(Last update of this blog: 29.3.2021)
What is the difference between being a freelancer and self-employed (sole proprietor with a sole proprietorship)? – and when could you be considered an employee instead?
What is a freelancer?
In general, a freelancer does not have any plans for building a company with employees, getting an office and all the typical things you would see in a normal company as a self-employed.
When you are self-employed you are called a “sole proprietor”.
And the company you have is called “a sole proprietorship”.
Even though you are self-employed you can hire your own employees.
So a self-employed (sole proprietor) can have as many employees as they can afford.
There is no specific industry for freelancers.
So if you are a consultant, a web designer or an IT-programmer makes no difference.
Usually, the costs for a freelancer are quite small.
And there is only a small financial risk.
A freelancer is a “one-man-band”.
The income a freelancer has is called “honorar” in Danish.
There is no direct translation into English, but the word describes an income that is not a salary and also not sales as a sole proprietorship would have.
It is kind of in-between.
For the purpose of this blog, we will call it “income”.
A freelancer receives B-income
The income from a tax perspective is called B-income (the same as for a self-employed (sole proprietor)).
And the tax you pay is called B-tax (also the same as for a self-employed (sole proprietor)).
But a “real” freelancer is not self-employed (sole proprietor) even though the income and tax are called “B”.
The “B” just tells the tax office that this is not income derived from a normal job (called “A-income”).
Being a freelancer can sometimes make it difficult to place you in the correct box in relation to how you are taxed and what obligations you have in relation to accounting and VAT.
Just because you have a contract with your client, and you might think that you are a freelancer, then in Denmark you are unable to decline to be an employee, even though a freelance contract has been signed telling otherwise.
So always look at your actual situation before deciding what applies to you.
How do you tell the difference between being an employee, a freelancer and self-employed (sole proprietor)?
We typically need to consider 3 scenarios.
1: A freelancer that is considered an employee
As a freelancer, you are considered an employee when certain criteria are met.
There are no single criteria but rather it is a case to case evaluation.
These observations below will point in the direction of being considered an employee:
You only have 1 employer (“client”) or 1 major employer (“client”);
The agreement between the employer (“client”) and you is ongoing and has not specific term;
The employer (“client”) instructs you how to do the work;
Also, the employer (“client”) inspects the work you do;
And the employer (“client”) tells you what equipment and programmes to use;
You are not allowed to hire your own employees for doing the work;
Also, you don’t have any financial risk, no matter what happens you get paid;
And you have no costs relating to performing the work;
As well as you use the employer’s company name on all documents;
Your working hours and holiday are agreed with or decided by the employer (“client”);
The agreement is ongoing without a specific term,
The contract stipulates a termination period;
You get paid per hour, weekly, monthly;
The employer (“client”) pays for the costs relating to the work done;
You have paid holiday, employee insurance and similar.
Employees get a payslip – they do not invoice their services
If you are considered an employee then you will get a normal payslip.
So you should not send an invoice for your work.
And your client is called your employer instead.
The income you receive as an employee is called A-income.
And the tax you pay as an employee is called A-skat.
The A-tax is collected by your employer (“client”) and paid to the tax office.
Also, you have the typical benefits of being an employee in relation to holiday etc.
Employees cannot deduct costs in their personal income
On the downside, the costs that you have incurred as an employee cannot be deducted as in a company, but instead will be considered typical employment costs.
The value of the tax deduction is lower than for a company since you can only deduct costs in your taxable income and not your personal income.
Furthermore, in 2021 the first 6.500 DKK per year cannot be deducted.
And also the costs have to be directly related to the income you derived from the employer.
When you declare the related costs, it is done in the employee cost field number 58 on the tax declaration.
Your income is declared in the normal field number 11 for salaries.
You do not use the fields for sole proprietors.
Regardless of the size of your income, you will not have to pay VAT as an employee.
You also do not have to do accounting.
2: A freelancer that is not an employee and not self-employed (sole proprietor)
This situation is the “real freelancer” that is in between being an employee and being self-employed (sole proprietor).
Here we look at these criteria – and remember you have to look at the big picture – not one single criterion is enough to determine your situation.
Criteria that indicate you are not an employee – and not self-employed (sole proprietor) – but a real freelancer
1: You have more than 1 client;
2: You have some level of financial risk;
3: You do not intend to run a large company, you just want to be yourself;
4: You make contracts with different terms from client to client;
5: You sell short-termed and defined projects;
6: Your work has a limited timeframe and is not ongoing;
7: You decide how to perform your work;
8: You decide your working hours;
9: You decide what equipment and programmes to use;
10: The client does not instruct you how to do your work;
11: The client does not inspect your work;
12: You get paid when the project or milestones are delivered;
13: You use your own “company” name on work and documents delivered to the client;
14: You are in charge of paying costs for office, office supplies, computer, telephone etc.;
15: You can work for other clients also;
16: You could hire employees if you wanted for the project;
17: You are making advertising to get new projects;
18: There can be civil law liability if you make an error;
19: You are registered for VAT;
20: You are not offered paid holiday and also not paid when sick;
21: You decide when to go on holiday;
22: The contract can be terminated without notice (of course most contracts has a termination period, but the wording cannot be as in an employment contract).
What can a freelancer deduct in tax?
As a freelancer, you can deduct your costs from your income.
Your costs are not allowed to exceed the income.
So you cannot end the year with a deficit like a sole proprietor can.
Your income should be declared by the company paying you your income as “honorar” in field 12 on your tax return.
If the company have not declared your fee in field 12, then you need to write the amount in field 15.
Your cost should be declared in field 29 on your tax return.
You need to be able to document your costs in detail.
A freelancer often need to pay VAT
Once your income (also called revenue or sales) as a freelancer exceed 50.000 DKK during a 12 months period, then all your income will be VAT applicable.
