Part-time freelancing alongside employment: what to watch for

Wages and profit are added together

Your wages and your profit come together in box 1 and are taxed as one income. That has an important consequence: your profit sits on top of your wages for tax purposes and is therefore taxed at your highest rate. If you earn 45,000 euros from your job, every euro of profit falls directly into the 37.56% bracket, and with a higher total income into the 49.50% bracket. Moreover, no tax has been withheld on your profit yet, unlike your wages. So from the first invoice onwards, reserve a substantial share, as a rule of thumb 40 percent, for income tax and the income-dependent healthcare contribution.

You probably will not meet the hours criterion, and that is okay

For the self-employed deduction and the starter's deduction you must spend at least 1,225 hours per year on your business. Alongside a four or five-day job, that is virtually unattainable: it comes down to over 23 hours per week, every week. If you do not meet the criterion, those deductions lapse. Be realistic about this: time records stretched to reach 1,225 hours fall through in an audit, and the correction is substantial.

The good news: the SME profit exemption of 12.70% has no hours criterion. If you are an entrepreneur for income tax purposes, that exemption automatically comes off your profit, however small your business. And all your business costs remain deductible.

Tax credits: no double benefit

Your employer applies the payroll tax credit to your salary. That credit applies only once to your total income, so you do not get it again on your profit. The labour tax credit is calculated on your total earned income, including profit, but phases out at higher incomes. The effect: of every euro of profit you keep less net than the bracket rate alone would suggest. Another reason to reserve generously, especially in the first year when no provisional assessment is running yet.

Check your employment contract and your insurance

Not tax, but essential: check your employment contract for clauses on secondary activities and competition. A ban on side work is nowadays only allowed with objective justification, but notifying your employer is often mandatory, and working for your employer's clients is sensitive. Also realise that for your self-employed hours you are not insured through your employer: you cover your liability with business liability insurance, and in case of incapacity for work you fall back on nothing for your business income, unless you arrange something yourself. As long as your employment continues, you do keep the employee insurance safety net for that part.

VAT and the KOR: starting small can be smart

For VAT, your side business quickly makes you an entrepreneur, regardless of your job. If your turnover stays below 20,000 euros per year, the small business scheme can be attractive: no VAT to charge and no returns to file. For part-time entrepreneurs with mainly private clients, that is often a fine start. If you supply businesses or plan to invest, being VAT-liable is usually better because you can deduct input tax. Run the numbers before choosing, because the KOR choice is in principle fixed for three years.

Is it outgrowing the side hustle? Good

Many successful businesses once started alongside a job. If your turnover grows, there comes a moment when working fewer employed hours becomes attractive: growing towards the hours criterion suddenly does mean entitlement to the self-employed deduction and possibly the starter's deduction. That tipping point is a good moment to calculate your situation as a whole: income, tax burden, insurance and pension. That way you make the switch based on numbers instead of gut feeling.