The Taxation of Freelancers in Serbia – Welcome to the New Era

The past few years will be remembered as a very turbulent and challenging period for freelancers in Serbia when it comes to taxes. To recap, there was significant backlash from freelancers after the Tax Administration announced that individual taxpayers in Serbia were obliged to pay taxes on income earned from providing services and were requested to settle tax liabilities for the previous period, under threat of initiating tax proceedings.

The frustration among freelancers with the actions of the competent authorities led to widespread protests and extended negotiations with government bodies. It became evident that the status of freelancers in our country needed swift and substantial reform to ensure proper recognition of this form of work while avoiding excessively burdensome taxes. Despite multiple proposals to amend the Personal Income Tax Law, the process of establishing a fair tax framework for freelancers in Serbia has taken longer than hoped.

Fortunately, a positive conclusion finally arose: at the end of 2022, new amendments to the laws on personal income tax and contributions for mandatory social insurance were officially adopted, introducing a new tax framework for freelancers. The revised rules came into effect on 1 January 2023, while the portal for registration and taxation of freelancer income was launched a few months later. In light of these updates, we will answer your numerous questions and provide a detailed overview and breakdown of the current regulations.

A few introductory notes about the change

Briefly, what do the new rules consist of?

• Freelancers now have the option to choose between two taxation models – one that is more advantageous for freelancers with lower incomes and other that is better suited for freelancers with higher earnings.

• Both models are based on acknowledging certain nominal expenses that reduce the tax base, while the amount, i.e., the method of determining costs differs depending on the chosen model.

• In both models, we are talking about self-taxation, meaning that the freelancers must calculate, declare, and pay the tax themselves.

• Insurance contributions are treated differently depending on the type of contribution. For pension and disability insurance, there are also two models available, with the applicable model determined by the freelancer’s chosen taxation model. Health insurance has its own set of rules, which vary based on whether the freelancer is already insured on another basis or not.

Who is considered a freelancer?

In essence, a freelancer is an individual who is not registered to conduct business activities but provides services and thereby earns income. For example, if you are, for instance, registered as an entrepreneur, you do not fall under the freelancer category.

Understanding who is classified as a freelancer is crucial to comprehend to whom the new tax rules apply. To be taxed by the domestic tax authority, a freelancer must be a taxpayer of the Republic of Serbia, encompassing two categories of individuals:

1. a resident of Serbia who earns income both domestically and abroad,
2. a non-resident of Serbia, for the portion of income earned in Serbia.

Therefore, Marko from Novi Sad, who provides video editing services to foreign clients through Upwork, is considered a freelancer.

Andrea, who lives in Čačak and occasionally teaches English to children, can also be a freelancer.

The same applies to Hose from Spain, who comes to Serbia only a few times a year to teach a Spanish cuisine cooking course.

All of them, Marko, Andrea, and Jose are taxpayers in Serbia on the income they generate in the above examples.

However, Hose has no obligation to pay tax in Serbia on the income he earns working in Spain – he will likely have to pay tax on that income in Spain, depending on the local regulations and tax treatment of such income. On the other hand, Hose may be entitled to a tax credit if he has already paid in his home country tax on the income earned here, but this depends on the existence of a double taxation treaty between Serbia and Spain.

In practice, freelancers often include professionals such as designers, developers, foreign language teachers, SEO experts, and translators. However, freelancing is not limited to just online jobs – it also includes services that require physical presence, like fitness instructors or photographers. Even craftsmen such as plumbers, electricians, or painters can also work as freelancers if they do not provide their services as entrepreneurs or through a business entity.

It is important to note that freelancers cannot be engaged in trade, as trading requires mandatory registration in the form of an entrepreneur or a business entity.

Which income of freelancers is subject to taxation?

Freelancers must pay taxes on income derived from copyrights and related rights, as well as on income for services rendered, all of which are taxed through self-taxation.

What types of income are included?

Interestingly, the new regulation does not cover income from industrial property rights, which include, for example, trademarks and patents. Therefore, a freelancer could not choose to have his income from licensing a registered trademark taxed according to one of the two new models, but such income is taxed according to the “old” rules, which allow for standardized costs in (different) fixed percentages.

Additionally, it is important to note that the new tax rules do not apply to independent artists who are registered in an adequate register of persons who independently perform artistic or other activities in the field of culture. These artists are still taxed according to the old rules, which remain unchanged.

Does it matter where the money comes from?

Yes, it does matter. The application of the new rules is limited depending on who the payer is. Namely, as a freelancer, you can work for:

1. a foreign principal, whether it is a legal or natural person,
2. a domestic client who is a natural person,
3. another domestic principal who does not calculate and pay withholding tax.

