Taxes for freelancers

The taxman may be the most dreaded person – besides your ex. And you know what is common between a taxman, a 60-minute workout and your ex? You avoid all three of them until it becomes mandatory to embrace the truth and do what you should do. Responsibly.

The taxman may be the most dreaded person – besides your ex. And you know what is common between a taxman, a 60-minute workout and your ex? You avoid all three of them until it becomes mandatory to embrace the truth and do what you should do. Responsibly. With that said, statistically speaking, a growing number of young people are working as digital nomads a.k.a self employed either as a side hustle along with their studies or as a full time freelance job. No matter how cool you may sound when you tell your peers that you are self employed and free as a bird, you can’t escape the tax cage when it comes to the European Union’s strict policies for each country. Besides that, many young people today have no idea how much they need to be earning through freelance work in order to become eligible for taxes; Is it $4000, $8000 or $15,000? Who decides how much tax money you should be paying and why?

Another grave problem faced by the expats today in Europe is whether or not they become subject to double tax returns if they live in another state or country without possessing complete citizenship yet. Many such good hearted expats have come to Miss Legal to solve their tax problems that is causing them headaches in their new beautiful countryside apartments while they happily work as freelancers.

I live in another country how do I avoid double taxation on my income?

Fortunately, almost all of the countries in EU have a double tax agreements that spare you from being subject to paying taxes twice on your income. The country you are currently working in, may consider you as a resident if you have resided there for more than 6 months during your work period. You may then be eligible to pay taxes only in the country you are residing in. However, in order to avoid future troubles with double taxation you may have to inform the tax authorities in your home country that you have already paid taxes on your income in your country of residence.

With that said, here is a good news. While you cannot evade taxes in your country of residence after avoiding double taxation, even if that means that the tax you pay here is more than what your home country applied on the same amount of income, you do however have the chance to choose a country in Europe with the lowest tax rate. According to FinGlobal, some of the lowest tax rates countries in Europe include:

  • Georgia at 6%
  • Bulgaria at 10%
  • Gibraltar at 10%
  • Malta at 15%
  • Monaco being a tax haven at 1% income tax rates and only 17% VAT taxes on household items While countries with the highest tax rates in Europe include:
  • Sweden at 61.85%
  • Denmark at 55.8%
  • Austria at 55%
  • Belgium at 53.7%
  • Netherlands at 52%
  • Luxembourg at 48.78%
  • Portugal at 48%
  • Germany at 47.5%
  • and France at 45%

Other than that The Great Britain has somewhat similar tax return rates to France and Germany, with mediocre tax return rate at a consistent rate of 45% making it a tax friendly country to live in. In comparison, the United States has various tax brackets for the different amounts of incomes received by different people, ranging from 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. With so many different options to choose from while deciding your country of work, you may still be subject to scrutiny under tax authorities if you try to manipulate the system through misinformation, fraud, incomplete information or complete evasion of taxes.

For instance, the Ministry of Social Affairs and Employment and the Secretary of Finance Ministry under the government of Netherlands states that:

“In general, everyone who works as self-employed has to register themselves with the Chamber of Commerce. The first step to start working as a freelancer in Netherlands is to make sure that you are registered as a freelancer to be able to receive VAT number from the tax authorities so you don’t get into any trouble.”

Now the most common question asked by the expats from Miss Legal is how can I decide if I come under self-employed, to which the NL government has issued a clear statement under the Labour Law:

Are you self employed?

You are self employed if:

  1. You have at least three different clients per year;
  2. You do not invoice more than 70% of the income to the same client;
  3. You have varying income;
  4. You decide how you carry out your work and you are not in authority to the client (s);
  5. Your client (s) may / may not give you specific instructions or interfere with your work in terms of content;
  6. You can send another self-employed person in your place, without this creating a problem;
  7. You drive your company at your own risk, you are liable for damage;
  8. You advertise your company (business cards, advertisements, a website, writing blogs, giving workshops etc.);
  9. You strive for continuity: you undertake actions to ensure that your company continues to exist;
  10. You invest in your business;
  11. You strive for profit.

