As of January 1st, 2023, will it be more convenient to work in Romania as a freelancer or as an employee? This is a question asked by a lot of people lately, so I decided to write an article that can shed light on this topic. This can be useful to many people who are not yet decided on how to organize their activity starting next year.

On the top, since the taxation system for freelancers in Romania will change as of January 1st, 2023, with higher social contributions for freelancers, many people say it isn’t convenient any more, from a tax perspective, to work as a freelancer (in Romanian: “persoană fizică autorizată” – or in short: PFA).

I would say that, even if the changes brought to the social contributions applicability thresholds, or to the taxation rules for the fixed/lump-sum income system will increase the overall tax burden, the tax regime for freelancers continues to be much more advantageous than that of employment income.

In Romania, the tax regime for freelancers (PFAs) has long been more attractive than that of employees. This applies even more for certain types of economic activity rendered by freelancers, for which taxation on fixed/lump-sum income can apply. And because of this, the theory of switching an employment relationship into one of providing services as freelancer is a common one in Romania.

Individuals are very often proposed by companies to set up a freelancing collaboration rather than an employment one. And for many of them the main reason is “paying less taxes to the state”. However, they are not always aware of the involved risks of using freelancer services in Romana. And in some cases, they end up with tax inspectors requalifying such a collaboration.

Main changes to freelancers tax regime, as of 2023

From next year, two major changes will come into force regarding freelancers tax regime in Romania:

  • minimum income threshold from which the obligation to pay social contributions (pension fund contribution and health insurance contribution) will change; more exactly, a lower threshold will apply (of 6 minimum gross national wages) as of which freelancers will start paying the social contributions. At this moment, the minimum threshold is set at 12 minimum gross national wages.
  • a new (higher) threshold, from which freelancers will be due higher social contributions, is introduced – the new higher threshold is of 24 minimum gross national wages.
  • the opportunity to apply a taxation system based on fixed/lump-sum income will be limited, by introducing the obligation to switch from this system to taxation based on actual registered revenue and expenses, when a freelancer’s annual gross income exceeds the equivalent in lei of 25,000 euros (a threshold four times smaller than the current one, of 100,000 euros). This change actually means that those who estimate they will make more than 25,000 euros in 2023 will no longer be able to use the fixed/lump-sum income taxation system, and will be forced to apply directly the taxation based on actual registered revenue and expenses. You can read more on the differences between the two systems in this article: Tax obligations for a freelancer in Romania – how it works in 2022.

All of the changes described above will impact the taxation of freelancers as of next year.

The first two changes mean that, from next year, with the new thresholds applicable for social contributions, more freelancers will be paying these contributions, and in higher amounts than before.

In what regards the change described under the third bullet, for many taxpayers using the fixed/lump-sum income taxation is a convenient option, in contrast to applying the taxation based on actual registered revenue and expenses. Thus, the significant decrease in the income threshold to 25,000 euros will certainly have a negative impact.

In addition, for many freelancers the application of the fixed/lump-sum income taxation rules also makes taxation itself easier. Therefore, the transition to taxation based on actual registered revenue and expenses will involve more administrative tasks, including the obligation to keep single-entry bookkeeping.

So, after all these changes come into force as of 1 January 2023, how will it be better to work, as employee or freelancer? Let’s find out with some concrete numbers.

Even with the new thresholds for social contributions, the freelancer remains more tax convenient than the employment

Our calculations start from the assumption, of course purely hypothetical, that the Romanian minimum gross national wage will remain at the level of 2,550 lei for year 2023 as well. It is very possible to see an increase for next year, but here we are strictly in the area of ​​speculation. Therefore, we will stick to what we know for the moment.

Our calculations show that, even with the new thresholds introduced for the freelancing income, the taxation in the case of employment will remain higher in 2023. This is mainly because the social contributions rates (25% for pension fund contribution and 10% for health insurance contribution) apply to the salary income regardless of how high or low the monthly gross salary is. Also, there are no caps applicable for salary income, as there are for freelancers.

This means that an employee with a higher salary invariably ends up paying more than a freelancer who, although deriving the same income, has the option of choosing a slightly lower base – and this often happens .

Here is our comparison calculation, which shows, by numbers, that the tax regime for a freelancer still remains more advantageous than that of an employee, even with the much-criticized latest changes to the freelancing taxation system.

Use our comparative tax calculators to estimate tac costs for different scenarios: Freelancer versus employment tax calculator for 2023.

Author

Tax & Legal consultant since 2005.

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