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Senior Associate: Anja Berić
The last few years will be remembered as a very turbulent period for freelancers from a tax perspective in Serbia. Here’s a brief reminder: this period was marked by strong opposition from freelancers to the announcement from the Tax Administration warning the individual taxpayers in Serbia that they were obliged to pay taxes on income earned from providing services and were requested to settle tax liabilities for the previous time period, under threat of initiating tax proceedings.
The dissatisfaction of freelancers with the actions of the competent authorities culminated in numerous protests and long negotiations with state bodies. It became clear that the status of freelancers in our country requires a rapid and radical reform that will enable adequate recognition of this form of work without imposing an unbearable tax burden. However, despite multiple proposals to amend the Personal Income Tax Law that followed, the process of shaping the tax status of freelancers in Serbia took longer than expected.
However, a positive conclusion finally arose: at the end of 2022, amendments to the laws regulating personal income tax and contributions for mandatory social insurance were officially adopted, introducing a new tax regime for freelancers. The new rules have been in effect since January 1, 2023, while the portal for registration and taxation of freelancer income became active a few months later. On this occasion, we will answer your numerous questions and provide a detailed overview of the new regulations.
A few introductory words about the changes
Briefly, what do the new rules consist of?
- Freelancers can now choose between two taxation models – one is more favorable for freelancers with lower income, while the other suits freelancers with higher earnings.
- Both models are based on recognizing certain nominal expenses that reduce the tax base, while the amount, i.e., the method of determining costs vary depending on the chosen model.
- In both cases, we are talking about self-taxation, meaning that the freelancer is obligated to calculate, declare, and pay the tax themselves.
- The treatment of insurance contributions depends on the type of contribution. Regarding pension and disability insurance, there are also two models – which one will be applied depends on which taxation model the freelancer has chosen. Special rules apply to health insurance, and their application depends on whether the freelancer is already insured on another basis or not.
Who is considered a freelancer?
In brief, a freelancer is an individual who is not registered for conducting business activities but provides services and thereby earns income. So, if you are, for instance, registered as an entrepreneur, you are not considered a freelancer.
Understanding the term freelancer is vital 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 persons:
- a resident of Serbia who earns income both domestically and abroad,
- a non-resident of Serbia, for the portion of income earned in Serbia.
Therefore, Marko from Belgrade, who provides video editing services to foreign clients through Upwork, is considered a freelancer.
Andrea, who lives in Belgrade 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 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 are most commonly developers, designers, foreign language teachers, translators, SEO experts… however, freelancing is not limited to just online jobs but can also include services that require physical presence, like fitness instructors or photographers. Even craftsmen such as electricians, plumbers, or painters can also be freelancers if they do not provide their services as entrepreneurs or through a limited liability company (LLC).
What needs to be kept in mind is that a freelancer cannot be a trader, as trading requires mandatory registration in the form of an entrepreneur or a business entity.
Which income of freelancers is taxable?
Freelancers are required to pay taxes on income from copyrights and related rights, as well as on income for services rendered, which are taxed through self-taxation.
What constitutes these incomes?
|Income from copyright-related rights||
Income for performed work
|Income from software licensing, sales of books or professional works||Income from the performance of songs or plays||Income from providing services such as e.g. craft services provided by a painter or electrician|
It is interesting that the new regulation does not include income from industrial property rights, which include, for example, patents and trademarks. 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 include the recognition of standardized costs in (different) fixed percentages.
Also, it should be kept in mind that the new 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. They are still taxed according to the old rules, which have not been changed.
Does it matter where the money comes from?
Yes, it does. The application of the new rules is limited depending on who the payer is. Namely, as a freelancer, you can work for:
- a foreign principal, whether it is a legal or natural person,
- a domestic client who is a natural person,
- another domestic principal who does not calculate and pay withholding tax.
Essentially, this means that you are not considered a freelancer if you provide services to a domestic legal entity or entrepreneur. If this is the case, you have the option to register as an entrepreneur or establish an employment relationship with your employer. The same 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, one mitigating circumstance still exists: unlike entrepreneurs, freelancers are not subject to the independence test.
How much tax do freelancers pay?
