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Income tax plus self employment tax

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Posts: 4
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Topic starter
(@mjoakland)
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Joined: 1 month ago

Hi, I am an Independent Contractor and I'm thinking of a move to Portugal. I am confused about information I am finding about tax rates.  As a self-employed person am I required to pay both the standard income tax at 48% PLUS another 21% for self-employment?  And then I also will have to pay into the Social security and healthcare. If I have to pay all this I'm not sure I will  have any money left at the end of the day.  Can someone please explain the two types of taxes - income and self-employment?  Do I have to pay BOTH on my income? 

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Posts: 5
Community Member
(@andrew_za)
Active Member
Joined: 5 months ago

This is how I understand it - being a new-ish arrival in a similar position and how I have been advised by 3 accountants in Portugal. This is not tax advise.

48% is the maximum tax bracket - annual income over 75000 Euro. In my opinion the tax brackets in Portugal are high considering the low incomes that are required to fit into these high brackets. The pros of living in this wonderful country and worth the trade off in my situation - it may not be for others / yours.

As a self employed contractor - using the simple accounting regime, the tax authority considers 75% of your income as taxable. They assume 25% as being for expenses. Therefore you will be liable for 48% income tax / IRS (if you are in that top bracket) on the 75% and social security of 21.4% on that 75%. As you can see that is more than 50% - which is high. If you use the accounting regime (usually recommended for incomes of at least 50k annually) / pay an accountant, and have legitimate deductible expenses that can be used to lower your taxable income, that may be a better route.

If you are a first time resident or have not been resident for 5 years, you can take advantage of the NHR program. There is a lot of misleading information about this program. If you work in what is considered a 'high value activity' - there is an official list available online (but confirm if you qualify via an accountant or tax attorney), and if you receive income from abroad, you are able to be taxed at a rate of 20% for 10 years. Even if you are not working in a 'high value activity', registering may be beneficial if you get promoted into one of the qualifying categories within the 10 year period. (you can only register by the next March when you become a fiscal resident.). If you own an existing foreign company with management control outside of Portugal, you can receive dividends tax free which is a good option if you are a relatively successful entrepreneur with the necessary structures set up.

Social security contributions are not required for your first tax year, which is very helpful from a cash flow savings perspective. They are required from the 12th month of the first tax year, i.e. December. These amounts are paid every quarter. IRS is payable from April the following year. Tax years run from Jan-Dec.

I see you are from the US / citizenship based taxation - it is usually recommended that you get advice from both US and Portuguese based professionals in this scenario.

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Community Member
(@mjoakland)
Joined: 1 month ago

New Member
Posts: 4

@andrew_za   Thank you so much for the help! From what I understand, if I made $100,000 euros I would pay 48% on $75,000 plus 21.45% on 75,000 euros. That means my liability would be a total of 52, 087.50.  is that a correct understand? 

One other follow up:  Does the Social Security payment include health care coverage?

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 Zoom
Premium Plus member
(@zoom)
Joined: 1 year ago

Estimable Member
Posts: 168

@mjoakland I would highly recommend you speak to tax accountants/lawyers about this, since there are always "gotchas" that you may be unaware of. However, the news isn't as gloomy as you think. The US will tax worldwide income (but the tax treaty with Portugal ensures you don't pay taxes to both countries on the same income, only the difference, i.e if the US taxes you at 20%, and Portugal at 30, you will still pay a total of 30) as does Portugal, so you'll have to file in both countries. The US currently allows an exclusion (called Foreign Earned Income Exclusion) which allows you to exclude about $110,000 of income earned abroad (working as a contractor for a US firm, for example) from Federal taxes, provided you meet one of two "bonafide foreign residency" tests (see https://www.irs.gov/individuals/international-taxpayers/foreign-earned-income-exclusion-bona-fide-residence-test). Unless you're from a so-called "sticky" state like California, you will also be exempt from state taxes. As @old-bloke explained, Portuguese taxes are progressive (as are US taxes), so you pay a percentage of each band of income, not the marginal rate on your entire income - the highest rate applies to the income above 75,000. You can find a few tax calculators on the web that will provide you with an estimate of the net amount you'd pay. And yes, being a legal resident in Portugal entitles you to public healthcare, though most people tend to add some private insurance to get faster access for routine care.

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Community Member
(@mjoakland)
Joined: 1 month ago

New Member
Posts: 4

@zoom   Thank you so much.

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Posts: 443
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(@hank_2021)
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Joined: 1 year ago
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Premium Member
(@jeanmori7)
Joined: 6 months ago

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Posts: 64

@hank_2021 thank you.  Good info and was useful for me.  Looks like if I move to PT and keep working for my company in Canada, my income won't be taxed and I'm assuming until I apply and get permanent residency.

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Posts: 2169
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(@old-bloke)
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Joined: 14 years ago

The income tax rates are progressive.

Income that falls within each income band is taxed at the applicable rate for that band, so if you're earning €76,000 only €1,000 of it is taxed at 48%, not the whole €76,000.

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Posts: 4
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Topic starter
(@mjoakland)
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Joined: 1 month ago

Thank you, I understand now. 

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