This blog post highlights the main way that I have found out, legally, that you can use to pay less in tax as a freelance software developer. A disclaimer here that you will have to crosscheck the contents in this blog post to the laws of the country that you are operating in.
Registering as a private company to pay less in tax and how?
Usually freelancers register themselves as an independent contractor. This is faster to start your operations but this means that the you will have to pay taxes on all your income (minus a few expenses that you can deduct). The main “hack” is to instead open a private company. Why is that? Because you can pay taxes on dividends instead. If we use the UK as example there is a nice article here that you can read https://www.crunch.co.uk/knowledge-tax/what-tax-do-i-pay-on-dividends
The gist of it is as follows:
- Charge your customers from the company
- Optional: Pay yourself a minimum salary
- At end of the year declare a profit
- Pay yourself dividends which have much less tax
But how to maintain cash flow?
If you have cashflow issues and cannot wait until the end of the year to get paid with your dividends, then you might need to seek out a short term loan. In some countries this can be a business loan too. The ideal way is to at least have savings to sustain a year or part of it.
Last step: get an accountant
An accountant could easily advise you on the above for around 150 USD and it’s worth it. Seek them out before doing anything and you won’t regret it. The disclaimer again that this vary largely on the country that you are operating in.
Good luck, it’s a tough world out there 🙂