When making the decision to become a self-employed entrepreneur or freelancer in Portugal you will have to choose between two types of accounting: simplified accounting and organized accounting. Indeed in Portugal there are two ways to present your numbers to Finance and the choice of it has an importance on the amount of your profits as a self-entrepreneur at the end of the year. What are the differences between simplified accounting and organized accounting? How to make the best choice and increase profits? Bob, the Expat Assistant in Portugal tells you everything about accounting as a freelancer.
Who can choose between organized or simplified accounting in Portugal ?
Knowing how to choose between simplified or organized accounting is an important decision to start building a successful business in Portugal. However, in business as in life, there are no obvious answers on which model is the most suitable. There are rules, trends and specificities for each particular case.
You have the right to choose between one of the two accounting regimes if you are:
- Trabalhadores independentes (Self-employed workers);
- Empresários em nome individual (Individual Contractors)
Note: any company, whether anonymous, joint stock or otherwise, is required to use the organized accounting regime.
When is it not possible to choose one's accounting?
When your gross annual income exceeds 200,000 euros, organized accounting becomes compulsory for both self-employed and sole proprietorships.
If you start your business with the simplified plan then your turnover should not exceed the limit of € 200,000 over two consecutive years, or exceed this amount by more than 25% over one year. If this happens, the system must be changed, otherwise you will be subject to fines.
After the start of the activity, is it possible to change accounting system ?
Yes. When you start your business, by default and unless otherwise indicated, the tax authority assigns you the simplified accounting regime. However, it is possible to request a modification later.
It is important to note that the request for change can only be made until the end of March of each year, and each change of plan requires a minimum stay of three years.
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Differences between organized accounting and simplified accounting
- For the calculation of the income tax, only the annual gross income is taken into account;
- You can deduct business expenses;
- It is necessary to hire an official accountant (TOC);
- Every year, it is necessary to prepare, present and classify the accounts of the exercise.
- For the calculation of the tax, only a percentage of the income is taken into account;
- It is not possible to deduct work expenses;
- There are fewer tax obligations and expenses associated with this plan.
Respect the following income tax ratios for the simplified plan, to be applied to the different types of activity:
- 15% - Sales of goods;
- 15% - Hotel, restaurant and drinks services;
- 75% - Provision of services for the activities listed in the activity table of section 151 of the IRS Code;
- 95% - Capital gains;
- 95% - Construction revenue;
- 95% - temporary cessation or use of intellectual or industrial property;
- 95% - Income from capital from commercial and professional income generating activities;
- 30% - Grants or subsidies not intended for agriculture;
- 95% - Farm subsidies;
- 95% - Other category B income
Thus, for each of these activities, the customs tax administration considers, for example, that only 75% of their income should be taxed, the remaining business expenses considered.
Which annex of the IRS model 3 to use in its declaration?
- Annex B - For those using the simplified accounting regime
- Annex C - For those who use the organized accounting regime (the accountant must approve and sign the declaration)
Criteria to be considered when choosing between organized or simplified accounting
The larger the business and the higher the revenue generated, the more likely the organized accounting regime will be. On the other hand for an activity with less money flow and which generates less revenue the simplified scheme will be the most appropriate solution. But it's not always the case.
Think about the following:
- You are a self-entrepreneur in Portugal and your income is part of the activities listed in the article 151 table of the IRS code. If your business expenses represent more than 25% of your income then an organized accounting regime might be more judicious;
- However you must be sure to offset the expenses related to the employment of an accountant by lowering the amount of your taxes. To put it simply, your accountant should not cost you more than you could save. We must also take into account the time spent on all tax obligations.
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