If you are a freelance translator in Portugal, you certainly know the meaning of the word bureaucracy. You need to pay attention to the ever-changing legislation, in particular any regulations regarding taxes and IRS (Imposto sobre o Rendimento Singular, i.e., personal income tax).
Working freelance means falling automatically under the Class B of this tax and most likely being part of the simplified system. But let’s start from the beginning…
1- What is the simplified system?
The simplified system doesn’t mean your life as a translator is less complicated regarding mandatory statements and tax deduction. It means to simplify the calculation of how much of your income is subject to this tax. Under the simplified system, the tax authority considers that 75% of income as a result of your activity as a self-employed person is your revenue, i.e., regardless of how much money you have to spend, only 25% of the total will be taken into consideration for the tax calculation.
To sum up: It is not possible, for example, to deduct an amount paid to fellow translators you have hired for a project. Neither can you deduct any expenses you make to provide the services you offer as a self-employed person.
2 – What if I have a lot of expenses related to my activity, am I forced to stay under this simplified system despite its adverse conditions?
The answer is NO! The simplified system is not mandatory. It is fully optional. You can always opt for a system based on organised accounting.
This system based on organised accounting means that you should have a written record of all your accounting calculations, in a way that shows the accuracy and integrity of your activity. It’s very similar to the accounting system used by business companies, so you will need to have a Certified Accountant.
This option has several advantages since it allows for better control over how much tax you pay, since it’s not calculated on a fixed rate, but rather on all the records of your activity.
Do note that it’s pointless to add trivial expenses to your accounting books, since this system has highly strict rules:
- Any undocumented or confidential expenses can be accepted, but are subject to an autonomous taxation of 50%. (If you do the maths, you will understand that adding more expenses doesn’t mean deducting more taxes);
- Any expenses with physical property necessary for your activity, such as the building where you work, are accepted, but only up to 25% of the amount you record (including water or electricity bills, write-offs of loans, interest, lease payments and expenses with telecommunication companies);
- All travel expenses are accepted, but only up to 10% of your gross income of Class B (your activity);
- Any taxes on income are not accepted;
- Any fines, penalties or expenses related to misdemeanours are not accepted;
- Any tax or any other expenses made by members of your household (or by people directly related to your activity) are not accepted.
And the list goes on…
However, not all of it is bad news. You can report any loss from previous years, which means that, if you have had any income loss in your activity in a certain year, you can deduct that amount in the following years, although the amount to deduct can never be higher than 70% of your income.
|Simplified system||Organised accounting|
|Calculations of the amount subject to tax||75% of income||Accounting profit|
|Option to deduct loss from previous years||No||Yes|
|General expenses with housing||No||25% of expenses|
|Travel expenses||No||Up to 10% of gross income|
|Expenses with activity||No||Yes|
After analysing the differences between both systems, it’s pretty clear that the simplified system really only simplifies the calculations over the amount that is subject to taxation.
Do not forget that any other obligations are exactly the same in both systems, for example, withholding tax and VAT.
3 – What if I have only provided my services for one company? Is there a more favourable option for my case?
There may be. Any self-employed person who ONLY provides services for ONE company in a certain tax year can choose to present their taxes calculations under the rules for Class A.
- What’s the difference?
Instead of a 75% basis of income subject to taxation, the calculation will be: your income – €4,104. The maths is more complicated than it seems, though. There are several factors that can change your calculations, for example if you have other income under Class A, aside from your Class B income. Even so, assuming that we’re using an example of a person who only has Class B income related to services provided to only one company, for an income under €16,416 (4,104 ÷ 0.25), adhering to the Class A rules pays off. However, for any person with a higher income, the 25% deduction under Class B will be more favourable.
Do note that if you are using the organised accounting system (whether by choice or not) or if your income derives from one or several one-off transactions, you may not be subject to Class A rules.
A few new changes were introduced in 2015. There is no longer a minimum period of stay under one system or the other. Therefore, you can opt for an organized accounting system this year and for the simplified system in the next, provided of course, you meet the premises explained above. For this change to be valid, you must submit a Statement of Changes by the end of March of the year in which you want the change to take place. This change will be considered valid as of 1 January that year.
I sincerely hope this article has been useful to you and that you can make a more informed choice for your activity. In future articles, I will be discussing social security contributions and all the financial support you can (or cannot) benefit from in case you decide to interrupt your activity.