For IRS declarations running from April through June, there are several updates to take into account in Annex B (freelancers), with more tables to complete: 17A, 17B, 17C and 17D. All are destined to declaring expenses and charges borne by the independent worker in the exercise of a business activity (income, electricity, water, transportation, communications and insurance, among others). They stem from modifications to the Simplified Regime introduced in the 2018 State Budget.
The rules governing Social Security contributions for self-employed workers are changing in January. Graduated income tax brackets will no longer be the reference point. Payments will be based on 70% of declared earnings in the previous three months, rather than on the total of sole trader income from the previous year. The rate of contributions also drops from 29.6% to 21.4%. Freelancers will have to submit a quarterly statement to determine the relevant income, which will be the basis for Social Security assessment in the following trimester.
Earned income can be adjusted by up to 25% (up or down) so that workers can elect to pay a higher or lower amount that will eventually be reflected in benefits. The new rules also establish a minimum monthly Social Security payment of €20, including periods with no recorded income, as a way to ensure on-going social protection coverage, rather than the start-and-stop method that was used in the past.
The “AT” (Tax Office) wants to assure that all entrepreneurs receive their correspondence in a secure and unquestionable manner. To this end. all Sole Traders registered for VAT are now obliged to have an electronic post box with www.viaCTT.pt. The viaCTT account must be activated within 30 days after VAT registration. The rule applies to sole traders once they have reached an income of over than 10.000€ in the preceding year. Fines for non-compliance go from €50 to €250.
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.
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.
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.
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.
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.
Freelancers, who opt for the Simplified Regime in their first two years of registered business activity, benefit from a reduction of 50% and 25% respectively of the coefficients for the determination of taxable income, provided that they do not derive any income from Salaries (Category A) or Pensions (Category H).
If you exercise the “high value ” profession associated with your Non Habitual Resident application in Category B, the levy is customarily based on 75% of gross income, taxed at a flat rate of 20%. This leaves a final flat rate assessment of 15%, as compared to +40% as a typical higher rate taxpayer.
If your business activity is different from your NHR status, tax is commonly based on 35% of the gross income in the Simplified Regime, then assessed at marginal rates. This leads to a typical final assessment of 10-15%
The Government has confirmed that, for independent workers under the Simplified Regime, Social Security deductions are to be based on net taxable income after application of the appropriate coefficient, not the gross received. In addition, overall Social Security deductions due may not exceed 10% of gross income from all sources.