We explain in this article what are, in short, the applicable rules for Romanian taxation of self-employment income, according to the current tax legislation, as applicable in 2021. Especially for those who plan to work as self-employed in 2021, we describe below the most relevant aspects of self-employment tax obligations.
Thus, in addition to the advantages that come with the supposed freedom of work that this form of business can bring, there are also a number of tax reporting and payment obligations. We describe below what those responsibilities are, and how the tax obligations of a self-employed individual must be fulfilled.
The main tax obligations of a self-employed individual in 2021 resume to a number of taxes which are due on the income derived during a year, and are largely similar to those tax obligations that a Romanian employer normally owes for its employees. But some of these taxes must be calculated depending also on the level of income that the freelancer earns during a tax year (calendar year).
We start with that tax obligation that any that any self-employed individual owes, no matter what the level of income he/she actually earns is. That is, either if someone earns, say, 5,000 lei per year as a freelancer, or earns 500,000 lei, his/her income will always be subject to income tax. According to the provisions of the Romanian Tax Code in force, the income tax amount due by a self-employed individual must be calculated at a rate of 10% of the taxable income obtained.
It is important for a person authorized as self-employed to know that two distinct methods can be used to calculate the income tax they owe. First of all, taxation can be done based on income actually derived, which means that the determination of the taxable income will be done by deducting from the gross revenue (i.e., income cashed in) the business deductible expenses. The calculation of the net taxable income must be done on the basis of keeping a single-entry basic accounting.
Alternatively, the freelancer may choose to determine the tax due based on an annual income norm (income tax is calculated at an annual threshold). In this scenario, only certain categories of activities can qualify for taxation based on income norms. The annual taxable income norms are pre-established by the Romanian Ministry of Finance on an annual basis.
The annual income norm cannot be lower than the guaranteed national minimum gross basic salary, multiplied by 12. Thus, the value of the Romanian minimum wage for each tax year is taken into account when establishing the income norms. For year 2021, the minimum gross wage established by the government is 2,300 lei. Therefore, the annual income norm for a freelancer in 2021 cannot be less than 27,600 lei (12 x 2,300 lei).
Although it may seem tax advantageous for some categories of freelancers to apply the taxation system based on the income norm, it is important to note that, from a certain level of income upwards, a freelancer has no longer the freedom to choose. This is because, according to the Romanian Tax Code, an individual who generates during one year gross income that exceeds the equivalent in lei of 100,000 euros is obliged to apply, starting with the following year, the taxation method based on income actually derived (based on bookkeeping).
Unlike income tax, which is mandatory regardless of the actual income obtained by a freelancer, things are different in terms of social contributions. More exactly, if the net annual income does not reach a certain minimum threshold, then social contributions are not due.
Specifically, the pension fund contribution (CAS) and the health insurance contribution (CASS) become liabilities of a self-employed individual only if the person obtains income which during a year reaches the level of 12 gross minimum wages per economy. Which, for 2021, means it must reach at least 27,600 lei per year.
An important aspect to know is that the social contributions due on self-employment income apply strictly in relation to the freelancing activity, regardless of the existence of an employment relationship that can take place in parallel. In other words, a self-employed individual could be in the position to owe social contributions for his self-employment income, together with the social contributions already paid under an employment relationship.
On the other hand, there is nothing stopping a freelancer from optionally insuring and pay social security contributions, even if his/her annual net taxable income does not reach the level for paying the contributions mandatorily.
The actual rates at which the two contributions are calculated are:
Reporting and payment of the taxes due
As regards the declaration and payment of the income tax and social contributions due, the reporting obligation must be fulfilled by each individual by submitting the annual tax return (“Declarația Unică”).
Starting this year, the annual tax return must be prepared and submitted by each taxpayer to the Romanian tax authority (ANAF) by May 25.
For more details on submitting the Romanian annual tax return, you can read our article on this topic here: Romanian annual tax return – frequently asked questions.
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