Tax and social security for a freelance practice
A freelance practice must establish its tax and social-security responsibilities, keep provision for payments and obtain advice suited to its business form and jurisdiction.
Tax planning and jurisdiction
Freelances lack the tax departments available to large companies, while their position outside ordinary employment can complicate tax planning. A 2014 account reported cases of freelancers owing hundreds of thousands in retrospective tax, interest and penalties after misunderstanding the rules, while emphasizing that lawful, ethical planning could save money.
Tax responsibilities depend on national policies and the way the business is established, making local knowledge and professional financial advice valuable. A tax accountant may be worth hiring, especially for an incorporated practice, because the writer’s time can be spent on client work rather than learning the tax code. Responsibility for a business’s accounting does not require the owner to perform all of it personally.
Profit tax, additional levies and VAT
European freelance guidance in 2014 described taxable profit as turnover minus allowable expenses, with taxation as an individual, company or combination depending on legal form. Its German examples of additional levies were:
- Trade tax for businesses not recognized as liberal professions, varying by municipality; the Munich sole-proprietor example was 3.85% on trade income above €25,500 in addition to ordinary income tax.
- A solidarity surcharge of 5.5% of income tax.
- A church-member surcharge of 8% or 9%, depending on the federal state.
- A television and radio levy paid as an individual and for each company owned.
- A 5% levy on payments to journalists and artists, including web designers.
The same 2014 guidance described German VAT as normally 19%, with a reduced 7% rate usually available to writers; it explained that VAT increased the price for customers unable to reclaim it, while a business could reclaim VAT on services it purchased. For the UK tax year 2013–2014, it gave a £79,000 turnover threshold over any twelve months for compulsory VAT registration, voluntary registration below that level and a Flat Rate Scheme for turnover below £150,000 to simplify accounting.
Reporting and payment schedules
A 2010 US account described health-care reform legislation scheduling an expansion of 1099 reporting from 2012: companies would report purchases exceeding $600 in goods or services per payee per tax year, including payments to corporations rather than only contract workers. It identified purchases from office-supply or computer retailers as examples and anticipated a substantial paperwork burden for small businesses gathering names and taxpayer identification numbers without in-house accounting staff.
US freelance advice published in 2011 called for scrupulous income reporting and at least quarterly tax reports, while noting that earnings and state rules might also require monthly federal or state deposits, sales tax or local business, unemployment or earned-income taxes. It recommended checking the applicable requirements with federal and state offices.
A US S-corporation owner’s 2011 payment calendar included federal payroll tax on the fifteenth and last day of each month and quarterly New Jersey filings on the accountant’s advice. The federal payments covered Medicare, Social Security and federal wage tax, with amounts supplied by the accountant and drawn from the business bank account through the Electronic Federal Tax Payment System. Registration supplied a PIN for use with the company’s federal identification number or a personal Social Security number, and processing took one business day. The New Jersey filings were NJ927, NJ-500 and Corporate Business Tax, using a mixture of cheques and electronic payments. The 2011 account gave March 15 for S- and C-corporation returns and April 15 for LLC and personal returns.
Deductible expenses and tax questions
A US freelance’s 2019 advice proposed discussing business-supporting expenses with an accountant and taking deductions only where lawful and documented. The categories and conditions in that practitioner’s account were:
- Office space, with an accountant calculating the share of rent or mortgage; the writer treated a home office as deductible only where entirely dedicated to business and the writer was not also employed elsewhere, excluding a guest bedroom used as an office.
- Office supplies, reference books, subscriptions and software.
- Client gifts and their shipping, including holiday chocolates and cards.
- Office equipment, directly or by depreciation, including computers, printers, copiers, recorders, transcribers and furniture, with tablets, phones and video cameras dependent on their use.
- Purchased books and published material related to work the writer could demonstrate, spa travel when writing about the experience, and DVDs or music for scriptwriting or video production.
- Business-related lectures, classes and webinars, professional-education travel, and substantial portions of automobile and entertainment expenses.
Tax-planning topics for US writers in 2008 included depreciation, health-insurance and vehicle deductions for self-employed people, home offices, self-employment tax, net operating losses, section 1244 stock, treatment of furniture and computers and the circumstances in which employing children in the business was advantageous. Record retention involved both a three-year rule and exceptions.
One 2008 example concerned a writer expecting a six-figure book advance after years of low income: the tax adviser rejected a colleague’s suggestion of income averaging, explaining that the Tax Reform Act of 1986 had abolished it for nearly everyone with a limited exception for farmers, and suggested considering a self-employed retirement plan instead. Another example described a 1995 US Tax Court decision concerning a literature professor who recorded unpaid Shakespeare lectures: the court rejected the IRS’s profit-motive objection because the work advanced the professor’s main career, distinguishing it from sideline activities capable of serving as tax shelters.
A writer in the Azores reported in 2015 that an adjoining outbuilding had been purchased by the business, with a workshop and upstairs office planned, and expected a large tax-deductible expense that year.
Social-security contributions
European guidance published in 2014 described social-security payments as building entitlement to state pensions and healthcare, with contributions depending on whether a person was self-employed or an employee of their own limited company; it reported employee rates as high as 40% in some jurisdictions.
For the UK tax year 2013–2014, its self-employed example comprised Class 2 contributions of £2.70 weekly, Class 4 contributions of 9% on annual profits between £7,755 and £41,450, and 2% above that range. Its German example described compulsory health insurance with a choice of private cover, a €350 minimum monthly contribution for those remaining in the statutory system and an optional unemployment scheme quoted at €68–81 depending on location. Pension contributions were described as compulsory only for certain professions, with the government favouring extension to all self-employed professions.
Professional support through the year
Qualified advice from the start can save time and money and support compliance, particularly when a practice works across borders. The appropriate professional can differ by country: 2014 guidance contrasted UK tax planning through an accountant with Spain’s use of a fiscal lawyer and suggested starting with the national freelance representative body. In 2014, the UK freelance representative body PCG reported maintaining a register of accredited accountants trained in freelance taxation.
In 2011, a US S-corporation owner described meeting the accountant quarterly and when additional issues arose, reviewing business and personal liabilities together because S-corporation profit flowed through to the personal return. Another US freelance, describing practice in 2011, visited an accountant with a bookkeeper in October or November to assess actions needed before year-end and again in February or March for final paperwork and tax calculations. Both approaches combined continuing records with advice during the year rather than leaving preparation until the filing deadline.
In a 2015 account of moving from the Netherlands to the Azores, a writer’s first Portuguese tax year produced less business tax than expected and a personal-tax refund, but a worldwide-income form for the Dutch authorities remained outstanding after the former accountant became unavailable. When Portuguese inspectors disputed about €3 of social-security contributions, referral to the local accountant resolved the matter.