7 essential tax optimization tips for expat freelancers in Spain

For expats, freelance life in Spain is mostly an absolute pleasure. Exploring a fascinating destination, waking up to (almost) guaranteed sunshine, and discovering a new culture, what’s not to love? 

Let's be honest, very few of us get into the game for the joy of the admin. The Spanish tax system is a uniquely frustrating world — a potent mix of mind-numbingly dull, off-puttingly complex, and all in a different language. But if you don’t understand the tax system, you’re in danger of overpaying and missing out on benefits that are rightfully yours. 

Help is at hand, though. The experts at Xolo know the tax system like the back of their hands and have given us seven tax optimization tips for freelancers in Spain, so you can save money without needing a master’s in accounting. 

Sure, it’s boring and a little scary, but come with us as we help you:

• Understand the ins and outs of tax for expat freelancers in Spain
• Stay compliant with the law
• Make smart decisions that save you money
• Reduce your taxable income

Tax 101 for expat freelancers in Spain

No judgment here, but we can’t dive into Spanish tax hacks if you don’t know the basics. 

First things first, as a freelancer in Spain, you're considered self-employed. This means you have to manage your own taxes. In this beginner summary, we don’t need to go into great detail, but we’ve got a guide for each of your regular payments to the government 🤓. 

• Income tax, or IRPF. This is a progressive system, which basically means the more you earn, the more you pay. You pay your income tax through retentions on your invoices as well as in quarterly tax returns. 
• Value-added tax, or IVA. This is a fixed percentage, usually set at 21%, that you charge your clients on top of your services. It’s not in addition to your income tax though. Your clients pay it to you and you pass it on to the government on their behalf every quarter. 
• Social security contributions, or la cuota de autónomos. This amount is tied to your earnings and gives you public healthcare, a pension, and more. Technically, your social security contributions aren’t a tax, and you can’t hack them in the same way as your income and value-added tax, but it’s best to be aware of what you’re dealing with.

If you’re registered as a freelancer in Spain, you can’t avoid these payments without opening the door to serious repercussions, so play it safe to stay out of trouble.

But our freelance tax optimization tips aren’t just about compliance. They’re also about how to make informed decisions so you can save money and grow your business. 

1. Get informed! Understanding the basics of the Spanish tax system

Our first tax optimization strategy isn’t rocket science, but it’s not something you can do overnight. Lucky you, though. By reading this article, you’ve already started. 

When you know your obligations for freelance tax in Spain, you can be prepared and avoid any nasty surprises that catch you off guard. Start by learning what taxes you need to pay and when you need to do it. Your monthly Social Security contributions leave your account every month via direct debit, but your tax payments aren’t automatic. Here’s a handy calendar with deadlines for 2023 and the Modelo, or form, that you use to make your payments. 

Yes, that’s a lot of information. But don’t worry, you’re doing great 🤩. 

And you’re not in this alone. There are plenty of resources you can reach out to for extra tax optimization tips. In the Xolo community, for example, there are experienced solos from a vast range of industries who help each other out with tips and guidance on taxes and much more. Even better, our trained experts can address any issues you have via phone or email. 

2. Keep accurate records of your income and expenses

When you’re a beginner, record-keeping is an anxiety-inducing part of freelance life. They don’t teach you this stuff in school, and it’s easy to believe that you’re the only one in the world who isn’t adulting well enough to organize your finances. But believe it or not, most people are terrible record keepers, and you’re about to become a whole lot better.

Keeping records of your income and expenses is high on our list of tax optimization tips for expat freelancers in Spain because you’re running a business, and businesses can be audited. If you don’t have clear records that match your transactions, the tax agency, or Agencia Tributaria, to give it its Spanish name, will smell something fishy.

You’ll be delighted to hear that proper record-keeping isn’t that hard. All you need to do is face up to reality, learn the basics, and build healthy habits. And the rewards are great! Being reliable and consistent with your record-keeping not only makes tax filing easier but can also help you reduce your tax bill. 

Here are the main areas you need to address to keep your records up to date:

Track your income

Keep a record of all your income, including invoices, receipts, and bank statements. Make sure to include details such as the date, client name, and amount. This will help you accurately report your income when filing your taxes.

