When referring to a freelancer, it usually implies a person who does not intend to start a typical company or own a permanent office. If someone is self-employed, they own a sole proprietorship, which means they can hire employees if they can afford it. Freelancers are not restricted to a particular industry, and could work as consultants, web designers, or IT programmers, among others. Freelancers generally have lower business costs and less financial risk. In Danish, a freelancer's income is called "honorar," which does not have an exact Polish equivalent. Although honorar is a type of income that is different from salary or sales, we will refer to it as "income" for simplicity in this article.
From a tax perspective, a freelancer's income in Denmark is referred to as "B-income," just like for a sole proprietor, and the tax paid by a freelancer is called "B-tax." However, even though both the income and tax are labeled as "B," it does not necessarily mean that a freelancer is considered self-employed. The "B" label is simply used to inform the IRS that the income was not earned from a regular job ("A-income"). As a freelancer, it can be challenging to determine your tax status and accounting and VAT obligations. Although you may believe that you are a freelancer due to the contract you signed with your client, in Denmark, it is not possible to reject being an employee, despite what the signed freelance contract may say.
When it comes to working as a freelancer in Denmark, it's essential to be prepared for three potential scenarios.
According to Danish law, if a freelancer meets any part of the following criteria, they are considered an employee rather than a freelancer:
Instead of invoicing their services, employees receive a pay stub
If you are classified as an employee in Denmark, you will receive a standard pay stub and you should not submit invoices for your services. Instead, the income you earn will be classified as "A-income," and the tax you pay will be referred to as "A-tax." Your employer or client will collect the A-tax and pay it to the IRS. Additionally, as an employee, you will be entitled to standard employment benefits, such as vacation pay and other benefits.
Employees are not allowed to deduct expenses in personal income
As an employee in Denmark, any expenses you incur related to your job cannot be deducted in the same way that they can be for a company. These costs are considered standard employment expenses and are recognized as such. The amount of tax deduction you can claim is lower than it would be for a company because costs can only be deducted from taxable income, not personal income. These costs must also be related to the income received from your employer. To declare related expenses, you would use the employee expenses field No. 58 on your tax return. Your income should be declared using the normal field No. 11 for salaries. As an employee, you do not have to deal with VAT payments regardless of how much income you have. Additionally, you are not responsible for bookkeeping.
In some cases, there may be a "true freelancer" who falls somewhere between being hired as an employee and being self-employed. When determining your status, it's important to consider all relevant factors and not rely solely on one or two. While some of the factors we've mentioned, such as working for a single client or having a contract without a specific deadline, may suggest that you are a freelancer, it's essential to look at the bigger picture of your working arrangement. Ultimately, there is no single factor that is fully sufficient to specify your situation, so you need to consider all relevant factors when determining your status.
There are several factors that may suggest that you are a true freelancer rather than an employee or self-employed:
What deductions are possible in the case of a freelancer?
As a freelancer in Denmark, you are able to deduct your business expenses from your income for tax purposes. However, your expenses cannot exceed your income, so you cannot end the year with a deficit as a sole proprietor can.
The company that pays your honorarium must declare the income in box 12 on their tax return. If the company fails to declare your fee in box 12, they must enter the amount in box 15.
As a freelancer, you must declare your costs in box 29 on your tax return. It is important to document all details of your costs to ensure accurate reporting.
Freelancers often have to pay VAT
If a freelancer's income (also known as revenue or sales) exceeds DKK 50,000 in a 12-month period, their entire income will be subject to VAT, and they must comply with VAT regulations. Additionally, any sales made before reaching DKK 50,000 will also be subject to VAT in this case. The VAT rate in Denmark is a 25% charge without VAT, so the VAT for the first DKK 50,000 in sales will be 20% of that amount.
However, it's important to note that not all freelancers are required to pay VAT, even if their sales exceed DKK 50,000 for 12 months. Exemptions may apply to certain professions such as actors, musicians, artists, journalists, bloggers, speakers, writers, and translators.
The distinction between being an employee, a true freelancer, and self-employed can be a bit complicated, as it largely depends on the specifics of the individual's work situation.
