2019 Social Security Reform

01 Monday Apr 2019

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2019, basis, contribution, freelancer, portugal, quarterly, rate, rendimentos, rreform, self-employment, social security, ss

Once again, Social Security has become the object of significant change. The following are the highlights of the legislative updates to Social Security that freelancers will need to take into consideration in 2019 and beyond.

Quarterly contributions

The principal innovation of the 2019 Social Security Reform for Independent Workers is the rolling quarterly calculation of contributions. In the past, payments were determined based on prior earnings from two years before. While the trimester method of calculation requires more bureaucracy, it should prove to be more in line with the economic ups and downs that are the day-to-day realities of most sole traders.

SS rate eases – Starting in 2019, the Social Security contribution rate borne by self-employed workers is fixed at 21.4%, as compared to the prior levy of 29.6%. Individual Entrepreneurs now pay at a rate of 25.4%. *

Basis of incidence changes – From 2019 onwards, the contribution rate base generally considers 70% of the relevant income from the previous quarter (or 20% in the case of production and sales) as opposed to the previous year as before. The self-employed person may request a 25% reduction on the quarterly amounts.

Accumulating dependent work with self-employment has a SS exemption limit

In the past, salaried workers (Category A) who also earned sole trader income (Category B) were wholly exempt from additional contributions to Social Security. Under the new rules, those who receive more than €2,450.86 euros per month must pay additional SS contributions. If they are not exempt, the 21.4% SS rate will be applied to the amount that exceeds four times the value of the IAS (€1,743.04 euros in 2019). Benefits such as unemployment or parenting allowances, for which only salaried income is covered, are excluded.

Mandatory quarterly SS declaration – Based on the quarterly statement, Social Security determines the relevant income and the basis of contributions for the following three months. In this declaration, the worker can request to pay a 25% lower or higher contribution. This declaration should be submitted by the last day of April, July, October and January. Social Security contributions are monthly and now run between the 10th and the 20th of the following month.

Minimum contributions – The new rules also establish a minimum monthly contribution of €20. This amount should be paid when there is no income in the reporting period in question. This measure is designed to ensure social protection in slow periods where independent workers are without income for a limited period.

“Cuidado! O Português pode ser uma língua traiçoeira!” (Beware, the Portuguese language can be treacherous) For Individual Income Tax (“IRS”) purposes, the expression “rendimentos professionais” (professional income) refers to earnings from a specialised career listed in Article 151º of the CIRS. For the most part, these professions require a higher education degree, such as doctors, lawyers, architects, etc. Under the Simplified Regime, the taxable coefficient for these “Individual Entrepreneurs” is 75%. Other freelancers fall under the category of “Rendimentos empresariais” (vocational income) and are assessed based on 35% of their gross sole trader income.

In the lexicon used by Social Security, “Individual Entrepreneur”refers to a Sole Trader who, through a permanent establishment, has or is likely to have employees, such as hairdressers, mechanics, restaurants and others. While these “Empresários em nome individual” may pay the same “IRS” rate as other vocational trades, they are levied a higher Social Security rate (25.2%) on quarterly contributions when compared to other “trabalhadores Independentes” (21,4%).

Working for a UK company in Portugal

23 Thursday Aug 2018

Posted by Ursula in Article, Posts

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brexit, british, employee, freelance, portugal, resident, social security, uk, work

A common situation arises where a UK employee wishes to continue to receive a salary from a British-based company but would prefer to provide the services virtually via the internet while residing in Portugal.

Unfortunately, there are significant obstacles to this type of arrangement:

As an employee of a UK-based company, you cannot enrol nor make contributions to Social Security (National Insurance) in Portugal.
If you continue to declare as a UK resident but, in fact, are living and working in Portugal, you will fail to meet the criteria of the UK Statutory Residency test requirements.
To be employed by your UK company in Portugal, the Company would need to set up a subsidiary or branch office in Portugal. While this is possible, the process involves both initial start-up costs as well as ongoing overhead to the Company. This solution is unlikely to be cost effective for just one employee.
Once a branch office is in place, Portuguese personal income tax (“IRS”) on a modest salary (€35,000) would be ±25%. In contrast, as a freelancer in Portugal, taxation on a similar amount would be just ±5% in year one, ±7.5% in year 2 and ±10% after that.
Post Brexit (March 2019?), requirements could become more complicated. While not even insider political negotiators know how Brexit will turn out, there is no reason to expect anything less than a more complex state of affairs for UK individuals wishing to work abroad.