Record your expenses

Just as important as tracking your income is recording your expenses. We’ll go into expenses in more detail in the next point, but keeping physical and digital records of your receipts, invoices, and other proof of expenses is essential to reducing your tax bill and justifying it if the Agencia Tributaria comes knocking. Organize expenses by category, such as office supplies, travel, or marketing, and you’ll make it easier to claim deductions and reduce your taxable income.

Streamline your record-keeping with smart tech

You don’t need to be a professional accountant to keep track of your incomings and outgoings these days. Rather than overcomplicating things with a convoluted Excel that your cousin’s buddy Dan says is “Bulletproof. No, seriously.”, look for tried-and-tested online accounting software that will save you time and reduce mistakes in your records. 

Hire a professional accountant

Don’t feel disheartened if this is all a bit overwhelming, there are people out there who can help! And here’s the dirty little secret. Almost all freelancers in Spain hire accountants to handle their tax obligations and accounting. Gestorías, or financial management companies, are a huge part of freelance life because they demystify the Spanish tax system so you can save money and time each month. 

There is a new wave of gestorías that allow you to create invoices and keep records of invoices and expenses 100% online — ideal for the digital nomad. But Xolo goes one step further, giving you a human face behind the algorithms to give you personalized advice and peace of mind. 

3. Reduce your taxable income by deducting expenses

A freelancer reducing their taxable income is not the same as the dubious tax activities of certain coffee shops, tech giants, or rainforest-inspired bookshops on steroids. If that’s what first came to mind when you read that header just now, forget it. Business expenses are a perfectly legal way to lower your taxable income and write off VAT on certain products and services.

But to take advantage of this benefit for freelancers, you need to understand which expenses are deductible and how to claim them properly.

Know what's deductible

In Spain, you can deduct any expense that is directly related to your freelance business. This includes costs such as office supplies, advertising, travel, and professional fees. 

Deductible expenses also include items above and beyond obvious business expenses, although many of these give you a proportional deduction, rather than the full amount. For example, if you use your home as an office, you can deduct a percentage of your rent and utilities, not the full amount. We cover a full range of expenses in our article on deductibles in Spain, but here’s a taster:

• Professional vehicles
• Civil liability insurance
• Donations to NGOs or crowdfunding
• Social security expenses
• Workspace rental
• Outsourced services (like Xolo!)

Keep proof of expenses

To claim a deduction, you must have proof of the expense. This includes receipts, invoices, and bank statements. Auditors can ask for evidence up to four years after the fact, so keep all your documentation organized and readily available online and in paper form where possible.

Understand VAT deductions

As we mentioned earlier, when you pay your quarterly VAT bill, you’re actually paying your customer’s VAT on their behalf. But when you submit your tax return, you can deduct the VAT you have paid on your business expenses and keep it for yourself. 

Here’s the basic formula:

VAT you have charged to your clients — VAT you have paid on your expenses = final VAT bill.

As standard VAT is 21%, freelancers who bury their heads in the sand and ignore expenses essentially pay 21% more than they should for their expenses, and that doesn’t even take into account the savings on their taxable income. So when you’re buying a new laptop or hiring an assistant for a day’s work, keep your records and save yourself some $$ bills at the end of the quarter. 

4. Take advantage of tax credits and deductions

In addition to deducting business expenses, you may also be eligible for tax credits and deductions that can further reduce your tax bill. 

Research and development (R&D) tax credit: If you invest in R&D activities, you may be eligible for a tax credit of up to 25% of your expenses. This can be a significant saving for freelancers in innovative fields. 

Employment tax deduction: If you hire employees, you may be eligible for a tax deduction of up to €3,000 for each new employee under 30 years old. Similarly, you can qualify for a deduction of up to €12,000 when you hire disabled workers. These tax incentives are to encourage diversity, equity, and inclusion in job creation, but it can mean a nice saving for your business too.

Environmental tax deduction: We all want to save the planet (most of us, anyway), and the Spanish government offers tax deductions for investments in environmentally friendly technologies and businesses. 

5. Consider turning your freelance business into a limited liability company (LLC)

OK, it might seem like a bit of a jump if you’re just a new freelancer in Spain, but incorporating your business to become an LLC, or SL in Spanish, comes with some tax incentives. 

