How to manage income and expenses as a freelancer in Spain

James McKenna
Written by James McKenna
on julio 18, 2023 8 min of reading

Expat freelancers in Spain can have quite a tough time managing income and expenses once they get swept up in their new lifestyle. 

A curious mix of a low cost of living, warm weather beckoning you out of the house, and endless invitations to events big and small make it easy to put smart financial planning on the back burner. 

It’s not just the Spanish lifestyle. Managing income and expenses is difficult for anyone anywhere who has chosen the self-employed life. Very few of us get taught financial literacy in school, so when freelancers have the complex tasks of calculating their earnings, taxes, and expenses, it’s understandable that many put their heads in the sand and hope it will all magically work itself out. 

But at Xolo, we know that the devil is in the details. The more you know about how to handle your income and expenses, the more financially secure you’ll be. So in this article, we’ll clarify everything from what constitutes freelance income and expenses to tips and tricks for managing your money like a pro. But to kick things off, we’re going to start with an overview of financial literacy and why it’s important for us freelancers.

What is financial literacy?

Financial literacy is knowing how financial systems work and being able to turn that knowledge into a personal advantage. It covers understanding tax systems, budgeting, investing, identifying fraud, and of course, managing your income and expenses, making it a super-useful skill even if you’re not running your own company. 

The teaching of financial literacy is pretty appalling in most education systems. Even in the USA, 66% of the population is considered financially illiterate

And not to sound too tin-foil-hat, but it’s by design. When the masses know how money works, it is a serious threat to the big guns in investment. You might remember the famous GameStop stock market case when small-time investors on the subreddit r/WallStreetBets joined forces to skyrocket GameStop’s stock price. This caused an uproar among traditional investment houses that had shorted the gaming retailer’s price, expecting it to fail. 

This David and Goliath story, where regular people joined together to take on kingpins from the finance sector, is only astonishing because it so rarely happens. Financial literacy is still restricted to The Powers That Be® because if it were fully democratized, their money would have to be shared around. 

So unless your parents were in the banking industry, you’ve read ˝Rich Dad Poor Dad”, or you’ve broken the mold and educated yourself, it’s unlikely you’re an expert at managing your money. 

Why is financial literacy so important for freelancers?

Financial literacy covers a whole host of interweaving threads, but we’re only going to pull on one of them today: Managing income and expenses. As much as you romanticize it, your work exists largely to put you in a sustainable economic position. And put simply, understanding the relationship between your income and expenses will tell you if your work is profitable or not. 

Only it’s not simple. 

There are all kinds of factors at play here: The payments you receive, the taxes and social security contributions you pay out, but also all your other costs of living. After all, there’s no point in running a highly profitable business if you’re going to channel those profits into wild investments like a Fast and Furious Jurassic Park crossover (trust me guys, it’s going to be a smash hit at the box office). 

They say “If you can’t measure it, you can’t improve it”, and if you don’t track your income and expenses, you’ll be living in limbo. You won’t know how much money you’re making, how many more hours you should be putting in, whether you can rest, or whether you have a bit left over to invest in your business. 

Types of income for freelancers

Obviously, we don't need to distinguish between what expenses and income are, that's pretty straightforward. Maybe, at most, it's worth remembering that income and profit are not the same: the former is the money you receive from your clients, while the latter is calculated by subtracting your related expenses from that income.

There are three main types of income:

  • Your work, or, in other words, what you receive from your clients. Just started a dog grooming business? Then your income is the price your customers pay for your expert puppy cut.
  • Public aid. Imagine the government offers a €3,000 grant for work equipment to entrepreneurs under 30, and you're 29. Boom, take advantage of it. That’s another income stream. Just as a disclaimer, no such grant is currently on offer 😢.
  • Private investment, such as a consortium of pet-obsessed foreign investors who want a part of your business for €10,000. There you have it, private investment.

