Are you thinking about working as an independent contractor in Serbia? This form of business operation has become increasingly popular, especially among IT professionals, consultants, and freelancers who collaborate with clients from around the world.
However, before taking the leap, it’s essential to understand how this model works and what legal, financial, and operational factors come into play.
In this blog post, we’ll explore the key aspects of becoming an independent contractor in Serbia, including registration, taxation, and the benefits of this business model.
What is an independent contractor?
An independent contractor operates as an individual providing services to one or more clients while maintaining their independence and flexibility. Unlike traditional employment, independent contractors do not have the same obligations as employees, such as set working hours or long-term commitments to a single employer. Instead, they manage their own schedules, choose their projects, and bear the risks and rewards of their business endeavors.
In Serbia, the independent contractor model is typically associated with registering as an entrepreneur, which allows individuals to perform activities for profit legally. This setup provides flexibility but also comes with responsibilities, such as tax obligations and compliance with local laws.
An independent contractor can also be a freelancer—an individual who provides services independently without formally registering as a business entity. While both operate independently, freelancers are subject to specific tax and legal obligations, which differ from those of registered entrepreneurs. We’ve explored these distinctions in more detail in a separate blog.
Registration of an entrepreneur in Serbia
Starting your own business in Serbia is simpler than you might think. The entire registration process can be done online, and all you need is your passport. As legal advisors, we can take care of the registration for you using our electronic signature, making the process fast and secure. Typically, it takes just about five days to complete the registration.
Once your business is officially registered, the next step is to open a business bank account. This is essential for managing your finances and fully getting your business up and running. With minimal paperwork and our help, you can focus on your business while we handle the legal side of things.
Taxation of Independent Contractors
As an independent contractor, knowing how taxes affect your business is essential for financial planning and growth. Depending on the structure of your business, there are different ways your income will be taxed. In this guide, we’ll walk through the main taxation models you might encounter, so you can choose the right one and stay compliant with the law. Whether you’re just starting out or looking to optimize your tax strategy, understanding these models will help you make informed decisions and keep your business running smoothly.
1. Lump-Sum Taxation
Lump-sum taxation is a great option for entrepreneurs in Serbia who want a simplified and predictable way of handling their taxes. This model allows entrepreneurs to pay a fixed monthly amount for taxes and contributions, determined by factors like their business activity, location, and age. If your annual income stays below 6,000,000 RSD (~51,000 EUR), you can continue with this easy, one-size-fits-all tax system.
However, not all business activities are eligible. For example, businesses in areas like marketing, wholesale, retail, restaurants, real estate, and financial services can’t use lump-sum taxation. Fortunately, if you’re in IT services, you’re in the clear! This makes it an ideal choice for tech entrepreneurs looking to minimize tax complexity.
What’s even better? The tax amounts are relatively modest – usually just a few hundred EUR each month, making it affordable and manageable. The only thing you need to do is keep a simple record of your issued invoices in a “book of gained income”.
In short, lump-sum taxation can save you time, reduce paperwork, and keep your focus on growing your business, not on complicated taxes. If your future business plans and activities align with the previously mentioned guidelines and explanations, opting for lump-sum taxation could be a worthwhile consideration.
2. Self-Taxation
Self-taxation is the alternative to lump-sum taxation, and it’s typically considered less favorable due to the more complex calculations involved. Entrepreneurs who exceed the annual income limit of 6,000,000 RSD (~50,000 EUR) are required to switch to this system. Instead of paying a fixed monthly amount, self-taxed entrepreneurs calculate their taxes and contributions based on their actual profit for the year, which is determined by subtracting expenses from total income.
The rates applied are:
- Income tax: 10%
- Contributions for pension and disability insurance: 24%
- Contributions for health insurance: 10.3%
- Contributions for unemployment insurance: 0.75%.
While this system is necessary for many entrepreneurs who don’t qualify for lump-sum taxation, it can be more burdensome due to the need for accurate financial record-keeping and higher overall costs. As a result, most entrepreneurs who aren’t eligible for lump-sum taxation choose another option: self-taxation with payment of a personal salary. This alternative allows for a more predictable and manageable tax burden, though it still requires more paperwork than lump-sum taxation.
In essence, self-taxation is more complex, but it may be necessary depending on your business’s income. For those eligible for lump-sum taxation, it remains a much simpler and more efficient choice.
3. Self-Taxation with Personal Salary
The third taxation model, self-taxation with payment of a personal salary, is often seen as the most advantageous for entrepreneurs with higher income. It offers a more favorable approach by taxing only the entrepreneur’s salary, not the entire annual profit. This means that taxes and contributions are calculated based on a set salary, which tends to be much lower than the full profit amount, leading to overall tax savings.
Under this model, the entrepreneur essentially becomes an employee of their own business, paying themselves a fixed monthly salary that is subject to tax and contributions. The remaining portion of the business’s annual income is taxed at a 10% income tax rate. This structure can be highly beneficial for entrepreneurs who want to reduce their taxable income while maintaining a regular salary.
However, it’s important to note that this model requires “double” bookkeeping, which is more complex than the simplified “book of gained income” used in lump-sum taxation. Because of this, most entrepreneurs choose to hire an accountant to manage their finances and ensure compliance with tax regulations.