In general, a freelancer is someone who works independently and provides services to clients on a project-by-project basis, while a self-employed individual typically runs their own business and may have employees, an office, and other infrastructure to support their work.
However, there is some overlap between these categories, and a freelancer may begin to look more like a serious business as their financial risk increases and their plans expand to include staff and other resources. In this case, the conditions that apply to the freelancer would be similar to those for a self-employed individual, but on a smaller scale.
What a PMV is?
In Denmark, it is possible to run a small sole proprietorship that does not have to pay VAT, as long as your sales do not exceed DKK 50,000 in a 12-month period. To do this, you will need to register a PMV (Privat Mindre Virksomhed), which is a smaller version of a sole proprietorship.
If you expect your sales to exceed DKK 50,000, it's better to register as a VAT payer from the start. If your PMV does exceed DKK 50,000 in sales for 12 months, the sales you had before reaching DKK 50,000 will be subject to VAT, and you will have to pay a VAT rate of 20% on all previous sales.
The PMV is issued a CVR number, but does not require VAT registration. Later on, you can convert the PMV into a sole proprietorship and keep the same CVR number when registering for VAT.
In summary, a PMV is a smaller version of a sole proprietorship that is issued a CVR number but does not require VAT registration, as long as sales do not exceed DKK 50,000 in a 12-month period. A sole proprietorship owns a CVR number and is also registered for VAT.
What is a sole proprietorship?
In Denmark, the terms "self-employed" and "sole proprietorship" are interchangeable. If a sole proprietorship expects their sales to exceed DKK 50,000 in a 12-month period, they must register as a VAT payer.
The primary goal of a sole proprietorship is to generate a profit and establish the typical costs associated with running a business, such as marketing, employees, office rent, computers, machinery, and other expenses.
Compared to a freelancer, a sole proprietorship has more financial risk with clients, but there is no set amount that can be used to determine the level of financial risk. Ultimately, it depends on the individual business and its specific circumstances.
Some factors indicating that you are a sole proprietorship include:
1. You work for more than one customer
2. You enter into contracts with different terms
3. Your projects are short-term and have defined scopes
4. You work within a limited time frame
5. It's up to you to determine how you do your work
6. Your working hours are flexible and depend on your preferences
7. You choose what equipment and programs to use
8. You are not instructed by the client on how to do your work
9. The customer does not control your work
10. You receive payment once you deliver the project or reach specific milestones
11. You place your company name on the work and documents that you deliver to the customer
12. You are responsible for covering the costs of your office, computer, office supplies, telephone, and other expenses
13. You may also work for other clients.
14. You have the option to hire employees if you want to.
15. If you make mistakes or deliver projects late, there is a financial risk involved.
16. You can create ads to attract new projects.
17. There may be civil liability if you make a mistake.
18. You are required to pay Value Added Tax (VAT).
19. You are not entitled to paid vacation or sick leave.
20. You can decide when to take vacation time.
21. Your contract can be terminated without notice.
People who work as freelancers and operate their own businesses need to follow accounting rules. We suggest using e-conomic to handle your accounting. When you run a business on your own, you need to report it on your tax return by filling out specific field numbers on the SKAT Borger form:
Income, interest: 114;
Expenses, interest: 117.
After considering the factors mentioned earlier, it's not always possible to determine whether you are an employee, freelancer or sole proprietor with absolute certainty. In some cases, it may be obvious that you're running a sole proprietorship, while in others, it might be clear that you're an employee. However, in many cases, it can be challenging to make this determination. If you're unsure, you can seek confirmation from the tax office. They can provide you with written confirmation of your classification as a freelancer, but it typically costs around DKK 400.
There are two main consequences to consider if you incorrectly classify yourself as a sole proprietor rather than an employee. Firstly, your client may be liable for a tax bill, as they were supposed to withhold personal income tax from your earnings, and they may also face penalties for non-compliance with various regulations. Some of these claims may arise due to your actions, such as if you wrongfully terminate a contract or fail to receive vacation time. Secondly, if you have deducted costs as a sole proprietor on your personal income tax return, these expenses will be subject to different tax rules, which may result in a lower tax deduction. Additionally, if you have reported a deficit in the past, it will be changed to zero income, which will increase the amount of tax you owe.