We have reached the central question of this topic, which is – how to calculate the tax that a freelancer should pay?
As we emphasized earlier, the answer depends on the chosen model. The idea of the new taxation system is that each freelancer chooses a model that is more tax optimal for him, depending on the amount of income.
This model is more favorable for freelancers who have lower incomes per quarter because the recognized (standardized) costs amount to RSD 96,000. 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.
In other words, the tax base is calculated by deducting RSD 96,000 from the freelancer’s quarterly income, and a 20% tax rate is applied to what remains.
Let’s say that Mark, who teaches Chinese 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 24,000 and that income will be taxed at 20%. Therefore, Mark will have to pay RSD 4,800 in taxes.
If the freelancer makes less than the amount of recognized expenses, he is not obliged to pay tax.
If Mark earns RSD 75,000 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.
The second model is more favorable for freelancers with higher incomes because this model recognizes two groups of standardized costs:
- fixed amount of RSD 57,900
- percentage determined amount in the amount of 34% of the total realized income.
Therefore, the tax base is already reduced by 57,900 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 modified 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 57,900 RSD from the total income, leading to the amount of 942,100 RSD,
– deeducing that amount by 34% of the total income, more precisely by the amount of RSD 320,314,
– applying a tax rate of 10% to the thus obtained amount of taxable income = RSD 621,786
– and thus, concluding that his tax liability in that quarter amounts to RSD 62,178.6.
What about insurance contributions?
Regardless of the type of contribution, a separate application must be made for insurance. In other words, 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 we talk about contribution amounts, a distinction should be made 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 choosing 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 96,000 are also recognized when calculating contributions and they are deducted from the total gross income in the quarter. What it means? We will explain with an example.
Let’s go back to Mark 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 24,000, and a contribution rate of 24% is applied to it. By this calculation, we get the amount of RSD 5,760 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 57,900
- 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 57,900 RSD from the total income and thus getting the amount of 942,100 RSD,
- reducing that amount by 34% of the total income, more precisely by the amount of RSD 320,314,
- applying the contribution rate for PIO, which is 24%, to the thus obtained amount of taxable income = RSD 621,786
- and finally concluding that Mark has the obligation to pay contributions for PIO in the amount of RSD 149,228.6.
However, in this case, there is an additional limitation – the law stipulates 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 a person who has health insurance on some other basis does not pay contributions for health insurance as a freelancer.
- For example, 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 applies to retired persons, 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 happy to hear 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,
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 data is also determined by the authority responsible for statistics, and the amount varies from year to 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.
The result of this is that freelancers cannot exercise the right to unemployment compensation or “open 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, it is not prohibited for the freelancer and the client to agree otherwise, which means that, although they do not have them as a rule, freelancers can have these benefits if they agree with the client in that regard.
To summarize, the differences between the two taxation models are as follows:
|MODEL A||MODEL B|
|96.000 RSD||57.900 RSD
+34% gross income
|Tax rate||20% on income over 96,000 RSD||10% of the gross income minus the standardized costs|
|Contributions for pension and disability insurance||24% of the gross income minus standardized costs||24% of the gross income minus standardized costs
3 x the lowest monthly contribution base
(= there is always an obligation to pay contributions)
|Health insurance contributions||if there is no health insurance on another basis:
from taxable income
from three times the monthly base (which is 15% of the average monthly salary)
|if there is no health insurance on another basis:
from taxable income
from three times the monthly base (which is 15% of the average monthly salary)
Can I change the selected taxation model?
You’ve probably already concluded that from Mark’s examples, but even if you haven’t, you can breathe a sigh of relief – the answer is YES. If you 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 dilemmas 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, and I work as a freelancer from Serbia?
No problem – 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, and not only if you don’t 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 5,000 to 150,000 Serbian dinars – 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 500 EUR, according to the results of a survey conducted by the Association of Internet Workers.
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 15th, you are obligated to calculate interest starting from May 1st – since the deadline for submitting the report for the first quarter is April 30th.
Don’t forget that the obligation to report all income also applies to 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 need a change and are in the mood for new career ventures, we believe that the knowledge you have now gained will finally give you enough courage to try your hand at freelancing.