March 30, 2021

Tax advantage of a freelancer

In this blog I will show you how to increase your spending power by 2.4 times as a freelancer. Note that this only applies to goods that you need for your business, like a phone, laptop etc. Or you can be create; a friend of mine wanted a camera drone and bought it on his business. He makes one video per year for a customer besides using it for all his vacations. Or someone using his vacation home for ocassional painting workshops/retreats, making it a business cost.

Calculation

Let’s image you have an income of 100.000EU per year as a freelancer, the top of your income falls in the upper tax bracket. Let’s separate 10.000 of the initial income and calculate with that.

If we spend this money the regular way, we would first transfer this to our private account. If we ignore pension costs etc., we would first pay income tax (49.5%).

10.000 * (1 - 0.495) = 5.050

If we now want to buy a regular good, we pay sales tax (21%). A good that costs 100eu will costs 121 with sales tax. Thus a consumer advertised price of 121eu will cost 100eu to a business.

So instead of using this 10.000eu the normal route and be able to buy 5050eu of consumer goods, you can spend it as a business and buy

10.000 * 1.21 = 12.100eu

of consumer goods. The difference is 121005050 = 2.4 times the spending power!

Other tax authorities

To calculate it for different tax amounts, use:

1 / (1 - 0.495)     * 1.21      = 2.4
         income tax   sales tax

NOTE: I used the tax amount of NL, to lower this, use EE.

Blog by lent.ink