In this article, we’ll be breaking down the cost of being Self Employed in Madeira, your tax and social security contributions, and compulsory insurance.
Individuals who work as a freelancer or sole traders, or are self-employed in Madeira have their income treated as personal earnings and pay Portuguese income tax, as opposed to corporation tax, classed as category B income. Being an entrepreneur and working for yourself, or on a green receipt, has its benefits as well as its disadvantages. You have freedom and the flexibility to choose when and where you work, but on the other hand, there are several associated expenses that must be considered.
As an employee, these are typically taken care of by your employer. Once you make the decision to work for yourself, they become your responsibility and the costs can be significant.
In Portugal, the associated costs don’t just depend on your income or turnover, but on the business activity as well. This is because the legal tax framework is not the same for all self-employed workers and different taxes can be levied against different products or services offered.
As a result, there is no blanket calculation, due to the number of variables across the space of self-employment. In this guide, we’ll break down as many of these variables as possible and give you an idea of what to expect when you begin your business in Madeira.
Taxes to Pay (IRS and VAT)
IRS (personal income tax) and VAT (value-added tax) are the two taxes you must account for when you are self-employed. Rates are dependent on the activity of the business and there are minimum limits from which they are exempt.
IRS – Category B, is income obtained through self-employment and must be declared. In the case of salaried workers, it is retained at the source. In other words, part of what is earned is retained by the company and paid to the state on the employee’s behalf.
The withholding rates applicable to independent workers are:
- 25% for income listed in the table of professional activities in Article 151 of the Código do IRS (CIRS). For example, Engineers, Nurses, and Accountants.
- 5% for independent workers not listed in the table of professional activities in article 151 of the CIRS
- 5% for income obtained through intellectual property, such as writers or information in the commercial, industrial, or scientific sectors
- 20% for income obtained through value-added assets of a scientific, artistic, or technical nature, as defined by the Portuguese Government.
As an example, if the value of the green receipt is 1000 euros and is subjected to an income tax of 25% and withholding income at the source, €250 should be withheld by the company and paid directly to the state. €750 euros is then paid to the employee as per their contractual agreement.
Exemptions from withholding income at source
Withholding tax at the source is not mandatory for everyone. If the previous tax-year income was below a certain amount, then you mark the option “Exemption of Withholding Tax / art. 101-B, no. 1, paragraphs a) and b)” on the CIRS form.
The turnover limit that gives the right for exemption from withholding at the source (and VAT exemption) has risen from €10,000 euros in 2020 to €12,500 in 2021. As a result, there is an exemption to withholding income at the source if that income is equal to or less than:
- €10,000 if the start of activity occurred until 31st March 2020
- €11,000 f the beginning of activity occurred after 1st April 2020
- €12,500 if the beginning of activity occurred after 2021.
If in the middle of the year in which the taxpayer benefits from the exemption, the taxpayer exceeds the established limit, they must start withholding the IRS in the following receipt.
Payment in Account
If tax is not withheld from the employee at source, you are still required to pay the IRS, through the so-called Payment on Account. These are made three times per year, in July, September and December.
By considering the income that you have declared, IRS will assess your income from the year before and base their calculation on the assumption that your income will remain the same. If you overpay during this period, you will be reimbursed, if you underpay you will be notified of the corrected amount now required to be paid to the state.
VAT, Value Added Tax, is an indirect tax levied on products and services rendered for remuneration. This tax is applicable to those who exceed specifics amount through turnover. For example:
- Businesses that started their activity before 31st March 2021 and exceed €10,000 in invoicing in 2021
- Businesses that started activity after 1st April 2021 and invoiced more than €11,000 during 2021
- Those who started their activity after 1st January 2021 and invoiced more than €12,500
- Those who have invoiced more than €12,500 in 2021 and started their activity in 2020 and are no longer exempt from VAT or IRS contributions. The threshold of €12,500 will apply from 2022 with reference to their turnover achieved in 2021.
Once the threshold has been exceeded, the self-employed remain exempt from charging VAT until January the following year, and from that date, they must submit a declaration of change of activity to the Tax and Customs Authority.
