WHO IS CONSIDERED A FREELANCER?
In general, a freelancer is someone who works independently and is not building a traditional company with a permanent office. If you are self-employed, you own a sole proprietorship and have the option to hire employees if you can afford it. Freelancers work in various industries, including as consultants, web designers, or IT programmers, for example. Typically, the costs of running a freelancer business are low, as are the financial risks. In Denmark, a freelancer’s income is referred to as „honorar,” which does not have an equivalent term in Polish. It is a type of income that is different from a salary or sales that appear in a sole proprietorship, and is considered something in between the two. For the purposes of this article, we will refer to it as „income.”
FREELANCER RECEIVES INCOME B
From a tax perspective, a freelancer’s income is referred to as B-income, and the tax paid by a freelancer is called B-tax, the same as for a sole proprietor. However, it is important to note that a true freelancer is not considered self-employed, even though their income and tax are labeled as such. This is simply to inform the tax authorities that the income was not earned from a regular job (A income). As a freelancer, it can be complicated to determine the appropriate tax category and accounting and VAT obligations. It is possible that you consider yourself a freelancer only because of the contract you signed with your client, but in Denmark, even if you have a freelance contract, it is impossible to refuse being classified as an employee.
WHAT IS THE DIFFERENCE AMONG BEING AN EMPLOYEE, FREELANCER AND SELF-EMPLOYED?
Typically, we have to be ready for 3 possible scenarios
FREELANCER WHO IS CONSIDERED AN EMPLOYEE
If a freelancer meets even part of the following criteria, they are considered an employee under the law:
- You have only one employer or main client and your contract does not have a specific deadline for completion.
- Your client gives you instructions on the work you are to do and controls the work that you do.
- Your client chooses which equipment and programs you should use and you cannot employ other people to do the work.
- You bear no financial risk and you do not incur any costs associated with doing the work.
- You use your client’s company brand name on the entire documentation.
- Your working hours and vacations are agreed upon or set by the client.
- The contract is concluded without specifying.
- The contract provides for a notice period.
- You are paid on an hourly, weekly, or monthly basis.
- The client covers the costs associated with the work performed, including vacation, employee insurance, and other benefits.
Instead of invoicing their services, employees receive a pay stub
If you are hired as an employee, you will receive a regular pay stub and should not submit invoices for your services if your client is listed as your employer. Income earned as an employee is known as A-income, and the tax you pay as an employee is called A-tax. Your employer/client is responsible for collecting and paying A-tax to the IRS. As an employee, you are entitled to standard benefits such as vacation time.
Employees are not allowed to deduct expenses in personal income
However, expenses that you incur as an employee are not deductible in the same way as they would be for a company, but instead, they are considered typical employment costs. The tax deduction for these costs is also lower than in the case of a company because they can only be deducted from taxable income, not personal income. The expenses must also be related to the income received from the employer and should be declared in the employee expenses field No. 58 on your tax return. Your income is declared using the regular field No. 11 for salaries, and you do not use the fields reserved for sole proprietors. As an employee, you are not required to pay VAT regardless of your income, and you don’t have to keep bookkeeping records.
A FREELANCER WHO IS NOT AN EMPLOYEE AND NOT SELF-EMPLOYED
The situation being discussed involves a person who is considered a „true freelancer,” which means they occupy a position that is somewhere between being hired as an employee and being self-employed. When determining whether a person falls into this category, it’s important to consider various factors. However, it’s important to note that no single factor will be enough to accurately determine a person’s situation, as there are many different aspects that need to be taken into account. Ultimately, a larger and more comprehensive picture must be considered in order to fully understand the person’s employment status.
Factors that signal that in fact you may not be an employee – and also not self-employed – but a true freelancer
- The individual has multiple clients, not just one.
- There is a certain level of financial risk involved in the work.
- The individual does not plan on running a big company and wants to work independently.
- Contracts with clients vary in terms and conditions.
- Projects are short-term and well-defined.
- There is a limited timeframe for completing the work.
- The individual has control over how the work is done.
- Working hours are flexible and up to the individual.
- The choice of equipment and programs to use is at the individual’s discretion.
- The client cannot give instructions on how the work is managed, nor can they control the work.
- Payment is received once the project is delivered.
- The individual uses their own company name and branding in their work and documentation.
- The individual is responsible for covering the costs of their office, computer, office supplies, phone, etc.
- The individual may work for different clients.
- They have the option to hire employees.
- The individual creates advertisements to receive new projects.
- They may face civil liability if they make a mistake.
- They have to be registered as a VAT payer.
- They are not entitled to paid vacation or sick leave.
- It’s up to the individual to decide when to take a vacation.
- The contract is terminable with no notice (although most contracts do have a notice period, it is not the same as in an employment contract).
What deductions are possible in the case of a freelancer?
As a freelancer, you can deduct your expenses from your income. However, your expenses cannot exceed your income, so you cannot end the year with a deficit like a sole proprietor. The company that pays your fee as a freelancer must declare this income in box 12 on their tax return. If they don’t declare it, the freelancer must enter the amount in box 15. Freelancer costs must be declared in box 29 on their tax return, and they must be able to provide documentation of all the details of their expenses.
