More and more people are interested in freelancing. This form of work can bring both positives and negatives. In this article, we've summarized them to give you a clearer perspective.
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Advantages of the freelancing
The main advantage is, of course, the higher financial remuneration. The employer doesn't pay taxes for the freelancer, so they usually pay a higher remuneration for the work done.
The contractor is not obliged to pay social security contributions in the initial period after setting up the trade. After filing his first tax return, the amount of these contributions will be calculated on the basis of his income for the previous year.
Therefore, in this period (which may be more than a year), the only expenditure is the health insurance contribution. In 2020, its minimum amount is set at EUR 70,91 per month.
If the amount of the sole trader's turnover does not exceed EUR 100,000 per year, his tax rate is even lower than that of a permanent employee. Specifically, it is 15% of the income (for an employee it is 19%). On an average "salary", a freelancer can make hundreds of euros a year.
This is how it should be done
Every freelancer has the right to claim a flat-rate expense of up to 60% of the aggregate of his/her business income (but no more than €20,000 per year). These are such expenses that serve to maintain this income, but do not need to be proven by tax documents. No tax is payable on these expenses. They are therefore deducted from the income of the sole trader when calculating the tax rate for the year.
Example
The annual income of Peter Št'astný, a property developer, is EUR 32 000.
His annual contributions during the first year after setting up his business are EUR 851 to the health insurance company, he does not pay social security contributions.
1) Peter can claim flat-rate costs, which in his case are EUR 19,200
- calculation: 60% of EUR 32 000 = EUR 19 200
2) He pays tax of EUR 1.792
- Calculation: EUR 32,000 - EUR 851 for levies - EUR 19,200 for flat-rate costs = EUR 1,792
3) His net monthly income is EUR 2,446
Annually, therefore, on an income of €32,000:
- he will pay EUR 2 643 in taxes and levies, which is EUR 220 per month on average.
- His net monthly income is €2,446 (€2,666 income - €70.91 health insurance contribution - €149 tax contribution).
Another great advantage of a freelancer is his independence and ability to organize his working time, flexibility to choose more interesting projects, the latest technologies or work on several projects at once. Also, multiple remote work options are an advantage.
Disadvantages of the freelancing
A freelancer has to pay his/her own health and social insurance contributions, also the tax rate. He is also responsible for the correct and timely filing of tax returns and all administrative and accounting activities. On the positive side, the freelancer sets up the social and health contributions 1 time a year and the standing order has the monthly payments covered.
This is how it should be done
As the freelancer is paid for time worked or work delivered, they are not entitled to holiday pay, meal allowance or income replacement during sickness absence for the first 10 days.
If the contractor does not voluntarily pay unemployment insurance, he is also not entitled to unemployment benefit.
In the initial period after setting up a trade, when the trader is not legally required to pay social security (but may voluntarily pay it), he or she has a disadvantage in claiming sickness or maternity benefit.
If you're still undecided about what to do next, or don't know how to become a contractor, contact us. We'll be happy to guide you through the whole process from A to Z and help you set up your business quickly.
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