From February, you are then obligated to collect VAT on services rendered and pay them to the state. Expenses related to the business may be deducted.
Organised Accounting or a Simplified Regime?
If you are self-employed in Madeira, with an annual income of more than €200,000 you are automatically placed into the simplified regime, but you have the option to classify yourself for organised accounting.
A simplified tax regime means that you are not required to hire a certified accountant, allowing you to avoid further expenses. This regime, however, prohibits the deduction of expenses incurred during business operations. For tax purposes, only part of the income obtained is considered, which varies according to the business activity.
Organised Accounting, also available to those who earn less than €200,000, allows you to deduct your business expenses, but also requires that your gross annual income is considered for tax.
Social Security Contributions
Social Security is a mandatory expense, except for those who began their business within the last 12 months. Individuals who are self employed in Madeira can make a voluntary contribution of €20, and still benefit from social protection.
For self-employed individuals who are not covered by the Organised Accounting regime, the value of your social security contribution is calculated on a quarterly basis. The amount of the contribution is based on your income, divided by three, and a rate of 21.4% is applied.
It is noted that the amount of Social Security payable does not reflect the total income declared. It is calculated based on ‘relevant income’. Relevant income is 70% of the income from the provision of services or 20% of the income associated with the provision and sale of goods. For example, if your quarterly declared income is €3000, dividing by three gives us €1000. 70% of that figure is €700. A rate of 21.4%, which represents a monthly contribution of €149.80.
There is a mechanism in place that allows you to pay more, or less, social security, at 5% intervals. These changes can be made up to a limit of 25% without prejudice. A minimum contribution of €20 is required, up to the maximum of 12xIAS (€5318.40 in 2020)
For those covered by the organised accounting regime, the relevant income is calculated based on the taxable income of the previous year. This amount is then divided by 12, with the minimum limit being 1.5xIAS (€664.80 in 2022)
The Tax Calendar for Self-Employed workers in Portugal
The payment of your contribution is made monthly, between the 10th and 20th of the month. As a self-employed worker in Portugal, your quarterly statements are submitted at the following times:
- By 31st January 2022, self-employed workers must declare their income for the last quarter of the previous year (October, November and December 2021). You must also, on this date, confirm or declare the amounts of income for the previous calendar year.
- By 30th April, you must submit income earned in January, February, and March.
- By 31st July, the income earned in April, May, and June.
- And until 31st October, the income earned in July, August, and September.
Dates for filing the periodic VAT return
According to article 41 of the VAT Code, the periodic declaration for VAT must be submitted on the Portal das Finanças:
- Until the 10th day of the 2nd month following that to which the operations relate (monthly VAT periodic declaration). Remember that the submission of the monthly VAT periodic declaration is compulsory for those who had a turnover equal to or greater than €650,000 in the previous calendar year
- By the 15th day of the 2nd month following the quarter of the calendar year to which the operations refer (quarterly VAT periodic declaration), payment must be made by the 20th day. For example:
- 1st quarter: delivery by May 15 and payment by the 20th
- 2nd quarter: delivery until the 15th of August and payment until the 20th
- 3rd quarter: delivery until the 15th of November and payment until the 20th
- 4th quarter: submission by 15 February and payment until the 20th.
Compulsory Insurance for Self-Employed workers in Portugal
It is mandatory for self-employed individuals to obtain Personal Accident Insurance. It is also highly recommended that you take out Professional Indemnity Insurance when operating in the Portuguese Territory. There to protect you from legal liabilities, that may arise from your clients while providing a service, in the event of negligently causing loss or damage, errors or omissions caused by a breach of your professional duties.
Compulsory insurance policies may cover different levels of risk, according to the respective legislation in your business area. For those who do not have it, there are fines of between €50 and €500.
How can Madeira Company help?
If you’re Self Employed in Madeira, working as a freelancer, or wish to form a limited liability company in Madeira or Portugal, speak with a member of Madeira Company. Experienced and professional Tax and Business Consultants, best placed to help you navigate and manage your tax and social security contributions in Portugal. Contact us today and discover the benefits of working with us.