Working as a PT freelance contractor to the UK Company

The best solution to the dilemma is to be a Portuguese-based freelancer, contracting with the UK Company, rather than continuing to work as a UK salaried employee. By being registered as providing “other support services” from Portugal, you will be assessed on just 35% of your gross invoicing to the Company under the Portuguese “Simplified Regime”. Social Security deductions will be made on a similar reduced basis. As already mentioned above, the final tax due should be substantially lower.

The Company should also find this arrangement to be advantageous by eliminating UK National Insurance obligations, thereby lowering overhead. Payment of freelancer invoices can continue to be made to the sole trader’s local UK bank account if so desired.

The Company hires on a project-by-project basis; the freelancer earns more; the Company lowers risk. Shifting to an independent worker status based in Portugal can create a win-win situation for all concerned.

New Social Security Contributory Scheme for Independent Workers

16 Monday Apr 2018

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2019 scheme, accounting, benefits, deduction, drop, exemption, local lodging, new, social security, sole trader

The revamped Social Security contributory plan for Sole Traders has been passed into law. Under the new regime, the deductions applicable to the Self-Employed will be based on the average income of the previous trimester, rather than the preceding year. The first declaration under the new rules will take place in January 2019, based on the earnings of the last quarter of 2018. According to the diploma, until the changes take effect, the contribution base established in October 2017 will continue to apply. Keep in mind that the following rules will only start as of January 2019, not in 2018.

Contributions drop

Under the new regime, Social Security contributions decrease from 29.6% to 21.4%. Based on 70% of the product, Freelancers in services will have a net rate of 15%. With a corresponding coefficient of 20%, Sole Traders in production, sales or tourism will have an effective contribution of 4.28%. In all cases, the computations derive from the average income of the previous three months. Furthermore, Independent Workers will have the flexibility to adjust further their payments up or down by as much as 25%, to take into consideration on-going earnings fluctuations.

Minimum deduction

Self-employed individuals must declare their income to Social Security each quarter. The new regime creates a minimum monthly contribution of €20 to guarantee stability and continuity over the course of one’s contributory career to assure future pension entitlements as well as other social benefits associated with occurrences of unemployment or illness.

Other Benefits

The new scheme provides that sick pay may be awarded from the 11th day onwards, rather than after the 31st day as before. Eligibility for unemployment compensation will require 360 days of contributions instead of the current 720 days.

Standard Accounting

In the case of self-employed individuals with standard accounting (“contabilidade organizada”) rather than the Simplified Regime, the relevant income corresponds to 1/12 of the taxable profit calculated in the previous year, with a minimum limit of 1.5 X IAS (±€643), to extend over a minimum period of 12 months. Nevertheless, these taxpayers may opt for the quarterly scheme.

Local Lodging exemption

Starting in 2019, a Sole Trader whose only income results from a Local Lodging activity will be exempt from Social Security contributions. Under the current system, individuals who have opened an “AL” business must begin making payments to Social Security when their first year waiver is over unless they are already contribute or receive benefits from another Social Security system. The same practice applies to those with earnings from renewable energy production.

Withholding, limits and exemptions

Contracting entities should withhold 10% in situations where the Freelancer’s economic dependence (read: income from a sole contractor) exceeds 80%, or 7% when less. Exemption from contributions will continue for self-employed workers who accumulate pension income, as well as those who have contributed the minimum monthly deduction of €20 for a period of at least one year.

On the other hand, Sole Traders who accumulate salaried work will be exempt when average monthly income (relative to the previous quarter) does not exceed the value of 4 X IAS (Social Support Index) or ±€1,715.

Before there was no such limit, that is, those accumulated income from dependent work derived from self employment could be automatically exempt from contributions on their Sole Trader earnings.

Tax Evasion

21 Monday Nov 2016

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bureaucracy, cause, contributions, law, porto, social security, sovereign, tax, tax evasion, university

According to a recent report issued the Economics and Fraud Management Observatory of the University of Porto, the main causes of tax evasion in Portugal are the burden of direct and indirect tax on businesses and households as well as Social Security contributions. Other causes include the intensity and complexity of laws and regulations (bureaucracy in general) and the lack of credibility of sovereign bodies.