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Bogdan Ivanchev
Manager Business Development at Accounting & Consulting
What you need to know about accounting when you work as a freelancer?
Civil contract
Self-employed person
Company
Civil contract
In the case of a civil contract, the Employer takes care of the declaration, withholding and payment of income and insurance taxes. It is required to submit an Annual Tax Declaration to the National Revenue Agency and if the statutory threshold for received income (100,000 BGN for the last 12 months) is exceeded – VAT registration.
The civil contract is a suitable option when you work one-off or sporadically on projects for a short period of time and the income comes from companies in Bulgaria. When the income becomes regular and increases, you should consider registering as a self-insured person or as a company.
Self-employed person
You pay health and insurance contributions on your own account at a rate of 27.8%. In addition, upon request, you can be insured for general sickness and maternity in the amount of 3.5%.
You take advantage of 25% legally recognized costs. You don’t need to collect documents for them, the percentage is applied automatically. They reduce the tax base before it being taxed with 10% tax on total income.
You issue invoices, like any person who carries out an independent economic activity.
VAT registration is mandatory when your total non-employment income in Bulgaria reaches BGN 100,000 for the last 12 consecutive months.
You have the right to hire employees on both labor and civil contracts.
Important!
If you work on an employment contract and are insured to the maximum insurance income as a self-insured person, you do not owe additional insurance. In this case, you effectively owe only 7.5% tax on this activity.
When calculating non-employment income up to BGN 100,000, rental income is included. It does not include income from stocks, bonds, sales of real estate, cars, etc.
You are not required to have a cash register and issue receipts. Only an issued invoice is sufficient.
Steps to register as a self-employed person
- Registration in BULSTAT at the Registration Agency, after which you will receive a unique identification code (UNIC)
- Registration in the NRA
DEADLINE: Within 7 days from the start of your activity (conclusion of the first contract).
You can register with the Trade registration Agency to get an EIC, and then wait until the launch itself before submitting the application to the NRA. The goal is to finish with the administration part, and start paying the insurance yourself once you have real income.
BULSTAT registration requires a document proving your right to exercise the chosen profession, such as a diploma, certificate or others.
Income tax
- You owe 10% income tax
- The tax base is determined by deducting 25% of legally recognized expenses and payable insurance from the gross income
- Advance tax is declared every 3 months with a Declaration under Art. 55, para. 1 of the Income Tax Act, which is used to calculate and pay advance tax on the actually acquired income in the relevant quarter
Social security
- Each year from 01 to 31 January, you determine the type of your insurance for the relevant calendar year.
- You have the right to interrupt or resume the relevant work activity during the year, but you cannot change the type of insurance.
- You choose what income to insure yourself each month between BGN 710 and BGN 3,400, and in the annual tax return you equalize the insurance depending on the total amount for the year.
- The minimum monthly insurance income at the moment for self-insured persons is 710 BGN .
- You must be insured for:
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- state social insurance – 14.8%;
- additional mandatory pension insurance – 5%;
- health insurance – 8%
- If you wish to, you can make insurance contributions for general illness and maternity – 3.5%.
- Thus, the possibilities for securing a free profession are two – or 27.8% or 31.3%.
VAT registration for self-employed individuals
General case – mandatory registration is due when the person’s non-employment income reaches BGN 100,000 or more for a period not longer than the last 12 consecutive months before the current month.
Specific cases:
When the self-insured person provides services to foreign persons from the EU, even if it has not reached the amount of BGN 100,000, there must a VAT registration in advance for reporting purposes.
In the case of income from foreign persons outside the EU, VAT registration is not required.
Optional registration – when the conditions for mandatory registration are not met.
Use of tax credit when registering for VAT
- The presence or absence of a VAT registration does not affect the tax treatment of the income of individuals.
- The self-insured person registered under VAT may be entitled to a tax credit on the expenses incurred by them in connection with their activity, on which VAT has been charged.
For example: You can deduct VAT on the purchase of assets and expenses that are directly related to your business as a self-employed person – computers, software fees, licences, telephone, internet. It is possible if you have an expense for rent, office supplies, car fuel, etc., and consultation with an accountant is necessary.
Company
Requires a registration in the Commercial Register.
The minimum capital is 2 BGN and can be increased or decreased at any time. It is possible to attract partners, with whose funds the amount of capital can be increased. You can sell shares – you are more flexible in attracting fresh funds.
With a company, you have limited liability for the incurred obligations of the company only up to the amount of its capital. You are not responsible with your personal property.
Different types of activities can be carried out through one company, as well as relying on many different tools and assets to generate business and income.
You owe a profit tax of 10%.
When distributing profits, you owe dividend tax of 5%.
It requires bookkeeping by a specialist and compliance with numerous legal requirements in the field of accounting, administrative and labor law matters.
All income and expenses are proven by invoices/documents (there are no automatically legally recognized expenses).
A recommended option when you have a more complex business model – you carry out transactions outside the country, when you have a VAT registration, havng expenses above 25%, you want to hire people.
There are opportunities to optimize tax and social security contributions – by accounting for business trips, fringe benefits such as vouchers, supplementary health and pension insurance and other tax-free tools.
Important!
- A company is a very good option for starting a small business, especially for cases in which the owner carries out all the activities of the business.
- With an EOOD, the liability is limited to the capital.
- There are higher costs of company administration – for registration/liquidation, accounting services, legal services.
- If you receive payments in cash, you must have a cash register.
Social security
As the owner of a commercial company
- These insurances are not treated as expenses of the company and are not deducted from the profit. They are treated as expenses of the self-insured person.
- It’s a suitable option when starting a small business with limited capital because it allows the person to minimize insurance costs.
For example: With a minimum of BGN 710, only 27.8% insurance is due. Total income tax is not due.
Management and Control Contract Assurance (MCC)
- All insurances are considered an expense of the company.
- MCC can be equated to an employment contract and the person receives a monthly remuneration, accordingly.
- The minimum insurance income varies according to the economic activity of the company (check the NRA website for reference).
- No registration with the NRA is required. Form 1 and Form 6 declarations are submitted monthly.
For example: With a minimum gross salary of BGN 1008, insurances of 32.7% are due (for employee and employer). A total income tax of 10% is payable.
In both cases, if you work on an employment contract and are insured on the maximum insurance income, you do not owe insurance as a business owner.
Up to about 110,000 euros annual income is a profitable option with a low remuneration under MCC and a maximum dividend. After that, it becomes more profitable the other way around. The reason is in the dividend tax, which is 5 percent compared to the Insurance, which is fixed – 568.45 euros in total.
VAT registration with a company
General case – mandatory registration when revenue reaches BGN 100,000 or more for a period not longer than the last 12 consecutive months before the current month.
Specific cases:
When the company provides services to foreign persons from the EU, even if it has not reached the amount of BGN 100,000, it must be registered for reporting purposes
In the case of income from foreign persons outside the EU, VAT registration is not required
Optional registration – when the conditions for mandatory registration are not met.
Self-employed vs company registration
In this report, you will find both forms of registration and what their advantages and disadvantages are. You can compare and choose the most suitable option by tracking the commitments and amount of taxes and insurance.
We hope to be helpful in making the right decision.
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