Individual tax payments in advance and retentions

Employees, independent workers and rentals

EACH INDIVIDUAL with an income will have to pay individual tax (IRS). However, in order to calculate the individual tax that is owed, a complex set of rules must be followed. If you are an employee, you have specific guidelines for the calculation of your IRS, but also, should you have any other type of income, there are specific rules for each different type. In this article, I am going to focus on the tax that we pay in advance that quite often is forgotten as having been paid.

If each kind of income has different tax calculation rules, the guidelines for tax paid in advance are also different, depending on the type of income. The most common income tax is employee tax.  Every employee pays a percentage of IRS through his/her employer’s company. That deduction (IRS paid in advance) has different requirements and depends on the monthly gross salary amount, on civil status and number of children. The tax rates are updated yearly, generally in the first trimester of each year. The amount (deduction) is paid monthly and is taken off from the gross salary.

At the end of the year, your employer will give you a document, which shows all your income for the year and the amounts you paid for social security and for IRS. That means that you have already paid IRS in advance and, therefore, when you present your tax return, the fiscal authorities will calculate if you have to pay more tax or if you have overpaid tax – in this case, they will return the corresponding amount.

With other types of income, such as green-receipted income and income from property rentals, we must follow different rules. The employee deduction mentioned above is similar for this kind of income, but, quite often, especially with regard to green receipts, there are many doubts as to whether that person has to apply retention or not. The similarity with employees is that the company that pays the independent worker for a service is the entity that pays his tax in advance to the government, a responsibility that must be honoured by day 20 of the following month. The deadline is the same for employees. For example, the IRS retentions for the month of December for employees and for independent workers need to be paid by January 20.

However, in which circumstances must the company retain IRS from the independent worker? The company will retain when he/she earns more than 9,975.96 euros per year. If so, the tax rate can be 10 or 20 per cent. Please note that these are just a few examples from both tax rates because there are more categories.

The rate of 20 per cent is for doctors, accountants, fiscal consultants, musicians, engineers, architects, lawyers, nurses, teachers, and others. The rate of 10 per cent is for mechanics and other maintenance services.  There are lots of situations where retention is not required. For example, if you go to the doctor, he issues you with a receipt (green receipt) and there is no tax retention included. This is explained because you are not a company or individual with a chartered accountant. This can happen with other services. General rule: services provided to individuals (private) don’t require retention.

When a person has a house, an office, a warehouse or a shop being rented to an individual or a company, he also pays IRS in advance and, in those cases, the tax rate is 15 per cent. The general rule for green receipts is also applied to rentals. One important issue with any kind of income is that the retention only has to be paid when the service was paid for or when the rent was paid.

• Pedro Simões can be contacted by Tel 219 205 225, by Fax 219 264 153, by Mobile 914 742 178 or via e-mail [email protected]. Visit