What is the difference between freelancer, self-employed and employee?

What is the difference between being a freelancer and self-employed (sole proprietor with a sole proprietorship)? – and when could you be considered an employee instead?

What is a freelancer?

In general, a freelancer has no plans for building a large business with employees, getting an office and all the typical things you would see in a regular business as a self-employed.

When you are self-employed, you are called a “sole proprietor”.

And the business you have is called “a sole proprietorship”.

Even though you are self-employed, you can hire employees.

So a self-employed (sole proprietor) can have as many employees as they can afford.

There is no specific industry for freelancers.

So if you are a consultant, a web designer or an IT-programmer makes no difference.

Usually, the costs for a freelancer are pretty small.

And there is only a small financial risk.

A freelancer is a “one-man-band”.

The income a freelancer has is called “honorar” in Danish.

There is no direct translation into English, but the word describes an income that is not a salary and also not sales as a sole proprietorship would have.

It is kind of in-between.

For this blog, we will call it “income”.

A freelancer receives B-income

The income from a tax perspective is called B-income (the same as for a self-employed (sole proprietor)).

And the tax you pay is called B-tax (the same as for a self-employed (sole proprietor)).

But a “real” freelancer is not self-employed (sole proprietor) even though the income and tax are called “B”.

The “B” tells the tax office that this is not income derived from a regular job (called “A-income”).

Being a freelancer can sometimes make it difficult to place you in the correct box in relation to how you are taxed and what obligations you have in regard to the accounting and VAT.

Just because you have a contract with your client, and you might think that you are a freelancer, then in Denmark, you cannot decline to be an employee, even though a freelance contract has been signed telling otherwise.

So always look at your actual situation before deciding what applies to you.

How do you tell the difference between being an employee, a freelancer and self-employed (sole proprietor)?

We typically need to consider 3 scenarios.

1: A freelancer that is considered an employee

As a freelancer, you are considered an employee when certain criteria are met.

There are no single criteria, but rather it is a case to case evaluation.

These observations below will point in the direction of being considered an employee:

You only have 1 employer (“client”) or 1 major employer (“client”);

The agreement between the employer (“client”) and you is ongoing and has not specific term;

The employer (“client”) instructs you how to do the work;

Also, the employer (“client”) inspects the work you do;

And the employer (“client”) tells you what equipment and programmes to use;

You are not allowed to hire your own employees to do the work;

Also, you don’t have any financial risk; no matter what happens, you get paid;

And you have no costs relating to performing the work;

As well as you, use the employer’s company name on all documents;

Your working hours and holiday are agreed with or decided by the employer (“client”);

The agreement is ongoing without a specific term,

The contract stipulates a termination period;

You get paid per hour, weekly, monthly;

The employer (“client”) pays for the costs relating to the work done;

You have paid holiday, employee insurance and similar.

Employees get a payslip – they do not invoice their services

If you are considered an employee, then you will get a regular payslip.

So you should not send an invoice for your work.

And your client is called your employer instead.

The income you receive as an employee is called A-income.

And the tax you pay as an employee is called A-skat.

The A-tax is collected by your employer (“client”) and paid to the tax office.

Also, you have the typical benefits of being an employee in relation to holiday etc.

Employees cannot deduct costs in their personal income

On the downside, the costs incurred as an employee cannot be deducted as in a company but instead will be considered typical employment costs.

The tax deduction value is lower than for a company since you can only deduct costs in your taxable income and not your personal income.

Furthermore, in 2023 the first 6.700 DKK per year cannot be deducted.

And also, the costs have to be directly related to the income you derived from the employer.

When you declare the related costs, it is done in the employee cost field 58 on the tax declaration.

Your income is declared in field number 11 for salaries.

You do not use the fields for sole proprietors.

Regardless of your income, you will not have to pay VAT as an employee.

You also do not have to do accounting.

2: A freelancer that is not an employee and not self-employed (sole proprietor)

This situation is the “real freelancer”, which from a tax perspective, is in the middle of being an employee and being self-employed (sole proprietor).

Here we look at these criteria – and remember you have to look at the big picture – not one criterion is enough to determine your situation.