Generally speaking, you’re better off as a limited company if you have a team or are earning over €60,000. There are a bunch of benefits for LLCs that standard freelancers don’t get, such as:

• A wider range of deductible expenses
• Corporation tax is lower than income tax
• Protection for your personal assets
• Tax incentives for early-stage companies
• Better access to funding to grow your business

Investing in new or recently created companies

If you’re not in the position to set up your own company, a great tax optimization strategy is to invest in someone else’s! By supporting a Spanish business under three years old, you can deduct 20% of your investment from your taxable income, up to a maximum of €50,000 (if you have a spare €250,000 to throw around). 

6. Plan for your retirement and make your money go further

I know, I know, it’s on your to-do list and you’ll get it sorted just once you’re up and running. But come on, we both know a retirement plan isn’t top of your priority list. 

That said, figuring out an effective plan for when you retire is one of the most important tax optimization tips for freelancers in Spain. Unlike employed professionals, you don’t have a company to contribute to your social security on your behalf. This means that self-employed workers traditionally receive around 60% of their salaried counterparts’ pensions. 

So how do you simultaneously improve your retirement plans and save tax in Spain?

Social Security contributions: The state pension

As a freelancer in Spain, you need to make monthly contributions to the social security system. This gives you access to healthcare and a pension. Your contributions are tax-deductible, meaning you don’t pay tax on them while simultaneously reducing your taxable income. However, as the money you put into the system is spread over healthcare, unemployment benefits, and the protection of other workers, putting more into the system isn’t a smart way of increasing your pension. 

Similarly, when you receive your state pension, it is considered income and taxed as such. Despite some allowances and deductions for pensioners, paying more into the state system is still an inefficient way of increasing the cash in your pocket. 

Private pension plans

Because freelancers get a relatively raw deal on their social security pension, it’s a smart move to top up your retirement fund with a private pension plan. Your private pension contributions are partially tax-deductible, and your investments are tax-free until they are hit with income tax when you retire and begin withdrawing. 

Individual systematic savings plans: PIAS

A PIAS, or plan individual de ahorro sistemático (individual systematic savings plan) is an alternative to a private pension plan that you can withdraw out for any purpose, not just retirement. Technically, it is an insurance product, rather than a pension fund, that offers a guaranteed minimum return as well as additional extras based on investment gains. In practice, you make regular contributions over time and a financial manager will choose how to invest your fund based on your chosen risk level. 

We’ve included PIAS plans in our tax optimization tips for freelancers in Spain as the returns generated are tax-exempt until you withdraw your money. But in contrast to private pension funds, PIAS withdrawals are considered capital gains, rather than income, so are usually taxed at a lower rate. This is in contrast to your state and private pensions, which are classified as income. 

The real bonus of a PIAS is to wait for ten years after starting the policy and then start taking the money out as a series of regular payments for the rest of your life (a life annuity). In this case, you won't have to pay any taxes on the profits (gains) made from your investments at all.

However you decide to prepare for your pension, make sure to make a habit of contributing. It’s easy to put your pension payments on the backburner, and consistency is key to earning a healthy retirement slush fund. 

7. Reach out to Xolo’s local tax experts in Spain

As a freelancer, you’re responsible for every aspect of your success, and even the most dedicated solos have a tough time keeping all those balls in the air. But when you’re running from pillar to post with admin tasks, it’s easy to miss out on the bigger picture of growing your business. 

Luckily, there’s an easy solution. At Xolo, we’re experts in the Spanish tax system and dedicated to helping freelancers like you keep more of their hard-earned money in their pockets. From our Starter pack to our Premium plan, you can:

• Manage your expenses to lower your tax bill
• Stay compliant to avoid hefty fines
• Keep neat, accurate records of your income and expenses
• Talk to our team of experts for tailored tax optimization tips 

What’s more, on our super-simple online platform, we help you:

• Register for FREE with the tax agency and social security
• Automate professional, compliant, and automated invoices
• File quarterly and annual tax filings

Of course, as a business expense, our services are tax deductible, just to sweeten the deal 🍦.

So to save time, money, and the headache of Spanish admin, sign up to Xolo and take advantage of our Spanish tax hacks for freelancers today. 

About James

James McKenna has been a freelancer since 2017, working in subtitling, translation, and his main passion — writing. He loves nothing more than falling down a rabbit hole, a habit that has helped him specialize in areas as diverse as biotech, climate change, higher education, and business strategy.

Based in Barcelona, James learned the ropes the hard way, making mistakes that turned into valuable learning experiences. After working hard to establish himself, he is now working smart, and is always on the lookout for ways to streamline his business.