This means that you are not considered a freelancer if you provide services to a domestic legal entity or entrepreneur. In such cases, you have the option to register as an entrepreneur or establish an employment relationship with your employer. The same requirement applies to the branch or representative office of a foreign legal entity.

Despite the large number of rules that need to be well understood to be properly applied, there is a notable advantage for freelancers: unlike entrepreneurs, freelancers are not subject to the independence test.

How much tax do freelancers pay?

This brings us to the key question of this topic, which is – how to calculate the tax that a freelancer should pay.

As we have mentioned earlier, the answer depends on the chosen taxation model. The idea of the new taxation system is that each freelancer chooses a model that offers the most favorable tax treatment based on his/her income level.

Model A

This model is more favorable for freelancers who have lower incomes per quarter. It allows for a recognized (standardized) cost amounting to RSD 103,296. This means that no tax is paid up to that amount, and if the quarterly income is higher than that amount, only the part that exceeds this limit is taxed. The stated amount is accurate as of the writing of this text but is subject to periodic changes.

In other words, the tax base is calculated by deducting RSD 103,296 from the freelancer’s quarterly income, and a 20% tax rate is applied to what remains.

Let’s say that Mark, who teaches Hungarian online, made an income of RSD 120,000 in the period from the beginning of the year to the end of March. If he chooses model A, Mark’s taxable income will be RSD 16,704 and that income will be taxed at 20%. Therefore, Mark will have to pay RSD 3,340.8 in taxes.

If the freelancer makes less than the amount of recognized expenses, he won’t have a tax obligation.

If Mark earns RSD 65,000 in the second quarter (from April to the end of June), he will not have tax obligations, but he is anyhow obliged to declare all income, even though he will not have tax expenses in that quarter.

Model B

The second model is more favorable for freelancers with higher incomes. This model recognizes two groups of standardized costs:

• fixed amount of RSD 62,300 (current at the time of writing of text, but also subject to periodic changes)

+

• percentage determined amount in the amount of 34% of the total realized income.

Therefore, the tax base is already reduced by 62,300 RSD, while the rest is reduced by an additional 34% of the total income. What remains after this calculation is taxed at a tax rate of 10%.

That’s right – with model B, the tax rate has been adjusted so that instead of the standard 20%, which is the usual rate for taxation of income from copyright and related rights and performed work, it now amounts to 10%.

Let’s imagine that Mark’s online business goes “uphill” during the third quarter, so in the fourth quarter (from October to the end of the year) he decides on model B. If he earns RSD 1,000,000 in the last quarter, he will first have to calculate the tax base by:

• subtracting 62,300 RSD from the total income, leading to the amount of 937,700 RSD,

• reducing that amount by 34% of the total income, more precisely by the amount of RSD 340,000,

• applying a tax rate of 10% to the thus obtained amount of taxable income = RSD 597,700

• and thus, concluding that his tax liability in that quarter amounts to RSD 59,770.

What about insurance contributions?

Regarding insurance contributions, it’s important to note that you must submit a separate application for insurance. By registering on the portal for freelancers, you are not automatically registered for insurance, but you must submit a separate application to start paying contributions.

However, when it comes to contribution amounts, it is essential to differentiate between the types of contributions, bearing in mind that each has a different treatment.

Contributions for pension and disability insurance

As for the tax, there are also two options for pension and disability insurance contributions, with each of the two previously explained taxation models “carrying” its own model of calculation and payment of contributions. This means that by selecting either model A or B, freelancers also choose the method of calculating contributions for pension and disability insurance.

If model A is chosen

In the case of pension and disability insurance contributions, there is a minimum base on which they are calculated. For the freelancer who chose model A, standard costs in the same amount of RSD 103,296 are also recognized when calculating contributions and they are deducted from the total gross income in the quarter. Here’s what this means: Let’s break it down with an example.

Let’s go back to Marko and his first quarter in which he earned a gross of RSD 120,000 as a freelancer. The basis for PIO contributions, in this case, is RSD 16,704, and a contribution rate of 24% is applied to it. By this calculation, we get the amount of RSD 4,008.96 that Marko needs to pay as the PIO contributions.

If the income in the quarter is lower than the amount of standardized expenses, there is no contribution (and no tax).

If model B is chosen

In the second case, as with tax model B, the calculation of the contribution base is somewhat more complex. Namely, the base is calculated by reducing the gross income in the quarter, again, by two types of standardized costs:

 fixed RSD 62,300

+

• 34% of total revenues

Since Marko earned RSD 1,000,000 in the fourth quarter and chose tax model B, the contribution base for pension and disability insurance will be calculated by:

• subtracting 62,300 RSD from the total income and thus getting the amount of 937,700 RSD,

• reducing that amount by 34% of the total income, more precisely by the amount of RSD 340,000,

• applying the contribution rate for PIO, which is 24%, to the thus obtained amount of taxable income = RSD 597,700

• and finally concluding that Mark has the obligation to pay contributions for PIO in the amount of RSD 143,448.

However, in this case, there is an additional constraint – the law mandates the minimum contribution base for pension and disability insurance, so it cannot be lower than three times the lowest monthly contribution base. In other words, with this model, pension and disability insurance contributions are paid even if the income is so low that no tax is paid. The amount of the lowest monthly contribution base is determined each year by the competent authorities, so the minimum contribution obligation also differs depending on the year in which it arises. 

Health insurance contributions

First, it should be emphasized that an individual who has health insurance on some other basis does not need to pay contributions for health insurance as a freelancer.

• For instance, freelancers who are employed and engage in freelancing in their free time already have paid contributions for health insurance, so they do not pay them again.
• The same rule applies to retirees, as well as to entrepreneurs who, in addition to being entrepreneurs, also provide services as natural persons.

Those who are not insured on another basis will certainly be glad to know that with health insurance there is no difference in the way of calculation and payment regardless of the chosen taxation model.

In this case, health insurance contributions are calculated by applying a rate of 10.3% to:

a) taxable income,

or

b) three times the amount of the monthly contribution base, which is equal to 15% of the average monthly salary in the previous year. This information is set annually by the responsible statistical authority, and the amount changes each year.

In other words, those freelancers who have an obligation to pay health insurance contributions must register and pay them, regardless of how much income they generate.

Contributions for unemployment insurance

When it comes to unemployment benefits, freelancers do not pay them.

As a result, freelancers are not eligible for unemployment compensation or “sick leave”.

Due to the fact that freelancers work outside of employment, they do not have benefits such as:

• paid maternity leave;
• paid leave from work due to childcare;
• paid sick leave.

However, freelancers and their clients can negotiate different terms. While these benefits are not typically available to freelancers by default, they can be included in agreements between the freelancer and the client if mutually agreed upon.

Comparative summary

To summarize, the differences between the two taxation models are as follows:

Can I change the selected taxation model?

You might have already figured this out from Mark’s examples, but if not, you can relax knowing that the answer is YES. If you initially apply for model A when filing your tax return for the first time due to the fact that you do not expect a large income, that model will be applied during the first quarter. However, if your business gets better than you hoped and you already determine before the beginning of the next quarter that your income will increase and that the other model would be more favorable for you, you can apply model B in the next quarter.

If I receive money through Payoneer, do I still need to pay taxes and contributions?

This is one of the most common concerns that a large number of freelancers have faced at some point. In short, from a tax perspective, it is not relevant how the payment has reached you – whether through one of the international payment methods, such as Skrill, Payoneer, or Neteller, through PayPal, your foreign currency account in a bank, or in some other way.

So, if you are wondering if someone is exempt from tax obligations for compensation received from abroad simply because the money doesn’t go directly into their account but, for example, into a PayPal account, the answer is very short: no. Every payment a freelancer receives has the same treatment regardless of the “path” with which it has arrived.

What if I am a foreigner working as a freelancer from Serbia?

No worries – foreigners can also register as freelancers on the portal and file taxes as long as they have either a foreigner’s registration number or a Tax Identification Number (TIN).

It’s interesting to note that in this case, a foreigner doesn’t need a work permit but can legally live in Serbia based on approved temporary residence and work as a freelancer, without entering into an employment relationship.

Are there penalties if I don’t pay the tax?

Yes, there are penalties, and not only if you fail to pay, but also if you fail to file a tax return, as well as for a number of other actions that violate the new rules. Fines for freelancers range from RSD 5,000 to 150,000 – which, you’ll admit, is not a small amount, especially considering that in 2021 the net average income for freelancers in Serbia was just above EUR 500, according to the results of a survey conducted by the Association of Internet Workers.[1]

In addition to the misdemeanor fine, a freelancer who is late in reporting and paying taxes and contributions is obligated to calculate interest starting from the day following the day when the obligation was due for payment.

For example, if you file the income report for the first quarter on May 20th, you are obligated to calculate interest starting from May 1st – since the deadline for submitting the report for the first quarter is April 30th.

Remember, you must report all sources of income, including cash. In fact, not only the money that has been paid to you through a bank account or an account on one of the electronic payment services is reported through the portal, but also all the money you receive in cash.

We believe that you will agree with us that, after a long time, we have finally received answers to the most common questions regarding the status of freelancers in our country. Whether you have been employed, had your own company, or worked as an entrepreneur until now, if you are seeking a change and are ready to explore new career opportunities, we believe that the knowledge you have now gained will finally give you enough courage to try your hand at freelancing.

[1] Source: https://uri.rs/2021/07/30/rezultati-ankete-frilenseri-problemi-potrebe-i-ocekivanja/