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Technology has multiplied the possibilities, and more and more people are making the leap to freelance life. With the explosion of digital business, countless options are opening up to achieve that longed-for FREEDOM, in capital letters and bold.
Freedom of schedule, freedom of decision and financial freedom. If there’s one thing the self-employed enjoy, it’s autonomy, as the name suggests.
But being self-employed goes beyond being registered with the RETA (the Special Scheme for Self-Employed Workers in Spain). It’s a whole lifestyle that, like everything, has its pros and cons. And, especially at the beginning, it involves lots and lots of questions.
«When is the perfect time to do it without putting my financial security at risk?»
«How can I save and look after my money as much as possible once I’ve decided?»
«What kind of obligations will I take on in my new self-employed stage?»
«Do I have the knowledge I need to deal with them?»
In this article, we explain what you should consider before registering as self-employed so you do it safely, are aware of everything you can gain (and everything it entails) and don’t risk your money.
1. Decide when it’s time to become self-employed
Are you already invoicing? How much can you invoice without being registered? When should you register so you don’t have problems with the tax authorities?
There’s no single way to get started, but a thousand possible paths to the point where you finally have to officially register as self-employed, so asking yourself these questions is completely normal.
Many self-employed people start little by little, combining their job as an employee with small forays into self-employed life, until they’ve tested their business model and feel confident enough to quit their job for good.
Others combine salaried and self-employed work for years, and it works out great for them.
And there are also those who dip into their savings and dive in headfirst to finally throw themselves into the project they’ve always wanted to start.
Only you can set the pace for all these steps, but the moment you’re obliged to register as self-employed and pay your monthly social security contributions is set by law.
In Spain, you can declare up to €1,000 earned in your income tax return without being registered with any agency.
This means that if you’ve been doing projects on your own and haven’t invoiced more than €1,000, you can simply include this income in your annual tax return without worrying about the tax authorities or social security objecting to you not having registered.
Once you go over that limit, you absolutely have to register with the tax authorities as someone carrying out an economic activity and file your tax forms religiously.
This point is fairly clear, but things change when it comes to knowing when you have to register with the RETA, which is another way of saying «registering with social security and paying self-employed contributions».
Here there are two criteria to keep in mind: whether your profits as a self-employed worker exceed the SMI (the Spanish minimum wage) and whether or not your activity is recurring.
In principle, you can wait as long as you don’t exceed the SMI. According to this criterion, you should only register when your monthly average profits exceed the SMI. For example, if you can invoice €12,000 over a whole year and this month you invoice €1,200, you can foresee that you’ll very likely exceed the SMI, so you should register.
But remember there was a second criterion. Even if you don’t exceed the SMI, there’s the question of how recurring your income is, which is key to whether social security sees your activity as marginal or as an economic activity. And therefore key to deciding when you should register.
If your fledgling business has become your main source of income and you invoice on a recurring basis (even if not every single month), social security will most likely consider that you’re carrying out an economic activity.
That means you’ll have to register. And be careful, because not doing so carries the risk that the authorities will ask you to pay all the contributions from the start of your activity, with no discount. It’s no joke.
In addition, invoicing without being registered involves other risks many new self-employed workers aren’t aware of, including these:
◆ Not being granted the flat-rate discount when you later want to take that step
◆ Having your bank investigate you for money laundering if the income you receive in your bank account doesn’t match an economic activity
◆ Another professional recording an “unreal” invoice in their accounts (because, after all, you’re not registered), which gets your clients, partners or suppliers into trouble. A surefire way to end business relationships.
◆ Other professionals raising objections, because no self-employed worker or company wants to pay another off the books, both because of the tax and legal problems it brings and because an expense without an invoice is no longer tax-deductible.
2. Choose the right IAE category
IAE categories are the headings the Spanish tax authorities use to classify the activity you’ll carry out as a self-employed worker, and they determine each person’s tax obligations.
Yes, it would be something like «tell me what you do and I’ll tell you what taxes you pay».
Now, the irony of it all is that there are hundreds of IAE categories, governed by rules, but also by exceptions to those rules, and, though it may not sound serious, there are also exceptions to the exceptions to those rules.
It’s a complex subject, to the point that 90% of registrations filed with the tax authorities without professional help contain errors.
But if we had to give one tip to guide your search for the right IAE category, it would be this: don’t just think of a job title; think about how you’ll carry out your activity and how you’ll deliver your products or services.
There are probably many categories you could identify with, but each one’s circumstances are different.
Keep in mind that your category will determine which tax forms you have to file, which expenses you can deduct and how you should issue your invoices, and that choosing the right IAE category is essential to get the best possible result each quarter.
Whether you register yourself or delegate the task to an accountant, it’s important that you’re the one who spends a little time defining this point.
If you’re not quite sure, hiring a professional can save you more than one headache, because registering or deregistering as self-employed is relatively quick and easy, but making a mistake in the process that leads to future tax errors can cost you dearly in the long run.
But let’s get down to business: let’s say you’ve finally registered as self-employed with both the tax authorities and social security, and let’s assume you’ve chosen your IAE category and filled in the other boxes correctly. Your work as a new self-employed worker isn’t over yet.
3. Learn everything you need and get your admin up and running
Now that you’ve registered, it’s time to learn the basics of accounting and taxes.
After all, you’ve become the captain of your own ship, which means that from now on you’ll have to row to keep the business going and steer the tax helm.
Not loving the idea? Keep in mind that by investing a little time to lay the groundwork properly and having the right help, managing your business can be quick and simple, as well as very advantageous financially (more on this in the last point).
But for now, let’s briefly look at the three areas you’ll need to learn the basics of: invoicing, deducting expenses and filing taxes.
Learn how to invoice
What should be the best part of being self-employed (invoicing, generating income) is often overshadowed by a lack of the right tools and knowledge to handle this basic yet vital part of accounting.
Invoices must include some mandatory minimum information and follow a small set of rules common to all self-employed workers. But then there are variations depending on each particular case.
Some self-employed workers apply personal income tax (IRPF) withholding to their invoices; others don’t. Some self-employed workers charge VAT and others don’t. And among those who apply these taxes, the VAT or IRPF percentages aren’t the same for everyone.
Things change for the same self-employed worker depending on the type of client they work for: selling to a Spanish company isn’t the same as selling to a foreign one, just as selling to a company isn’t the same as selling to an individual.
Imagine you’re a marketing consultant working with companies in your city; that means you have to issue your invoices with 21% VAT and 15% IRPF withholding.
But one day you get a German or Danish client, or one from any other EU country, and things change: those invoices won’t include IRPF.
In addition, if you’re both registered in the ROI (the Spanish register of intra-EU operators), they don’t have to include VAT either, although in this case they must mention the law that regulates the VAT exemption for intra-community transactions.
If you want to avoid problems with the tax authorities, you need to know all these particularities before issuing your invoices, not after.
Learn how to deduct expenses
We’ve talked about the rules for invoicing when you generate income. Now comes the other side of the coin: recording the expenses arising from your activity.
You may have had these expenses before, but since you weren’t registered, you simply couldn’t deduct them. For a self-employed worker, deductible expenses are the real key to saving on taxes.
Think of the tools you use to run your business, such as software or subscriptions, utilities and rent, trips to your clients’ offices, your website costs or your marketing and advertising expenses.
You’ll be able to include those expenses in your accounts, and each of them will help improve your tax result, that is, pay less in your income tax return or get a bigger refund. In other words, save.
This happens because, as a self-employed worker, you pay taxes based on your profits, and your profits aren’t the sum of your income but the difference between your income and all the expenses you’ve incurred as a self-employed worker.
Put another way, the higher your profit, the more you’ll pay. And the way to reduce your profit without reducing your income is to optimize everything on the expenses side.
And learn how to file your taxes
If you don’t want the tax authorities to come down hard on you, you need to learn to file your taxes properly, both quarterly and annually.
You can get professional help here, but as the captain of the ship, you shouldn’t wash your hands of it and let go of the helm completely. You need to get at least minimally involved in the process and understand how it works.
Keep in mind that even if you work with an accounting firm, your accountant will tell you at the start which tax forms you have to file, but if your situation changes at any point and you don’t proactively tell them, you’ll very likely end up with forms that haven’t been filed.
Going back to the marketing consultant example, as soon as they start invoicing a European client, not only does the way they invoice change, but filing a new quarterly form is added to their tax obligations.
Out of ignorance, forgetfulness or whatever, it’s very easy for the consultant not to tell their accountant… and that’s where their problems begin.
Also keep in mind that the accounting firm will gather all your income and expense invoices and tell you how much VAT or IRPF you owe at the end of each quarter, when it’s time to file the return.
By then, you no longer have any room to act. But if you work out this calculation in advance, not only will it be easier to set aside whatever amount you need, but you’ll also be able to consider alternative actions, such as waiting to issue an invoice until next month or adding a new expense.
In other words, if you get actively involved in your tax management, you’ll have more visibility, which will give you control and the ability to plan.
Bonus: choose a tax optimization tool
This point is closely related to the previous one, but it can make the difference between saving thousands of euros a year or not.
If you want to get more involved in managing your taxes while spending as little time on it as possible, the best option is to use tax management software or a digital advisory firm that works with this kind of resource.
A simple invoicing tool that lets you create invoices with automatic VAT and IRPF helps you avoid manual calculation errors and, as a result, problems with the tax authorities. That alone can make a big difference when it comes to saving.
But there are also tools that let you automate and optimize the whole tax filing process, including your annual income tax return.
For example, with Declarando, every time you enter your income and expenses, the tool fills in your tax forms and prepares your accounting books in case you ever need to meet any obligation with the tax authorities.
No information gets lost along the way.
Every entry you make in your accounts is automatically added to your quarterly returns and to your annual income tax return. That way, you won’t have to dig up all those invoices months from now and decide which ones are deductible and which aren’t.
Not only will you not forget any expenses or risk errors and fines with the tax authorities, but you’ll also spend much less time on it, because things get done once instead of three times.
At the same time, this is what lets you see at any moment how much you’ll pay in your next annual return.
So you see, with a little technology you can have all the data in real time, and that’s the key that opens the door to planning and to real tax optimization.
If you’re still deciding what kind of business to start, you’ll want to first read how to start a profitable business, and once you’re up and running, these effective solutions to the problems of your venture will help you overcome the most common obstacles.
Having predictable income, like that provided by an MRR (Monthly Recurring Revenue) model, makes it much easier to take this step with less risk.