Self-Employed vs. Freelance Tax in Turkey

Self-Employed vs. Freelance Tax in Turkey

Freelancing has become increasingly popular, especially as more businesses and individuals shift to remote work. However, as a self-employed person or freelancer in Turkey, you face important tax considerations. Understanding the difference between being self-employed (through setting up your own company) and working as a freelancer (independent contractor) is crucial when it comes to taxes. In this blog post, we’ll compare the two and help you decide which option works best for your business.

1. Income Tax Differences

One of the most significant differences between being self-employed and working as a freelancer in Turkey is the income tax you’ll pay. For example, let's assume you enter into a contract with a foreign company to provide software development services and agree on a monthly fee of $4000.

With an exchange rate of 36 TRY per USD, this amounts to 144,000 TRY per month or 1,728,000 TRY annually.

If you work as a freelancer with an individual company, you’ll pay significantly less tax due to the 80% exemption offered for services rendered outside Turkey (such as software, design, and data analysis). This means that your taxable income is significantly reduced, and your tax burden is much lower compared to an employee.

• Self-employed (individual company): In the case of a freelance service for a foreign company, you are taxed at a rate of 15% for income up to 70,000 TRY. The rest of the income is taxed progressively, but 80% exemption on services provided abroad significantly lowers the tax burden.

• Employee (Bordrolu Çalışan): If you are working as an employee with a salary of 144,000 TRY per month, the tax amount is much higher. The total tax to be paid for this salary is approximately 432,648 TRY annually.

Thus, the tax difference between being self-employed (with an individual company) and working as an employee is substantial.

2. Payment Timing for Income Tax

Another significant difference is when income tax is paid.

• Self-Employed (Individual Company): If you have a sole proprietorship, you can pay income tax quarterly. You make smaller payments throughout the year, with the remainder paid in two installments in March and July. This staggered payment system allows for more flexibility in managing cash flow.

• Employee: As an employee, your income tax is deducted automatically from your paycheck every month. This means that, unlike self-employed individuals, you cannot control when your tax is paid, and as your salary increases, your tax rate climbs, which can push you into higher tax brackets.

3. Tax Deductions and Expenses

When you are self-employed and run your own company, you can reduce your taxable income by deducting business-related expenses from your earnings. These can include equipment costs, software subscriptions, office rent, and more.

• Self-Employed (Individual Company): The key benefit of being self-employed is that you can deduct all business-related expenses from your taxable income. If you incur any costs directly related to your business, such as software purchases or other services, you can reduce your taxable income by these amounts.

• Employee: On the other hand, as an employee, you generally cannot deduct any expenses from your taxable income. Your tax is based on your salary alone, and any additional business-related expenses won’t lower the amount you owe.

4. Income in Foreign Currency vs. Turkish Lira

Another point to consider is how your income is paid.

• Self-Employed (Individual Company): When you work as a freelancer or have your own business, you have the freedom to receive payments in foreign currencies. This is especially advantageous if you are working with international clients, as you can keep your income in foreign currency (such as USD or EUR) without converting it to Turkish Lira.

• Employee: If you are working for a local employer, your salary will likely be paid in Turkish Lira. While there are exceptions, such as working for a foreign company or in a free trade zone, most employees in Turkey are paid in Lira.

5. Severance Pay (Kıdem Tazminatı)

In Turkey, employees have the right to receive severance pay (kıdem tazminatı) after a certain number of years working for the same employer. This is a significant advantage if you’re employed.

• Employee: If you are working as an employee, you are entitled to severance pay if your employer terminates your contract. The amount is based on your years of service, and while there is a cap on the maximum severance pay, it is a benefit not available to freelancers.

• Self-Employed (Individual Company): As a freelancer or self-employed person, you are not entitled to severance pay. However, some freelancers may negotiate clauses in their contracts that resemble severance pay for their services, but this is not a legal requirement.

Conclusion

Choosing between being self-employed (through setting up your own company) or working as a freelancer in Turkey depends on several factors. If you want to lower your tax burden, enjoy flexibility with payments, and benefit from tax deductions, setting up a company is a more beneficial choice. However, if you prefer a simpler approach with less responsibility, working as an employee may be better suited to your needs.

Each option has its pros and cons, and the decision should be based on your individual circumstances, income level, and long-term goals. Make sure to consult with a tax professional to evaluate the best choice for your specific situation.

If you're considering either option, feel free to reach out to Özmen Consultancy for expert guidance and advice tailored to your needs.

info@ozmconsultancy.com