Criteria that indicate you are not an employee – and not self-employed (sole proprietor) – but a real freelancer

1: You have more than 1 client;
2: You have some level of financial risk;
3: You do not intend to run a large company; you want to be yourself;
4: You make contracts with different terms from client to client;
5: You sell short-termed and defined projects;
6: Your work has a limited timeframe and is not ongoing;
7: You decide how to perform your work;
8: You decide your working hours;
9: You decide what equipment and programmes to use;
10: The client does not instruct you how to do your work;
11: The client does not inspect your work;
12: You get paid when the project or milestones are delivered;
13: You use your own “company” name on work and documents delivered to the client;
14: You are in charge of paying costs for office, office supplies, computer, telephone etc.;
15: You can work for other clients also;
16: You could hire employees if you wanted for the project;
17: You are making advertising to get new projects;
18: There can be civil law liability if you make an error;
19: You are registered for VAT;
20: You are not offered paid holiday and also not paid when sick;
21: You decide when to go on holiday;
22: The contract can be terminated without notice (of course, most contracts has a termination period, but the wording cannot be as in an employment contract).

What can a freelancer deduct in tax?

As a freelancer, you can deduct your costs from your income.

Your costs are not allowed to exceed the income.

So you cannot end the year with a deficit like a sole proprietor can.

Your income should be declared by the company paying you your income as “honorar” in field 12 on your tax return.

If the company have not declared your fee in field 12, then you need to write the amount in field 15.

Your cost should be declared in field 29 on your tax return.

You need to be able to document your costs in detail.

A freelancer often need to pay VAT

Once your income (also called revenue or sales) as a freelancer exceed 50.000 DKK during a 12 months period, then all your income will be VAT applicable.

And in that case, you need to comply with the VAT rules.

Also, the sales you had prior to hitting the 50.000 DKK in sales will be VAT applicable in that case.

So that will give you a 20% VAT bill (20% of the 50.000 DKK in sales equals 25% of 40.000 DKK – the VAT rate in Denmark is 25% of the fee without VAT) to pay afterwards for all your previous sales.

Be aware that some people do not need to pay VAT even if the sales exceed 50.000 DKK for 12 months.

These can be (always check your specific situation since there are always exceptions to rules):

Actors;
Musicians;
Artists;
Journalists;
Bloggers;
Speakers;
Writers;
Translators.

3: A freelancer that is self-employed (a sole proprietor)

So what is the difference between being an employee, a freelancer and self-employed (a sole proprietor)?

A freelancer becomes self-employed (a sole proprietor) when the financial risk gets higher.

And when the activities start to look more like a real business.

Maybe you intend to hire employees and have an office.

The same terms apply here as for the freelancer in example 2 above; just everything is stepped up a notch.

Now we have something that looks more like a real company.

A company that you run with personal liability as self-employed is called “a sole proprietorship”.

What is a PMV?

In Denmark, you can have a sole proprietorship that is so small that it still does not need to pay VAT.

That is the case when the sales are lower than 50.000 DKK during a 12 month period.

You still need to register the company, though, and we have a mini-version of a sole proprietorship called a PMW (“Privat Mindre Virksomhed”) that can be used if you want to register the company, but you do not expect sales to be higher than 50.000 DKK during 12 months.

If you think the sales could come up to 50.000 DKK or higher, then it is a good idea to register for VAT from the beginning.

This is because should a PMV exceed the 50.000 DKK in sales for 12 months, the sales you had before hitting the 50.000 DKK in sales will be VAT applicable in that case.

So that will give you a 20% VAT bill to pay afterwards for all your previous sales.

A PMV also gets a CVR number.

Just there is no VAT registration.

You can convert the PMV into a sole proprietorship later and keep the same CVR-number while getting registered for VAT.

The registration as PMV needs to be renewed every 3 years on VIRK.

So, in short:

PMV: A small version of a sole proprietorship with a CVR-number but no VAT registration. Sales are expected never to exceed 50.000 DKK during 12 months.

A sole proprietorship, in comparison, is expected to exceed 50.000 DKK during 12 months. It has a CVR-number and is registered for VAT.

What is a sole proprietor?

A sole proprietor runs a company structure called a sole proprietorship.

The term “self-employed” is the same as a “sole proprietor”.

With a few exceptions, a sole proprietor needs to register the company for VAT if it is expected that the company will exceed 50.000 DKK in sales during a 12 month period.