Freelancers often have to pay VAT
If a freelancer’s income, revenue, or sales exceed DKK 50,000 within a 12-month period, then their entire income will be subject to VAT and they must comply with VAT regulations. This also means that any sales they made before reaching DKK 50,000 will also be subject to VAT. The VAT rate in Denmark is 25%, so the freelancer will have to pay 20% of their total sales as VAT. This must be paid for all previous sales at a later time. However, there are some exceptions to this rule, and some freelancers may not have to pay VAT even if their sales exceed DKK 50,000. Examples of such exceptions include actors, musicians, artists, journalists, bloggers, speakers, writers, and translators.
SELF-EMPLOYED FREELANCER
The distinction between being an employee, a true freelancer, and self-employed depends on the specific situation. When a freelancer appears to be self-employed, it’s because their activity is becoming more like a serious business, and the financial risk is increasing. This may lead to the freelancer having plans to hire staff and establish their own office. In such cases, the same conditions as those for the freelancer from the earlier example would apply, but on a more advanced level.
What a PMV is?
In Denmark, it’s possible to run a small sole proprietorship that is exempt from paying VAT if your sales don’t exceed DKK 50,000 in a 12-month period. To do this, you must register a business and establish a PMV (Privat Mindre Virksomhed) which is a smaller version of a sole proprietorship. If you expect your sales to remain under DKK 50,000, then registering as a PMV is appropriate. However, if you think your sales may exceed DKK 50,000, it’s better to register as a VAT payer right from the start. If your PMV’s sales exceed DKK 50,000 for 12 months, then the sales you made before reaching DKK 50,000 will be subject to VAT at 20%. A PMV has a CVR number but no VAT registration, and you can later convert it into a sole proprietorship while keeping the same CVR number. In contrast, a sole proprietorship must be registered for VAT and own a CVR number, and its sales must exceed DKK 50,000 in a 12-month period.
What is a sole proprietorship?
The terms „self-employed” and „sole proprietorship” are interchangeable in Denmark. A sole proprietorship is required to register as a VAT payer if its sales are anticipated to exceed DKK 50,000 in a 12-month period. Typically, a sole proprietorship is established to generate profits and explore the typical costs of running a business, such as marketing, employees, office rent, computers, machinery, etc. Compared to freelancers, sole proprietorship owners face more financial risks with clients. There is no fixed amount that can be used to determine the level of financial risk involved.
Factors indicating that you are a sole proprietorship
- The individual works for more than one customer.
- Contracts with clients have varying terms and conditions.
- Projects are short-term and have defined deliverables.
- The individual has a limited timeframe for completing the work.
- The individual has control over how the work is done.
- Working hours are flexible and up to the individual.
- The choice of equipment and programs to use is at the individual’s discretion.
- The client does not give instructions on how to do the work, nor control the work.
- Payment is received once the project or milestones are delivered.
- The individual uses their own company name and branding in their work and documentation.
- The individual is responsible for covering the costs of their office, computer, office supplies, phone, etc.
- They may work for other clients in addition to their current client.
- They have the option to hire employees.
- There is a financial risk involved if, for example, the individual makes mistakes or is late with project delivery.
- The individual creates advertisements to receive new projects.
- They may face civil liability if they make a mistake.
- The individual is registered as a VAT payer.
- They are not entitled to paid vacation or sick leave.
- It’s up to the individual to decide when to take a vacation.
- The contract is terminable without notice.
Freelancers who run one-person businesses must comply with standards of accounting. We recommend using e-conomic for your accounting.
Running a sole proprietorship results in declaration on the tax return (on SKAT Borger) using the following field numbers:
Profit: 111;
Deficit: 112;
Income, interest: 114;
Expenses, interest: 117.
WHAT IF I’M UNSURE IF I’M AN EMPLOYEE, FREELANCER OR SOLE PROPRIETOR?
Based on the factors discussed, it’s not possible to determine with absolute certainty whether you are an employee, freelancer, or sole proprietor. While sometimes the evidence may clearly point to one category, it’s often difficult to make a determination. If you’re unsure, you can contact the tax office for clarification. They can provide written confirmation of the freelancer category you fall under, but there is a fee of around DKK 400 for this service.
WHAT ARE THE RISKS FOR YOU AND THE CLIENT IF YOU ARE FOUND TO BE AN EMPLOYEE RATHER THAN A FREELANCER OR SOLE PROPRIETOR?
There are two main consequences you may face as a result of certain actions related to your work. First, your client could be liable for taxes and penalties due to non-compliance, which could be caused by your actions, such as wrongful termination or lack of an employment contract. Second, if you are a sole proprietor who has deducted costs from your personal income, those deductions will be subject to different tax rules that could reduce the amount of the deduction. Additionally, if you previously reported a deficit, it will be changed to zero income, resulting in a tax bill.