Do I work as an employee or self-employed?
If you receive pay in compensation for the work you do for someone else, it is either wages or trade income.
You receive wages if you have signed an employment contract. In this case, tax is withheld on your wages, which requires that you have a tax card. If you do not have a tax card, your employer must apply 60% as the withholding rate. Conversely, if you are self-employed and your work is based on an assignment, the pay you receive is trade income. If you are in the prepayment register, you must pay tax prepayments on your trade income. If you are not registered for prepayment, the customer that buys your services must withhold tax on the trade income paid to you.
What are wages?
It may be difficult to know whether the income you receive should be classified as wages or as business income. Wages are paid for work performed in situations where there is an employer–employee relationship. Besides that, the following types of fees are always considered wages under definition of law:
- Fees paid in compensation for attending a meeting or conference
- Fees paid for giving a lecture or speech
- Fees relating to membership in a Board of Directors or to membership in a similar administrative body of a corporation
- Fees of a Managing Director
- Wages drawn by a partner in a general or limited partnership
- Compensation that you receive if you are a person appointed to a position of trust
The above fees and payments are considered wages even if no employer–employee relationship is formed.
What is trade income?
If you are paid compensation that is not wages for the work, assignment or service that you carry out, it is regarded as trade income. In these circumstances, your customer is not expected to withhold tax from the amounts the customer pays to you if you are in the prepayment register. The payer of trade income does not need to withhold employer’s health insurance contributions, either.
How can you tell the difference between work by a wage earner and work by a self-employed individual?
When you determine whether the person who works is a wage earner or a self-employed individual, take account of the following:
- Supervision and direction
If the person is a wage earner, working under an employment contract, the employer has control over the work and can give detailed instructions. Conversely, if the person working is self-employed, the customer is only buying the end result of the work. The customer can supervise the progress of the work and give some instructions to ensure that the end result is satisfactory. If the end result is different from what the customer ordered, the customer has the right to demand that the work is redone or that damages are paid.
- Social security
As provided by legislation, employers must make arrangements for their employees’ social security. They must pay contributions for pension insurance and several other types of insurance. They must continue to pay wages even during the employee’s off days and sick leave. However, when work is done by a self-employed individual, the only pay is the payment on invoice. The customer and the self-employed individual may have agreed on a fixed price in advance, or that the invoice to be prepared by the self-employed individual will be based on the number of hours worked. Self-employed individuals must take care of their own insurance contracts (such as pension insurance and accident insurance) and of their living expenses during days off.
- Fringe benefits connected with employment contracts
Besides paying their employees a cash wage or salary, employers can provide a variety of other benefits as well. These include benefits in kind, such as company cars, employer-provided meals and telephones. In addition, employers can make arrangements for free medical care and free recreational and hobby activities. Conversely, a self-employed individual is only paid the price that has been agreed with the customer. The invoice often contains a specification of how the price is formed.
- Allocation of responsibilities and agreements on warranty
The employer of a wage earner carries responsibility for their work. If a third party suffers a loss or injury, the demand for damages will primarily be addressed to the employer. Conversely, a self-employed individual is fully accountable for work quality. Self-employed individuals may grant a warranty that covers the completed work for an agreed period. If the customer finds any faults when the warranty is in force, the self-employed operator will repair them free of charge.
- The tools and materials necessary for the work
Generally, the employer must provide the tools and materials for their employees. However, in some lines of business, professional employees have their personal tools needed in the craft. For example, carpenters often own the tools they use even if they are wage earners under an employment contract. Conversely, self-employed individuals almost always own the tools used in their work, or have a rental arrangement with the customer to rent the tools from the customer. Self-employed operators also generally buy at least part of the materials necessary for the work.
- The place where work is done
Generally, self-employed individuals have their own premises. However, there are many sectors of business where even the self-employed must work at the customer’s premises because the work can only be done there. Examples include the construction and shipbuilding industries. The work itself may also require that at least part of it is done at the customer’s premises. For example, in the sector of software design, project meetings for a software project are held at the customer’s office. Additionally, data security may require that the work must be done at the customer’s office. On the other hand, wage earners may often work from home today. In this case, even if the employee works under an employment contract, the place where they work does not have to be the employer’s premises.