Once again, Social Security has become the object of significant change. The following are the highlights of the legislative updates to Social Security that freelancers will need to take into consideration in 2019 and beyond.
Quarterly contributions – The principal innovation of the 2019 Social Security Reform for Independent Workers is the rolling quarterly calculation of contributions. In the past, payments were determined based on prior earnings from two years before. While the trimester method of calculation requires more bureaucracy, it should prove to be more in line with the economic ups and downs that are the day-to-day realities of most sole traders.
SS rate eases – Starting in 2019, the Social Security contribution rate borne by self-employed workers is fixed at 21.4%, as compared to the prior levy of 29.6%. Individual entrepreneurs now pay at a rate of 25.4%*.
Basis of incidence changes – From 2019 onwards, the contribution rate base generally considers 70% of the relevant income from the previous quarter (or 20% in the case of production and sales) as opposed to the previous year as before. The self-employed person may request a 25% reduction on the quarterly amounts.
Accumulating dependent work with self-employment has a SS exemption limit – In the past, salaried workers (Category A) who also earned sole trader income (Category B) were wholly exempt from additional contributions to Social Security. Under the new rules, those who receive more than €2,450.86 per month must pay additional SS contributions. If they are not exempt, the 21.4% SS rate will be applied to the amount that exceeds four times the value of the IAS (€1,743.04 in 2019). Benefits such as unemployment or parenting allowances, for which only salaried income is covered, are excluded.
Mandatory quarterly SS declaration – Based on the quarterly statement, Social Security determines the relevant income and the basis of contributions for the following three months. In this declaration, the worker can request to pay a 25% lower or higher contribution. This declaration should be submitted by the last day of April, July, October and January. Social Security contributions are monthly and now run between the 10th and the 20th of the following month.
Minimum contributions – The new rules also establish a minimum monthly contribution of €20. This amount should be paid when there is no income in the reporting period in question. This measure is designed to ensure social protection in slow periods where independent workers are without income for a limited period.
“Cuidado! O português pode ser uma língua traiçoeira!” (Beware, the Portuguese language can be treacherous)
For individual income tax (IRS) purposes, the expression “rendimentos profissionais” (professional income) refers to earnings from a specialised career listed in Article 151º of the CIRS. For the most part, these professions require a higher education degree, such as doctors, lawyers, architects, etc. Under the simplified regime, the taxable coefficient for these “individual entrepreneurs” is 75%. Other freelancers fall under the category of “rendimentos empresariais” (vocational income) and are assessed based on 35% of their gross sole trader income.
In the lexicon used by Social Security, “individual entrepreneur” refers to a sole trader who, through a permanent establishment, has or is likely to have employees, such as hairdressers, mechanics, restaurants and others. While these “empresários em nome individual” may pay the same IRS rate as other vocational trades, they are levied a higher Social Security rate (25.2%) on quarterly contributions when compared to other “trabalhadores independentes” (21.4%).
By Dennis Swing Greene
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Dennis Swing Greene is Chairman and International Tax Consultant for euroFINESCO s.a.