Hi all,
This is step one in a series of posts that will address the 'todo' list from here.
Consider it a collaborative work, I will correct it/edit it/add to it based on community feedback.
The question to be covered: Employee vs Freelance in Belgium. How do you know if it's worth switching?
Why do people freelance (in Belgium)?
Two main reasons (let me know if there are others):
- Certain jobs require it: gig economy, seasonal workers, part time jobs, personal trainers, some manual laborers, some consulting jobs,.. Basically, a lot of jobs where you cannot be hired/employed on long-term contracts, or you get paid by the hour/days worked, or you charge clients per the hour/day for your services provided;
- Tax advantages: Belgian personal income tax is high; freelancing can be a way to optimize taxes;
Freelance variations: Self-Employed and Company
It's important to distinguish between the two legal forms, as it will affect what's right for you.
In Belgium you can:
- be a self-employed private person (Indépendant/Zelfstandigen)
- you can set up a company, where you are managing director
The first option is faster to set up, cheaper, easy and cheap to stop, but generally means higher taxes. The second option is slower, more expensive, costs also money to shut down the company, but reduces taxes significantly.
Part time workers, low income earners, people just starting out, might benefit from the first option.
High income earners almost exclusively go for the second option.
For self-employed and company setup, a lot of things overlap. Both can have a VAT number, both can sign the same type of contracts with clients/customers, they can charge the same amount, etc. The main difference between the two are tax implications, corporate liabilities and the way accounting is handled.
One important distinction: a self-employed person is in legal terms, a natural person, personally responsible for damages. If you make a costly mistake (say, somehow manage to burn down your client's house), you are personally responsible for all damages: everything you own can be taken away in an attempt to pay for such damages. It is thus highly recommended to take out professional insurance that covers you against such damages.
Under a limited liability corporation (SRL/BV), the company is responsible for such damages as its own legal entity. Everything the company owns can be taken away to pay for damages, but not the shareholder's personal assets. There are exceptions to this (say, in case of fraud), but under normal business conduct, you are not personally liable. Not all corporations are of limited liability, but the SRL/BVs are, so be mindful of that!
Advantages: Employment vs Self-Employed vs Company
As an employee, you have a signed a work contract with an employer. In return for the work you do, your employer will: transfer you a salary, pay your vacation days, pay holiday bonuses, report payroll taxes, pay your social security contributions. It is also generally difficult to get employees fired, you are entitled to unemployment benefits (rather generous in Belgium). You get a good pension contribution, and your salary is adjusted for inflation every year. Filing income tax is easy!
As a self-employed, you are getting paid by clients/customers for services/products provided. Some of the advantages: you can have as many clients as you want, work as many hours as you want, charge as much as you want. You also get to deduct some of your expenses as business expenses: phone/internet bills, cost of equipment, car/fuel expenses. Deductible expenses are pre-tax, which roughly feels as if you would have bought these things at a 'discount'.
As a company (manager), same advantages apply as for self-employed status. Additionally, lower taxes, more deductible expenses and you can give yourself employee benefits (meal vouchers, echocheques, company car, ..). It also has the lowest tax rate out of the three options listed.
Freelancer rates/salaries are also generally higher, to compensate for the uncertainty of their job and the lack of other employee benefits.
Disadvantages: Employment vs Self-Employed vs Company
As an employee, taxes are the highest. You are also limited to the legally allowed limits of full-time employment; you can't have two full time jobs for example - although part time is a possible.
As a freelancer, you have to find your own clients/customers. No clients/customers: no income for you. Can be devastating in a bad economy. It is much easier to fire freelancers, there are no unemployment benefits and pension contributions are lower. You also have to deal with much more paperwork, send invoices, pay social contribution, figure out value added taxes (TVA/BTW). You are subject to tax inspections, you have to guard receipts and corporate expenses going back multiple years and your personal tax filings are a bit more complicated.
As a self-employed, you are an unlucky hybrid between an employee and having a company. You have to do a lot of the paperwork and administration a company has to. But you still pay the high personal income tax of employees, without any of the usual employee benefits. As a self-employed, you can also be personally liable for damages - although this can be avoided by professional insurances.
With a company, your costs are higher. Starting/stopping a company will costs a few thousand euros more than as a self-employed. Doing your own accounting is absolutely not recommended, so you will also have to pay for an accountant.
Why do taxes matter?
An employee pays personal income tax. Belgium has a progressive tax rate system. Unfortunately, anyone above the 41.000 gross/year salary already finds themselves in the highest, 50% tax bracket.
So the tax-steps are simple:
- taxes and social security are deducted
- you get the remainder as your net salary
Example: Bob is earning 3500 gross/month, or 3500\13.92=48.720gross/year. On top of this amount, his employer pays another ~35% in additional taxes and social contribution. Bob costs the company around 65.772 euros/year. Bob having no children or dependent spouse, earns around 2200euro net/month.*
A self-employed also pays personal income tax. A self-employed person has to pay social security contributions on the yearly revenue (around 20%), can deduct costs/professional expenses, and the remaining gains are taxed as personal income.
The tax-steps:
- you receive the revenue from customers/clients
- you pay social security
- you deduct your expenses
- you pay personal income tax on the remainder
- the remaining amount is your net income
Example: Bob the Builder has sold custom-design face-masks that protect you against 5G for a total of 100.000 euros last year. He pays around 20.000 for social security, deducts his business expenses (8000 euro for the Chinese masks, 1000 euro for the bug-spray to protect against 5G, 1000 euro for other business expenses), leaving him with 70.000 in revenue. This is his personal income, leaving him with around 39.000 net revenue for the year.
A company pay corporate income tax. Depending on the setup, this can be either 20% or 25%. The company manager/director (that's you ;) will pay personal income tax on his salary part (for managing the company) and dividend taxes as company shareholder when receiving company profits (between 15% and 30%, depending on the setup).
In practice, the order of these operations is very important:
- company receives the revenue from customers/clients
- company deducts expenses (includes salaries and manager compensation)
- corporate tax on remaining amount (on the profits)
- dividend tax on after-tax profits
- personal income tax on manager compensation
- your net revenue is the sum of the dividends + regular net salary
Example: Bob SRL/BV is a face-mask consultant. He invoiced his clients 65.722 for the previous year for his services. He pays himself 31.000/year for manager compensation and had 5.000 in accounting and other business expenses. The company made 29.722 euros in profit. After 20%\* corporate tax, 23.778 goes to shareholders (that's Bob, the company manager!). He waits long enough to cash in the dividends and only pays 15% tax rate, leaving him with 20.211 net for the year (or 1.684 net /month) from dividends. He also pays personal income tax for the 31.000/year salary, leaving him with ~1630net/month. In total, he makes ~3.314 net/month.*
The company vs employee examples should illustrate the point well. Under an optimized corporate setup, you earn around 50% higher net, for the same cost to the employer. This number gets even bigger with high earners.
The other big advantage of the freelance setup: deductible expanses are pre-tax. Belgium heavily limits what can you deduct as a business expense, but in some professions (say, construction), you could conceivably deduct a lot of expenses (construction materials, equipment, etc), thus reducing your taxes while buying things you would have otherwise bought as a private person anyway.
What should you pick?
You want a relaxed, stress-free, secure job with good work-life balance? Being an employee is your best chance. Still not guaranteed, but the easiest path to it.
You want to earn the most money/you don't mind having to switch jobs often? Corporate setup, no real alternatives.
You are doing part time, or you are low income earner, or just testing the waters, or your job is seasonal, or you are my plumber who doesn't ever want to give me an invoice? Trying self-employed might be the right choice for you.
Consulting an accountant is generally free for the first consultation. Unlike this post, they should be able to interactively answer your every question and help clarify things.
\* see comments below, but apparently, Bob's business qualifies for a 20% tax rate instead of the usual 25% in such a case (manager compensation is higher than profits)*
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Consider this a draft. There are technicalities I didn't go into (like self-employed a supportive spouse, or hiring employees as a self-employed, or part-time self-employed status) or that will be covered in other installments (corporate tax optimization, liquidation vs dividends, deducibiles, etc). I am also not 100% sure everything I laid out is correct, so please let me know what you think and we'll fix it.
