Self Employment in Spain
As an individual, you are not obliged to maintain records which include a balance sheet. Your minimum obligation is to maintain records of all your sales and business expenses; in a way that meets the required standards. Of course, even though you are not obliged to maintain a balance sheet, you may benefit from it as it will help you manage your business more effectively. In particular, if the volume of transactions is high and you either buy or sell on credit.
IRPF - Withholding tax on your sales
In some instances, your corporate clients will be obliged to withhold some of your fees which will then be paid over to the tax office as income tax on your behalf. Let's consider a simple example:
|Fees||€ 1,000||Your agreed fee|
|VAT @ 16%||+ € 160||Output VAT on your sales|
|IRPF @ 15%||- € 150||Your income tax deduction|
|Total||€ 1,010||Amount receivable|
The standard rate of withholding tax in Spain for professional sole traders is 15%, however, during your first two years you may opt for 7% retention instead.
Many people opt for this to free up cash flow in the early days of business and improve their chances of success. However, if your cost base is low, opting for the 7% will lead to greater payments on account when the quarter comes to an end. Our advice is that if your profit margins are high and you are have difficulties setting money aside to pay your taxes, it is better to suffer a 15% retention as any balancing payments due will inevitably be lower.
Just like all businesses, self-employed individuals need to report to the tax office on a quarterly basis by filing the relevant returns including VAT, IRPF or informative returns. In addition to the general obligations that apply to all businesses, you may also be obliged to file a return disclosing your accumulated profits for the current year. Meeting the deadlines set by the tax office is essential as any late filing will lead to a fine and interest charges.
Income Tax payments on account
Generally, when a profit has been made, you will need to pay the tax office 20% of these reported profits as a payment on account of your personal income tax. This may come as a surprise if you were used to making payments on account in your home country only twice a year. However, you may appreciate the benefits of this system as you are less likely to face large tax bills on an annual basis. A simple example of your quarterly tax return would look as follows:
|Accumulated sales||€ 1,000|
|Accumulated costs||€ 100|
|Profit to date||€ 900|
|20% on account due||€ 180|
|Retentions suffered to date||- € 150|
|Amount payable||€ 30|