Freelancing is traditionally considered as the easiest and regulated-free way of making money. Usually freelancers receive profit as a result of their individual skills and experience. They provide services in different areas such as programming, IT-services, writing, photographing, etc.
The synonym of freelancer is “self-employed”. Freelancers find jobs by themselves and are not bound by a limited number of jobs.
Of course, this type of making money does not require you to hire an office or even staff. You can do freelancing from anywhere in the world.
Freelancing sounds attractive to many people as you do not have any initial capital to start providing services. However, as you start making money, you may ask yourselves whether you need to comply with any laws and pay taxes from profit generated as a result of freelancing.
Do I need to register a company if I am a freelancer?
Though you may register a company, it is not the only and probably not the best legal form for small-scale freelancers. For example, if you are a freelancer living and working in India. You wish to cut any possible administrative expenses, including operational costs for maintaining a company. Such forms as LLCs, partnerships require annual fees for company maintenance, address maintenance fees, etc. For some freelancers this cannot be cost-effective.
Depending on the jurisdiction, freelancers may work without any registration of business provided that they pay taxes. Alternatively, freelancers may register as sole entrepreneurs. The latter form is the easiest way of doing business for freelancers. Governments in most countries stimulate freelancers to be registered as a means of doing business and making money legally. They provide tax benefits to support self-employed individuals.
Once registered as a sole entrepreneur, you get your individual tax number and you need to open a bank account. If you reside in one country (for example, you live in India), you can open a bank account in another country. In most cases it can be done online without physical presence.
Accounting rules for sole entrepreneurs are not difficult, but you need to properly invoice your clients. Your invoices should include your tax ID, address and bank account details. Be careful with describing services you provided to your customer or goods you sold to them. For the purposes of AML compliance, tax authorities may check whether you actually operate.
In the meantime, if you make a good profit, you may consider to register a company (e.g. LLC, partnership). A company incorporated in reputable jurisdiction, such as UK, Hong Kong, Cyprus, Singapore, Latvia, Switzerland, Estonia works well for your good will. This is an excellent way to have high profile clients.
What is the difference between a freelancer and sole entrepreneur?
Freelancer is usually referred to a self-employed individual and does not define any legal type of business structure. The “sole entrepreneur” is a form of specific legal structure. Sole entrepreneur means an individual registered with relevant governmental authorities for performing any business activities.
Sole entrepreneur is the most preferable legal structure for freelancers as opposed to limited liability company or partnership. Sole entrepreneurs can hire employees and subcontractors, rent office and generally have the same rights and responsibilities as legal entities (such as LLCs, partnerships, etc.). However, sole entrepreneurs benefit from low taxation system and special accounting rules.
Do I need to pay taxes?
Any individual deriving profit from trading or provision of services has to pay taxes. The tax rate differs from country to country and depends on the form of legal structure you chose.
There are ways of eliminating taxes you pay. For this reason, many freelancers move to other countries with low tax rates or special tax regimes for certain activities. There is no universal answer on a country with the best tax rate, but you need to consider each jurisdiction individually and choose the one that best suits your particular needs.
What else do I need to do to fully comply with laws?
We mentioned that you need to choose a proper legal form for your freelancing business, open a bank account and keep accounting. In some cases, you also need to register for VAT number. It applies to providing services and trading in certain jurisdictions (like the EU) and making a profit in excess of a certain amount. It is recommended to consider whether you need to register for VAT number on a case by case basis.
If you hire employees, you may have additional responsibilities such as registering as an employer and paying social insurance contributions.
I am a freelancer and I travel a lot, in which country do I need to be registered?
There are no boundaries towards a country in which you may register as a sole entrepreneur or in which you may incorporate a company. With certain exceptions, you are free to choose any country to start your business. However, keep in mind, that various jurisdictions have its pros and cons. With so many options, you have to be careful in considering the best jurisdiction for you. Consider in which countries are your target customers, in which country your goods will be manufactured or where you want to live constantly.
I am a freelancer and reside in another country, in which country do I need to pay taxes?
You probably heard about tax or fiscal residency that may differ from the country of your citizenship. If you reside abroad, you need to consider in which country you will be defined as a tax resident. The tax residency determines your obligation to pay taxes, for example, its amount, deductions and deadlines.
Usually a foreign citizen becomes a tax residence if he or she has a physical presence in a foreign country for more than 183 days during the current calendar year.
Tax residency in certain cases allows to achieve fiscal benefits, for example:
- different rates can apply for residents and non-residents; usually smaller tax rates apply to residents;
- tax residents may use deductions to lower taxes.
Tax residents are required to pay taxes on their worldwide income, while non-residents are tax on local sources only.
To sum up, company formation is not a sole option for freelancers. While company as a legal form of business is suitable for freelancers with high income, it is not always a case for small scale individuals. Maintaining a company requires annual fees that are higher compared to other forms of business such as sole entrepreneurship. The latter requires lower operational costs. As such, this option is ideal for most of freelancers. As your individual business grows, you can consider establishing a company such as LLC or partnership. In most cases this is good way for gaining solid clients. Sometimes it helps entering foreign markets.