As of January 1st, 2023, will it be more convenient to work as a Romanian employee or freelancer, given the latest changes in the tax law? This is a question asked by a lot of people lately, so we decided to write an article that can shed light on this topic. This can be useful to many people who are not yet decided on how to organize their activity starting next year.
On the top, since the taxation system for freelancers in Romania has changed as of January 1st, 2023, with higher social contributions for freelancers, many people say it isn’t convenient any more, from a tax perspective, to work as a freelancer (in Romanian: “persoană fizică autorizată” – or in short: PFA).
We would say that, even if the changes brought to the social contributions applicability thresholds, or to the taxation rules for the fixed/lump-sum income system will increase the overall tax burden, the tax regime for freelancers continues to be much more advantageous than that of employment income.
In Romania, the tax regime for freelancers (PFAs) has long been more attractive than that of employees. This applies even more for certain types of economic activity rendered by freelancers, for which taxation on fixed/lump-sum income can apply. And because of this, the theory of switching an employment relationship into one of providing services as freelancer is a common one in Romania.
Individuals are very often proposed by companies to set up a freelancing collaboration rather than an employment one. And for many of them the main reason is “paying less taxes to the state”. However, they are not always aware of the involved risks of using freelancer services in Romana. And in some cases, they end up with tax inspectors requalifying such a collaboration.
From 1 January 2023, two major changes have come into force regarding freelancers tax regime in Romania:
You can read more on the differences between the two systems in this article: Freelancer tax obligations in Romania – how it works in 2023.
All of the changes described above have impacted the taxation of freelancers as of this year.
The first two changes mean that, as of 2023, with the new thresholds applicable for social contributions, more freelancers will be paying these contributions, and in higher amounts than before.
In what regards the change described under the third bullet, for many taxpayers using the fixed/lump-sum income taxation is a convenient option, in contrast to applying the taxation based on actual registered revenue and expenses. Thus, the significant decrease in the income threshold to 25,000 euros will certainly have a negative impact.
In addition, for many freelancers the application of the fixed/lump-sum income taxation rules also makes taxation itself easier. Therefore, the transition to taxation based on actual registered revenue and expenses will involve more administrative tasks, including the obligation to keep single-entry bookkeeping.
So, after all these changes come into force as of 1 January 2023, how will it be better to work, as employee or freelancer? Let’s find out with some concrete numbers.
Our calculations start from the assumption, of course purely hypothetical, that the Romanian minimum gross national wage will remain at the level of 2,550 lei for year 2023 as well. It is very possible to see an increase for next year, but here we are strictly in the area of speculation. Therefore, we will stick to what we know for the moment.
Our calculations show that, even with the new thresholds introduced for the freelancing income, the taxation in the case of employment will remain higher in 2023. This is mainly because the social contributions rates (25% for pension fund contribution and 10% for health insurance contribution) apply to the salary income regardless of how high or low the monthly gross salary is. Also, there are no caps applicable for salary income, as there are for freelancers.
This means that an employee with a higher salary invariably ends up paying more than a freelancer who, although deriving the same income, has the option of choosing a slightly lower base – and this often happens .
Here is our comparison calculation, which shows, by numbers, that the tax regime for a freelancer still remains more advantageous than that of an employee, even with the much-criticized latest changes to the freelancing taxation system.
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