When all criteria are met, there is nothing to worry about and there is entrepreneurship. The first five criteria are decisive in practice when asked by the tax authorities whether or not there is any entrepreneurship. However, it may not always be that you as a freelancer own the business. In fact, in some cases you may be considered in paid employment if

    • You perform work in person, or in certain period of time;
    • The employer is obliged to pay you a salary based on milestones or hourly rate;
    • There is a relationship of authority between your employer and you (as a freelancer), for instance an agreement or an NDA;

If you are someone in paid employment, then you are protected under Dutch Labour Law from dismissal and the minimum wages. In order to decide whether you should be put in self employed brackets or in a paid employment bracket, the tax authorities issued a solution in the form of Model Agreements.

Model Agreements under tax authorities

Two years ago, employers in Netherlands were able to get work done by freelancers in a cheaper rate without having to keep up with minimum wage laws and no strings attached that come with sophisticated contracts. However, the Model Agreement came into effect since May 01, 2016 that prevented the employers from doing the above. The model agreement was designed to get you more security about the fact whether you are taken as a freelancer or fictious employee by the tax authorities. By studying the contract between you and your employer, the tax authorities decide whether to charge you taxes as a freelancer or a paid employee. By using applicable model agreements issued by the government, you could register yourself as a freelancer. But what if the business your employer has is more complex to fit under a model agreement. Then they could devise their own model agreements and register them with the tax authorities. However, that looked way easier than it was. The model agreements simply didn’t live up to their name since they had many cons including:

    • The tax authorities seemed to take on every second that an employee worked for instance in an hourly, or they seemed to overdo it with every comma and semicolon that got included in the work;
    • The model agreements did not fit some categories of work under the same employer, for instance, a model agreement may fit an IT expert working on an hourly but could not fit a digital marketing expert whose mode of work could not simply be counted through the ticks of a wall clock!

Hence, the tax authorities came up with a new and improved solution to keep up with the seek-a-boo between a freelancer and a fictious employee:

Initiating invoices

If you are working as a paid employee then you don’t need to worry for the invoices as they are already including in your job description and company’s profile. On the other hand if you are working as a freelancer, you need to keep a complete record or your work activity. You would need to file invoice before the 15th of each month after the service you provide has been completed by you. However, your invoice must meet certain requirements to be accepted by the tax authorities. A good news, however is, if you work as a freelancer then your client is not eligible to deduct wage taxes on your income.


Improved law on model agreements

Along with the invoices, the tax authorities made it compulsory to have an employment contract with clear conditions regarding the hourly rates vs amount of work:

    • A longer duration of the contract or
    • A low rate in combination with performing regular activities
    • For an high hourly rate (€ 75.00 or higher), a client statement is entered

A client statement must give clients advance clarity and certainty when hiring self-employed people. A commission statement is issued by the tax authorities after a form of questionnaire has been completed. The practice is also decisive for the client statement. If the questionnaire is not filled in truthfully, an additional assessment will follow with a fine. In the elaboration of the law, field parties such as zzp organizations, employers 'and employees' organizations would be involved and both enforceability and impact on the administrative burden would be considered as important aspects of the contract.


The hunt for malicious employees

This does not concern the freelancers or self employed where there is a difficulty in finding a barrier between the scope of work defined between them and the client. The tax authorities initiated this task to ensure that there were no bad fish left in the sea. The hunt includes those with false pretense as freelancers, such as intent misinformation, scam or fraudulent workers. The tax authorities put greater emphasis on fields where the practice was found to be more intense including:

    • 35% in Construction
    • 510% in ICT
    • 40% in Healthcare
    • 50100% in Transport


Consequences of false self employment

Now that the malicious practices as workers were found more concentrated in the above mentioned sectors, it would not be long before the tax authorities grab the scammers and charge high penalties. For this purpose, more than a 100 million Euros have been allocated to combat 'fictious self-employed'. Once caught the scammers would also not be able to make improper use of tax benefits, such as the self-employed deduction and the SME profit exemption; in addition to heavy fines for their fraudulent statements.

Other than that when, after the tax declaration by the tax authorities, it is concluded that there is no question of entrepreneurship, but of an employment (on the basis of the practice) this has major consequences for you. You will have to pay back the tax benefits that you have enjoyed as an 'entrepreneur' that year. The unpaid wage tax and social security contributions will also be recovered from you.


Does working as a freelancer on social media count as false self employed?

Yes, if you work as a freelancer on social media you are still expected to pay tax returns on your extra income. You could be charged under pretentious false self employment if for examples you worked as a freelancer offering online services such as wedding planner, caterer, hairdresser, make-up artist, DJ, singer, rapper, photographer, speaker, keeper, cleaner, website builder, handyman, or your products such as cakes, wedding dresses, candles and clothing, and never filed a tax return on that income. While working as a freelancer on social media is not prohibited and is even encouraged, but the black work is illegal and may even leave you with unrevoable consequences.


Black Work is undeclared work

Black work goes a long way: if you earn money and you do not pay tax or social insurance contributions, you work black. In practice we come across questions such as 'I work full-time as a manager and besides my full-time job I want to earn extra money as a photographer to be able to redeem my tax debt faster, do I still have to pass on my income to the tax authorities?' I work part-time in health care and I also want to offer cakes and cookies on Facebook, Marktplaats and Instagram for sale in the weekends or in the evenings, do I have to pass this on to the tax authorities? "The answer to both questions is yes, because the reason why someone earns extra money besides their job or on which days someone does this does not matter. All income that someone earns structurally must be specified in the tax return. Pay attention! When it comes to prize money, this is different and it does not have to be structural earnings. A recent example is a Pokeraar who was caught by the Dutch Tax and Customs Administration on YouTube in 2014. The Pokeraar announced his winnings via Youtube, but he did not pass on his winnings to the Tax Authorities. The Tax Authorities were able to detect him with the aid of Youtube and issued an additional assessment of € 17,000.00.


Consequences of working black

When you work black, you are not insured against illness and incapacity for work and you do not accrue pension. You also run the risk that your customers can hold you personally liable if you do not provide the service or the product. You then run double risk: Firstly you have to pay your customer compensation, and secondly you run into the tax office and you will still have to pay tax and a high fine.


Detection methods

The Tax and Customs Administration works with its own investigators who can request data from Marktplaats, Facebook, Instagram and Youtube. Only offering a fake name your service or your products offers no protection. A warned man therefore counts for two. If the tax authorities find out that you do not pay taxes, you still have to pay tax and you have to pay a high fine that can go up to thousands of Euros.


What happens when you received a benefit under false self employment?

When you receive a benefit from the municipality, UWV or SVB and you work black, you can get a fine. You also run the risk that your benefit will be stopped and that you will be required to repay your full benefit. A recent example is the Eindhoven couple who were caught by the municipality last year. The couple is in assistance and has sold around 4,000 items via Marktplaats. This involved household goods, mopeds and bicycles. The municipality has, despite having its own used items, reclaimed € 153,000 in unjustly paid assistance. With a bit of bad luck, the tax authorities will still knock on their door and they will not only have to pay back the nine-year payment, but also the income tax and any fine.


What if I my employment relationship statement (VAR) was manipulated by my client?

The VAR is not binding and the tax authorities can still check and correct this up to five years after the declaration. The VAR is actually more of a kind of prediction for the coming fiscal year. It still goes that maybe your client interfered with the content and execution of your work. Or you were held accountable for your working hours by the client. Or maybe that your client initiated and directed invoices end customer while you should have had full authority to do it yourself. Or you only had business cards from the client and financially depend on the contractor. The tax authorities then can not only test at the end of the year whether the company conditions have indeed been met but also go back on their decision hence cancelling the VAR with heavy penalties.

If you are working as a freelancer, you have to keep up with invoices, VAT registrations, income tax returns and much more. We understand that this could get overwhelming for you. You can get a direct quote from Miss Legal to help you ease the process as a responsibl

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