In summary, self-taxation with a personal salary is a great option for those with higher income, offering tax benefits while requiring more administrative work. If you choose this path, make sure you have the right support in place, like an experienced accountant, to keep everything running smoothly.
Independent Contractor Test
Introduced to prevent the misclassification of independent contractors as employees, the independence comprises nine criteria. Meeting these criteria is essential to maintain independent contractor status and benefit from associated tax regimes.
Let’s explore each criterion in detail, supplemented with practical examples:
1. Control over working hours and leave
If the client determines the contractor’s working hours or if the contractor’s leave depends on the client’s approval without a proportional reduction in compensation, it indicates a lack of independence.
Maria, a software developer, works as an independent contractor for TechSolutions Ltd. If TechSolutions states that Maria works from 9 AM to 5 PM and requires approval for any leave without adjusting her compensation, this arrangement suggests an employer-employee relationship.
2. Work premises and equipment
Utilizing the client’s premises or equipment for work suggests a dependent relationship.
If Maria performs her tasks using TechSolutions’ computers and office space, it indicates dependence. Conversely, if she uses her own equipment and works from a location of her choice, it reflects independence.
3. Training and supervision
If the client provides professional training or closely supervises the contractor’s work, it may reflect an employment-like relationship.
Should TechSolutions enroll Maria in mandatory training sessions and closely monitor her daily tasks, it mirrors traditional employment supervision.
4. Engagement process
Being hired through channels typically used for recruiting employees, such as job advertisements or employment agencies, indicates potential dependence.
If Maria was engaged through a job advertisement posted by TechSolutions seeking full-time employees, it suggests an employment relationship.
5. Collaboration with client’s personnel
Frequent collaboration with the client’s employees or other contractors engaged by the client may suggest a lack of independence.
If Maria regularly works alongside TechSolutions’ in-house team on projects, it indicates integration into the company’s workforce, characteristic of an employee.
6. Primary income source
If the contractor earns more than 70% of their total income from a single client, it raises questions about their independence.
If Maria’s earnings from TechSolutions constitute 80% of her total income, it suggests economic dependence on a single client.
7. Business risk
Independent contractors typically bear the risks associated with their work, such as financial losses or unpredictable outcomes. If a contractor’s income remains the same regardless of the project’s success or failure, it suggests a lack of business risk, which is a key characteristic of independence.
For example, if TechSolutions agrees to pay Maria a fixed fee for her services, regardless of whether the project meets its objectives or not, this arrangement could indicate that she is more like an employee, rather than an independent contractor who typically assumes the risks of their work.
8. Non-Compete obligations
Restrictions imposed by the client on the contractor’s ability to work with others suggest a dependent relationship.
If TechSolutions prohibits Maria from offering her services to other companies during or after their contract, it limits her professional freedom, akin to an employment contract.
9. Duration of engagement
If an independent contractor provides services for the same client continuously or intermittently for 130 or more working days within a 12-month period, starting or ending in the relevant tax year, it may raise concerns about their independence. In this case, the contractor’s ongoing relationship with a single client for such a significant amount of time could suggest an employer-employee dynamic rather than a true independent business relationship.
For instance, if Maria works for TechSolutions for 130 or more days within a year, whether continuously or with breaks, it could imply a level of dependence, as such a long engagement is typically more characteristic of an employee’s role than that of an independent contractor.
What happens if you’re reclassified as a non-independent entrepreneur?
If you’re an entrepreneur, one of the most important things you’ll want to avoid is being reclassified as a non-independent contractor by the tax authorities. Failing to meet five of the nine key criteria from the independence test can mean your income is taxed differently – and let’s be honest, nobody likes surprises when it comes to taxes! So, what does it mean if you’re considered “non-independent,” and how does it affect your taxes? Here’s what you need to know.
The tax reality for non-independent entrepreneurs
If your business operations are classified as non-independent (meaning you fail to meet the independence test) the way your income is taxed changes significantly.
Here’s what you need to know:
- Higher Tax Obligations:
Reclassification can lead to increased tax rates applied to your income, with limited options for deductions, which could significantly affect your earnings.
- Additional Contributions:
On top of higher taxes, there are mandatory contributions that may further reduce your net income.
Who handles these payments?
- If you work with a local client, they might take on responsibility for tax and contribution payments.
- If your client is foreign, you’ll likely need to manage these obligations yourself.
The main takeaway is that failing the independence test could result in considerably higher costs for both you and your clients. To navigate this and explore ways to optimize your situation, it is always advisable to consult tax regulations in advance and make an informed decision.
Becoming an independent contractor in Serbia offers flexibility and autonomy, but it comes with a responsibility to understand the legal, tax, and operational implications. Whether you choose lump-sum taxation, self-taxation, or self-taxation with a personal salary, it’s crucial to stay informed about the rules and regulations that affect your business.
Equally important is ensuring that your status as an independent contractor is not challenged. The rules of the independence test serve as a safeguard to distinguish true independent contractors from employees. By meeting these key criteria, you can avoid reclassification and the higher tax burdens associated with being considered a non-independent contractor.
With the right registration process, tax strategy, and professional advice, you can focus on growing your business and enjoying the benefits of being an independent contractor in Serbia. Our experienced team is here to help guide you through the legal and financial aspects, ensuring your business runs smoothly and stays compliant. So, whether you’re just starting out or looking to streamline your operations, understanding your legal and tax obligations will set you up for long-term success.
