €2'500 per month, sole-trader rates are similar to a salary. Above this, the tax rates are lower, and above €8'500 per month the rates are similar to dividends. So the more you earn, the lower your tax rate is. Salary is a better option if you earn anything above €17'000 per month.
- Montenegro. Dividends are cheaper for an amount below €5'500 per month. For anything above a sole-trader status may save you up to 5%. Paying a salary will cost you +20%, however for anything above €15'000 per month the taxes will match of those on dividends.
- The Netherlands. Salary is the most expensive option for lower income. For income over €5'500 per month, taxes match those of a sole-trader. Above €6'500-€7'000 per month taxes come close to those of dividends.
- Norway. All three options are very similar in cost, varying by ±3%. However, taking into account that a minimal threshhold for social contribution is huge, salary might turn out much more expensive.
- Portugal. Sole trader status is similar to dividends, or cheaper if your income is below €100'000 per annum when special tax regime is applied.
- Serbia. Dividends are the cheapest option for income of up to €6'500 per month. For anything above, sole-trading or a salary will cost you less.
- Switzerland. Dividends are the most expensive option. Sole-trader is much cheaper, with a huge difference of 25%-30%.
- UK. Dividends and sole-trading are somewhat similar, while salary will be more expensive to pay.
- Turkey. All three options come very close for income above €6'000 per month. Above €12'000 per month there is practically no difference.
Overall, a company is your best bet for liability control. You could use a salary to cash flow your living costs, and pay yourseld a bonus at the end of the year. Usually this would help you keep your salary related taxes as low as possible. However, this is not always the case and will depend on the chosen country and your income. Use the calculator here to estimate taxes you would pay for your income, in a country of your choice.