Any individual who works in his or her own name, and not in someone else’s employ, falls into the category of self-employed. This entails some tax benefits compared to, for example, companies, since the tax rate to be paid annually on profits is not fixed, but can vary from 0 to a maximum of 35 percent. However, there are also several burdens: self-employment does not provide for any limited liability that Ltds enjoy, and those who carry it out must take charge of opening a VAT number, as well as the management of tax and social security practices.
An individual then chooses to continue as a self-employed person when providing services with direct responsibility. But once the business grows to a certain level, of course, it always pays to transform the activity into a company.
Starting the business
Any type of self-employment activity, which can be either full-time or part-time, will need to be registered with Jobplus (the employment agency). This will allow the individual to begin receiving the appropriate tax return form.
A self-employed person can also hire employees. In order to do this, he must receive an EP (social security) number.
The self-employed person must register for a “tax number” with the Office of the Commissioner of Revenue, unless he or she is Maltese or has already worked in Malta, and therefore already has one.
On an annual basis, from the first year of economic activity, the individual will have to file a tax return and pay taxes on profits. The deadline for filing the tax return and paying any taxes (filing is still required if no profits are made) is six months after the end of the calendar year.
The net profit from the self-employment activity is considered the taxable income. This net income should be taxed at individual tax rates.
The annual income statement and associated tax must be reported and paid by the end of June of the following year via the income tax form. Tax rates range from a minimum of 0% for incomes up to €. 9,100 to a maximum of 35% for incomes over €. 60,001.
If the individual is self-employed on a part-time basis, he or she may pay tax at a flat rate of 15% on earnings up to €12,000, provided that he or she files the declaration form and pays the tax by the end of April of the following year. If this is done on a regular basis, the individual will not have to file a tax return at the end of June unless the profits from the part-time self-employment exceed €12,000 for the year. In order for this to apply, the individual must be registered as part-time self-employed with JobsPlus, must not employ more than two people, and must have another full-time salaried job, or be a retiree, or a full-time student.
Just as with the tax number, the self-employed individual must register for a social security number with the Department of Social Security, unless he or she is Maltese or has already worked in Malta, and therefore already has one.
Once registered, the individual is required to make three annual payments by the end of April, August, and December. The required payments are calculated based on the annual net income for the year prior to the year in which the contributions are paid. If the individual is part-time self-employed and has another primary source of income (such as from a full-time job), Social Security contributions are paid only on this primary source of income and no additional payments will be required on part-time self-employment income.
As a self-employed person, the individual will have to handle social security contribution payments directly, unlike an employee, whose income and social security contributions are normally deducted by the employer from his or her salary. These social security contributions are 15% of the previous year’s annual income. If this is your first year in business, you must also apply the minimum contribution rate according to current law.
Provided that the income is not generated by an activity defined as “exempt without credit”, i.e. an exempt activity among those listed in the Maltese VAT Act, the individual is required to register the VAT number within 30 days from the start of the economic activity with the Office of the Commissioner of Revenue.
In Malta there is no exemption from VAT registration for income below a certain annual income threshold.
Failure to register within the prescribed time limits will result in heavy administrative penalties.
There are three types of registration:
- Registration under Article 10 – Any individual may choose to register under this article, regardless of income levels. Registration requires the individual to charge VAT on his or her supplies of goods or services, and he or she may request a refund of VAT incurred in the course of his or her taxable activities through the submission of the mandatory quarterly VAT return.
- Registration under Article 11 – An individual who will generate annual revenues of less than 30,000 euros (in the case of services) and 35,000 euros (in the case of goods) may elect to be registered under this article. In this case, the individual will not charge VAT on his supplies of goods or services. However, he will also not be able to claim a refund of VAT incurred in the course of his taxable activities. Self-employed persons in this category are required to file an annual VAT return.
- Registration under Article 12 – An individual not registered under Article 10 who receives goods or services from EU suppliers may be required to register under Article 12. Individuals who make intra-EU purchases of goods with a value of more than €10,000 (in a calendar year) or who receive intra-EU services (of any value) must register under this article to pay VAT on these transactions. These persons will have to submit VAT payment notices every time they receive goods/services from the EU, and on an annual basis they will have to file a return.
In general, depending on the activity, the VAT rate to be applied varies from 18%, 7% or 5%. VAT paid on expenses related to the business activity can be deducted on the quarterly return.
After the second full year of activity as a self-employed person, the individual will begin to receive a provisional tab from the Department of Revenue inbound. Through this mode, self-employed individuals will begin paying a provisional income tax and social security contributions. This provisional tax is based on reported income and taxes in effect two years prior to the current year. Social Security payments will be finalized and final, while any income tax paid more or less than the actual income tax due to that year’s net income will need to be refunded or resolved through the income tax return due by the end of June, respectively, as mentioned above.
Do you want to open a freelance business in Malta? Ask for Malta Business Agency‘s advice by filling in the following form.