In general, the sole proprietor runs the company to generate a profit. You will often see typical costs related to running a company, like employees marketing, office rental, computers, machines etc.

The sole proprietors take on higher financial risk in relation to clients than the freelancer.

There is no fixed amount you can use to determine the financial risk.

Criteria that indicates you are a sole proprietor?

1: You have more than 1 client;
2: You make contracts with different terms from client to client;
3: You sell short-termed and defined projects;
4: Your work has a limited timeframe and is not ongoing;
5: You decide how to perform your work;
6: You decide your working hours;
7: You decide what equipment and programmes to use;
8: The client does not instruct you how to do your work;
9: The client does not inspect your work;
10: You get paid when the project or milestones are delivered;
11: You use your own “company” name on work and documents delivered to the client;
12: You are in charge of paying costs for office, office supplies, computer, telephone etc.;
13: You can work for other clients also;
14: You can hire employees if you want for the project;
15: There is financial risk involved if you f.ex. make errors and/or deliver the project too late;
16: You are making advertising to get new projects;
17: There can be civil law liability if you make an error;
18: You are registered for VAT;
19: You are not offered paid holiday and also not paid when sick;
20: You decide when to go on holiday;
21: The contract can be terminated without notice (of course, most contracts has a termination period, but the wording cannot be as in an employment contract).

A sole proprietor need to comply with accounting standards

A freelancer that is considered a sole proprietor need to comply with accounting standards.

We recommend that your accounting is done in e-conomic:

Link to the accounting programme “e-conomic”

If you are not sure how to do accounting, then call a company like us.

The result of a sole proprietorship is declared on the tax return (on SKAT Borger) using these field numbers:

Profit: 111
Deficit: 112
Income, interests: 114
Expense, interests: 117

What if I am not sure if I am an employee, a freelancer or a sole proprietor?

Can you decide with 100% certainty based on these above-mentioned criteria when you are an employee, a freelancer or a sole proprietor?

The answer is often “no”.

Sometimes it is pretty clear, however, that most arguments points in the direction of being a sole proprietor.

And other times, it might be clear that you are an employee.

But more often, it can be hard to determine.

If you are not sure, then ask the tax office:

You can always ask the tax office for a written confirmation of what type of work you perform.

This is called a “binding ruling”.

The cost is 400 DKK, and you can apply here:

Link to the tax office application page

The only downside is that getting a binding ruling can take several months.

What is the risk for you and your client if it turns out you are an employee and not a freelancer or a sole proprietor?

Well, first of all, your client and you could face both a tax bill and fines for not complying with legislation.

Many claims could even be brought by you to the client, f.ex. for lack of employment contract, wrongful termination, not getting paid for holiday, maturnal leave etc.

Your income will generally be reclassified from B-income to A-income.

If you have deducted business related costs for a car, generally, but not always, the Danish Tax Agency will estimate a tax deduction for transportation related to your work performed as an employee.

If you have applied the business tax scheme, or other schemes, that lowers the income tax for sole proprietors, you might have underpaid your income tax, leaving you at risk of tax exposure and liability for fines.

This can be avoided to some extend by simply applying the personal income tax scheme.

Then at least the income tax will be similar to what you would have paid as an employee.

Your VAT will also have to be corrected.

This can be done in different ways, and the solution is suggested by the Danish Tax Agency.

Generally, either the Danish Tax Agency will refund VAT paid by you to the Danish Tax Agency to your client, or you will get a refund of paid VAT from the Danish Tax Agency and then refund the paid VAT to the client directly.

Also, VAT you have already claimed on costs will generally be taxed as A-income.

If your client as a result of these changes will have a loss, they can ask you to pay them for the loss incurred.

Any payments you do to the client, can be offset in your A-income by writing to the Danish Tax Agency and requesting a re-calculation of your income.

Income as freelancer or sole proprietor with an LTD (ApS)? – Be VERY careful

Suppose you intend to conduct your freelancing or sole proprietor activities through an LTD (typically an ApS). In that case, you should be careful to ensure that the ApS are considered the beneficiary, not you personally.

We have written a blog that explains why you could risk double and even triple tax here:

Link to blog

(Last update of this blog: 30.3.2024)

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