Employee salary and a freelancer invoice are different deals

Typing the same monthly number into the compare tool does not tell you whether to leave a job. The tool is a sketch. It is not a break-even certificate. A euro of gross salary and a euro of invoice buy different things. One is a contract wage, with an employer paying employer social security on top and, in the ordinary case, carrying holiday, a legal holiday subsidy and unemployment cover. The other is revenue you still have to insure, equip and smooth across quiet months.

The employee figures below are the legal illustration in the gross-to-net guide. The freelance figures are a steady year of article 151 services in the simplified regime. Neither side is a quote for a client or for payroll. If the year is not twelve identical months, the average is already the wrong shape.

The employee side, as a legal illustration

Take a mainland employee paid 14 times. Employee social security is 11 percent. The specific deduction is the greater of that contribution and €4,587.09. At €2,000 the year is €28,000, social security is €3,080, taxable income is €23,412.91 and the article 68 tax is €4,188.67, so the average net is €1,480.81 a month. At €2,500 the year is €35,000, social security is €3,850, taxable income is €30,412.91 and the tax is €6,404.28, so the average net is €1,767.55 a month. The path from those inputs to those cents is the walkthrough in the gross-to-net guide. The employee calculator is a separate screen.

The freelance side: coefficient 0.75, and social security outside the tax base

The freelance sketch is a full year of services covered by article 151, taxed under the simplified regime. The taxable coefficient is 0.75, so presumed expenses are the other quarter and taxable income is revenue times 0.75. Social security in this sketch is the ordinary independent rate of 21.4 percent applied to 70 percent of the invoice. The freelancer social security guide is the place for the base, the ceiling and the months with no invoice. IRS is then the article 68 scale applied to revenue times 0.75.

The independent calculator does the tax that way: it does not deduct compulsory social security again inside the tax base. Some readings of articles 25 and 31 of the IRS Code do deduct those contributions on top of the coefficient. This page does not decide which reading wins. Before you file, ask a certified accountant (TOC). The recibos verdes guide and the simplified regime guide cover the rest of the regime. What follows is only the steady-year arithmetic.

Invoice of €2,000 a month

1. Annual revenue. €2,000 × 12 = €24,000.
2. Taxable income. €24,000 × 0.75 = €18,000.
3. Band. €18,000 is above €17,838 and not above €23,089, so the marginal rate is 24.1 percent and the parcela is €1,476.52. The 21.2 percent band has already closed at €17,838.
4. IRS. €18,000 × 0.241 = €4,338.00. €4,338.00 − €1,476.52 = €2,861.48.
5. Social security each month. €2,000 × 0.70 = €1,400 of relevant income. €1,400 × 0.214 = €299.60.
6. Economic net per month. €2,861.48 / 12 = €238.4566…. Then €2,000 − €299.60 − €238.4566… = €1,461.94. That is revenue minus social security minus the simplified IRS, spread over twelve invoice months.

Cash in the month is lower when the invoice is withheld at 23 percent. Withholding is €2,000 × 0.23 = €460. Cash after social security and withholding is €2,000 − €299.60 − €460 = €1,240.40. Twelve months withhold €460 × 12 = €5,520, which is more than the simplified IRS of €2,861.48, so the sketch expects a later refund if the year really is twelve identical invoices and nothing else is taxed. That refund is not cash on the day the client pays. Withholding is an advance, not a second tax on top of the €2,861.48.

Invoice of €2,500 a month

Annual revenue is €2,500 × 12 = €30,000. Taxable income is €30,000 × 0.75 = €22,500, still in the same band, so IRS is €22,500 × 0.241 − €1,476.52 = €5,422.50 − €1,476.52 = €3,945.98. Social security is €2,500 × 0.70 × 0.214 = €374.50 a month. Economic net is about €2,500 − €374.50 − €3,945.98 / 12 = €1,796.67. A 23 percent withholding, when it applies, again lowers that month's cash and leaves the gap to the annual settlement.

At the same monthly number the two deals stay different. At €2,000 the employee average is €1,480.81 and the freelance economic net is €1,461.94, with cash of €1,240.40 after 23 percent withholding. At €2,500 the employee average is €1,767.55 and the freelance economic net is €1,796.67. A few tens of euros is not a decision. The employee figure assumes fourteen payments and the floor the compare tool ignores. The freelance figure assumes twelve busy months, a 0.75 coefficient, and no extra social-security deduction inside the tax base.

If the client pays the employer's monthly cost instead

An employee on €2,000 costs the employer about €2,475 of salary plus employer social security, because €2,000 × 1.2375 = €2,475 using the ordinary 23.75 percent employer rate in this sketch. That €2,475 is one month of base pay plus the employer's contribution. It does not add a holiday subsidy or a Christmas subsidy. Suppose the client pays the freelancer €2,475 a month instead of employing someone at €2,000.

• Annual revenue: €2,475 × 12 = €29,700.
• Taxable income: €29,700 × 0.75 = €22,275, still in the 24.1 percent band.
• IRS: €22,275 × 0.241 − €1,476.52 = €5,368.275 − €1,476.52 = €3,891.76.
• Social security: €2,475 × 0.70 × 0.214 = €370.76 a month.
• Economic net: €2,475 − €370.76 − €3,891.76 / 12 = €1,779.94 a month.

In this sketch the freelancer keeps more cash than the employee illustration of €1,480.81. The freelancer also loses paid holiday, a legal holiday subsidy, unemployment cover in the ordinary case, a meal allowance and equipment. See holiday and Christmas pay for what the employee side is actually owed. Value added tax, often at 23 percent on the mainland, sits on top of the invoice and is not income. One quiet month destroys the average, because the €1,779.94 figure needs twelve invoices at €2,475. There is no single break-even salary hiding in the last line.

How to use the compare tool without fooling yourself

• Read the employee column as social security only. It is not the €4,587.09 floor, and it is not the table above.
• Read the freelance column as revenue times 0.75, with social security at 21.4 percent of 70 percent kept outside that tax base. Withholding at 23 percent changes cash, not the final tax.
• Do not type a subsidised fourteen-month salary into the invoice box and call the gap a raise. The compare tool accepts the number. It does not read your contract or the client's payment terms.
• Outside the tool, add the months you will not invoice, VAT that is not income, unpaid holiday and equipment.
• If articles 25 and 31 are being read so that compulsory contributions also reduce the simplified base, stop and ask a TOC. This page, and the calculator, do not take that extra deduction.