And in that case, you need to comply with the VAT rules.
Also, the sales you had prior to hitting the 50.000 DKK in sales will be VAT applicable in that case.
So that will give you a 20% VAT bill (20% of the 50.000 DKK in sales equals 25% of 40.000 DKK – the VAT rate in Denmark is 25% of the fee without VAT) to pay afterwards for all your previous sales.
Be aware that some people do not need to pay VAT even if the sales exceed 50.000 DKK for 12 months.
These can be (always check your specific situation since there are always exceptions to rules):
3: A freelancer that is self-employed (a sole proprietor)
So what is the difference between being an employee, a freelancer and self-employed (a sole proprietor)?
A freelancer becomes self-employed (a sole proprietor) when the financial risk gets higher.
And when the activities start to look more like a real business.
Maybe your intention is to hire employees and have an office.
Basically, the same terms apply here as for the freelancer in example 2 above, just everything is stepped up a notch.
Now we have something that looks more like a real company.
A company that you run with personal liability as self-employed is called “a sole proprietorship”.
What is a PMV?
In Denmark, you can have a sole proprietorship that is so small, that it still does not need to pay VAT.
That is the case when the sales are lower than 50.000 DKK during a 12 month period.
You still need to register the company though, and we have a mini-version of a sole proprietorship called a PMW (“Privat Mindre Virksomhed”) that can be used if you want to register the company, but you do not expect sales to be higher than 50.000 DKK during 12 months.
If you think the sales could come up to the level of 50.000 DKK or higher, then it is a good idea to register for VAT from the beginning.
This is because should a PMV exceed the 50.000 DKK in sales for 12 months, then also the sales you had prior to hitting the 50.000 DKK in sales will be VAT applicable in that case.
So that will give you a 20% VAT bill to pay afterwards for all your previous sales.
A PMV also gets a CVR number.
Just there is no VAT registration.
You can convert the PMV into a sole proprietorship later and keep the same CVR-number while you also get registered for VAT.
So in short:
PMV: A small version of a sole proprietorship with a CVR-number but no VAT registration. Sales are expected to never exceed 50.000 DKK for 12 months.
A sole proprietorship in comparison is expected to exceed 50.000 DKK for 12 months. It has a CVR-number and is registered for VAT.
What is a sole proprietor?
A sole proprietor runs a company structure called a sole proprietorship.
The term “self-employed” is the same as a “sole proprietor”.
With a few exceptions, a sole proprietor needs to register the company for VAT if it is expected that the company will exceed 50.000 DKK in sales during a 12 month period.
In general, the sole proprietor runs the company to generate a profit and you will often see typical costs related to running a company like employees marketing, office rental, computers, machines etc.
The sole proprietors take on higher financial risk in relation to clients than the freelancer.
There is no fixed amount you can use to determine the financial risk.
Criteria that indicates you are a sole proprietor?
1: You have more than 1 client;
2: You make contracts with different terms from client to client;
3: You sell short-termed and defined projects;
4: Your work has a limited timeframe and is not ongoing;
5: You decide how to perform your work;
6: You decide your working hours;
7: You decide what equipment and programmes to use;
8: The client does not instruct you how to do your work;
9: The client does not inspect your work;
10: You get paid when the project or milestones are delivered;
11: You use your own “company” name on work and documents delivered to the client;
12: You are in charge of paying costs for office, office supplies, computer, telephone etc.;
13: You can work for other clients also;
14: You can hire employees if you want for the project;
15: There is financial risk involved if you f.ex. make errors and/or deliver the project too late;
16: You are making advertising to get new projects;
17: There can be civil law liability if you make an error;
18: You are registered for VAT;
19: You are not offered paid holiday and also not paid when sick;
20: You decide when to go on holiday;
21: The contract can be terminated without notice (of course most contracts has a termination period, but the wording cannot be as in an employment contract).
A sole proprietor need to comply with accounting standards
A freelancer that is considered a sole proprietor need to comply with accounting standards.
We recommend that your accounting is done in e-conomic:
If you are not sure how to do accounting, then call a company like us.
The result of a sole proprietorship is declared on the tax return (on SKAT Borger) using these field numbers:
Income, interests: 114
Expense, interests: 117
What if I am not sure if I am an employee, a freelancer or a sole proprietor?
Can you decide with 100% certainty based on these above-mentioned criteria when you are an employee, a freelancer or a sole proprietor?
The answer is “no”.
Sometimes it is pretty clear, however, that all arrows points in the direction of being a sole proprietor.
And other times it might be clear, that you are an employee.
But more often it can be hard to determine.
If you are not sure, then just ask the tax office:
You can always ask the tax office for a written confirmation as to what type of freelancer you are.
The cost is 400 DKK and you can submit the application here:
What is the risk for you and your client if it turns out you are an employee and not a freelancer or a sole proprietor?
Well, first of all, your client could face both a tax bill (since he should have withheld your personal income tax) and fines for not complying with legislation (f.ex. not providing you with a proper employment contract, breach of the Danish holiday act, termination periods etc.).
Many of these claims could even be brought by you, f.ex. for lack of employment contract, wrongful termination, not getting paid for holiday etc.
Also if you have deducted costs in your personal income as a sole proprietor, then these costs will instead be deducted using another set of tax rules, that will diminish the value of the tax deduction.
Furthermore, if you have declared a deficit in the past, then this will be changed to a zero income instead, meaning that you will receive a tax bill.
Freelancer or sole proprietor with an LTD (ApS)? – Be VERY careful
If you intend to conduct your freelancing or sole proprietor activities through an LTD (typically an ApS) then you should be very, very careful.
We have written a blog that explains why you could risk double and even triple tax here: