Tax deductions in Spain for the self-employed can provide a great opportunity to save money and create a more stable income. Freelance Tax deductions are available on the cost of materials, tools, and maintenance expenses for self-employed or independent workers. Tax deductions may also include other professional costs such as training, exhibitions, and conferences – all of which could provide an invaluable resource for self-employed individuals in Spain.
This is an absolute must-read if you want to become a freelancer in Spain. Without a doubt, the taxes that come with self-employment are one of the most crucial aspects to consider as part of your choice. Read on!
What are tax deductions for self-employed?
In Spain, two taxes offer deductions to self-employed workers: the Personal Income Tax (IRPF) and the Value Added Tax (IVA). Those who take advantage of these tax reductions can greatly reduce costs.
Personal income tax is a progressive tax levied on the income of individuals. Employed workers are taken off their payroll each month. In the case of the self-employed, they must withhold a small amount on each invoice they issue. Both employed and self-employed workers have to make the annual income statement to balance the amounts. IVA is a direct tax that taxes consumption and is added to the amount of each item or service for sale.
Income tax or IRPF (“Impuesto de la Renta de las Personas Físicas”)
Almost every quarter, self-employed people must pay the Spanish tax agency (Agencia Tributaria) for personal income taxes. This tax is known as IRPF or personal income tax by the Spanish tax authority. As a freelancer, you’ll be dealing with the IRPF on a regular basis:
- when invoicing clients
- setting aside for quarterly payments
- calculating your annual tax report
Thus, if you file your quarterly tax return, 20% of it should be submitted as an advance payment. You must complete 130 (Modelo 100) and 131 (Modelo 130) forms, and this preliminary report will make preparing the annual tax return easier.
How to file IRPF quarterly
Every 3 months, self-employed individuals must submit their Personal Income Tax (IRPF). This declaration includes your income decreased by any relevant expenses. If you’re a freelancer living in Spain for more than 183 days each year, then you will become known as a tax resident. As such, all income generated from any self-employed activities must be declared and taxed accordingly.
Consequently, when filling out the quarterly IRPF documents you are essentially paying a 20% prepayment in anticipation of your income statement. To file your Personal Income Tax, you’ll have to turn in Tax Form 130 (Modelo 100) or Tax Form 131 (Modelo 131) every quarter. Later on, these quarterly reports will help you file your annual tax return (Declaración de Renta).
How to calculate IRPF in the Annual Tax Report
It depends on several factors, such as your economic situation and the type of activity that you pursue. In general, tax rates range from 19% to 47%.
- From 0 to 12.450€: 19%
- From 12.450€ to 20.200€: 24%
- From 20.200€ to 35.200€: 30%
- From 35.200 to 60.000€: 37%
- From 60.000€ to 300.000€: 45%
- Above 300.000€: 47%
Depending on the specifics of your circumstances, you may use additional allowances to reduce what you owe in terms of the base rate.
How to apply IRPF retention when invoicing a client
When voicing clients in Spain, the percentages of IRPF that the customer has to remit will also be included on your client’s invoices. IRPF’s annual costs vary, though the average is 15% deducted from all the fees paid by the client. Your customers withhold IRPF percentages and pay them back to the Tax Office in your name.
VAT for self-employed workers (“IVA”)
Once each quarter (between the first 20 days of each quarter, on January, April, July, and October), you file and pay your quarter VAT at the local tax office. In Spain, VAT is 21%, and you will apply that extra rate to the different invoice services you send to your clients.
How to file VAT
In order to file your VAT, you must fill out and submit a Modelo 303 form. This document is mandatory for all self-employed workers that have to pay social security contributions or freelance tax (Autónomos).
When filing this form, you must provide evidence of the expenses incurred, such as food expenses, maintenance costs or professional fees.
During each quarter, each invoice you send will include an extra 21% on your prices. For each business-related invoice you received and for all those invoices for work-related products you have purchased (like a new phone or computer), you will pay that 21%.
At the end of the quarter, you must sum up all VATs you received, subtract VATs paid, and the difference is what you must pay to the Tax Agency. You will do that using Model 303.
You may be exempt from paying this tax if you deal with business customers outside Spain (but within the E.U.) and are VAT registered.
How to deduct VAT
For instance, if you’re a computer programmer and purchase software, computers, or ergonomic chairs, they’ll be tax deductible. If you submit an invoice for non-business items like a refrigerator or table set with six chairs, unfortunately, it won’t pass silently but will qualify should your business specialize in hospitality services.
How to file your annual VAT
At the end of each year, you must also submit Model 390, including a summary of all VAT transactions throughout the year. Completing this annual VAT declaration form will provide you with a comprehensive overview of all your incoming and outgoing VAT transactions. You can do it quickly and conveniently online through the Agencia Tributaria website. However, if you deliver educational services, artworks, or specific types of freelance writing, then filing your Value Added Tax Return is not required – but that also means no tax deductions for those activities.
Which are the expenses you can deduct?
But now comes the good news: what you can deduct and all those concepts that will help you save money. That is because, on your income tax declarations, you can deduct several invoices you have been paying throughout the year to lower the final tax base.
You can get a tax credit in Spain if you have paid freelance or self-employment taxes. In most situations, a deductible item should be credited to the yearly return. If not, you cannot file a tax deduction. As business owners, you can claim deprecated assets on your company property.
What exactly is deductible?
- Your monthly social security contributions
- Any type of expense related to sustaining your freelance activity
- Tax and accounting invoices you paid
- Any tool or service that works as a subscription base that you use for your working operations
- Your health insurance monthly payment (up to 500€)
- Utilities like your phone and internet invoices
- Supplies, like your office
- Vehicles, in case those have been used for your freelance activity
- Tax services maintenance expenses
For all deductions to be applicable, you must prove the corresponding expenditures through formal invoices, in which your name, address, and tax identification number must appear.
How to file freelance tax in Spain
After filing a tax return with the tax authorities, your earnings must be reported at least three times per year. You declare your earnings from October to December and pay 20% of your tax. This is a Model 131 form, and it is required for every employer to submit a request. Every self-employed person must use model 132 for their freelance income tax in Spain. Each year, you will do your yearly income tax declaration, which uses model 100 and contains all the incomes you received and taxes you paid during the previous year.
Options to file tax returns
There are two different options to file tax returns: online with the Spanish tax authority (Agencia Tributaria) or through a personal visit to your local Tax Office. In either case, you must provide all personal information, income, taxes paid, and deducted expenses in the annual income statement.
Additionally, there are extra tax declarations that you may need to submit depending on your personal situation and business activities. For instance, If 70% or more of your clients make tax withholdings on your fees, on each invoice, you send to your clients, you can choose to subtract from the total a standard 15% income tax, or a reduced 7%. Then, once you do your annual income tax declaration, and according to how much you have generated during the year and after subtracting all the different allowances and bonification, you will pay (or receive) the difference.
But there is also another alternative. Using Model 130, you would quarterly pay, in advance, a 20% income tax for all the incomes you declare quarterly (without subtracting the 15 or 7% on each invoice). But, if you use a modular system called “estimación objetiva”, you would use model 131 instead, and your income levels will be based on estimations rather than actual income.
A word from SpainDesk
From the look of it, taxes for a self-employed worker in Spain are quite favorable given all the deductions available to qualified individuals.
Being a freelancer means spending your money on supplies and services. However, you can offset some expenses against your personal income tax, social security contributions, and freelance tax deductions. Knowing which items are eligible for these deductions is key to maximizing the amount of money you save in taxes each year. Additionally, knowing the fundamentals of finance and law is essential in order to maximize your savings while being self-employed.
After studying our guide, we strongly believe you have a better comprehension of what it costs to be an independent contractor in Spain. Even if this information may appear overwhelming at first glance, do not worry; SpainDesk has got your back. We are here to assist you to make the most out of your freelance experience by providing any support or answers that you need.