Types of expenses for freelancers

The categories of expenses for freelancers are a bit wider and more varied, so we’ll split them into six groups:

1- Taxes

All freelancers who want to live and work in Spain have to accept that they’ll need to pay taxes. There’s no sneaking around and getting paid into a foreign account to avoid them. If the tax man doesn’t get to you first, your clients will smell something fishy and get understandably suspicious. 

Most kinds of freelancers only have to deal with income tax (IRPF) and value-added tax (IVA). IRPF is a tricky one as you pay a standard 15% on Spanish invoices and 20% year-to-date for international jobs. This isn’t a true reflection of what you earn, making your actual payments difficult to predict.

Your IVA on the other hand is more predictable. In essence, you take the 21% VAT that your clients pay you on each invoice and pass it on to the government, minus any business-related expenses that you’ve paid over the quarter. 

2- Social security contributions

Social security contributions, or the freelance quota, are a monthly expense for freelancers in Spain, making them quite predictable. However, how much you pay per month will depend on whether you qualify for reduced rates, whether you’ve set up a limited company and hired employees, and how much you earn.

Paying your freelance quota is never a nice experience. But if you need a middle-of-the-road icebreaker with expat freelancers in Spain, mention the freelance quota and you’ve got yourself a common enemy to bond over. 

3- Leases and depreciations

So you started your dog-grooming business, working out of the home you bought, with no need to pay rent on a salon — excellent 🤑! But your partner is now about to send you packing due to the amount of fur in the hallway and the non-stop barking. So, reluctantly, you decide to rent a small place for your business. This lease usually comes at a fixed monthly rate, making it nice and predictable.

Another option, if you have the chance, is to straight-up buy a place. This could be referred to as a depreciation expense. Depreciations are long-term expenses, and their effect on income shouldn't be measured immediately, unlike rents, but over a longer period. 

For example, let’s say you outright buy a place for €20,000. It doesn’t make sense to subtract the €20,000 from one month's profits as if it were rent. Instead, you should spread out the amount month by month, over the years in which you're going to get a return from it. The same goes for any other equipment that's intended for medium to long-term use.

4- Financial expenses

OK, not many of us have €20,000 to throw at an office space just like that. When buying property, most of us need to take out a mortgage, which counts as a financial expense. Another financial expense you could chalk up here is a loan to get your business started.

5- Operating expenses and consumables

Contrary to depreciations, operating expenses and consumables have a short-term impact. For example, you’ve got gas for driving for home visits, your premium dog shampoo, treats to help Sergeant Puppers relax before using the hairdryer, or the 20,000 combs you need to use on that Cocker Spaniel whose hair knots just won’t quit.

Unlike depreciation which is more of a long-term investment, your full operating expense and consumable payments should be included in each month's accounting. 

6- External services

Your external services are third-party providers who you hire for the jobs you can’t (or won’t) do, like someone to clean your shop windows once a month. That falls into the external service category that you'll also need to count as an expense for your activity.

4 golden rules for managing income and expenses as a freelancer

Now you’ve got an idea of where your cash is flowing in from and where your costs are stinging you, we need to turn to some top tips for managing income and expenses. 

1- Collect those receipts!

You know when there’s a line of 57 people at the coffee shop and some annoying [INSERT INSULT HERE] is holding everyone up by demanding a receipt? Well, they’re probably a freelancer who’s just taken a client out for a meeting at a café and has mastered the art of keeping records. 

First on our list of tips for managing income and expenses as a freelancer is to collect receipts for any expense that can be deducted from your taxable income. Later, you and a financial expert can sort out what qualifies for a business-related expense and what doesn’t when filing your income tax or VAT returns. In short, become that annoying freelancer who has no problem shutting down an entire street to get that valuable receipt. 

2- Consider what is an asset and what is a liability 

Another pretty obvious piece of advice: spend wisely. Part of financial literacy is understanding assets and liabilities: 

  • Assets are things that can bring you future economic benefits, like pension plans, real estate, and even your specialist skill set as a pet groomer (yes, we’re still running with the pet groomer example).  
  • Liabilities are any debts that are diverting some of your hard-earned cash away from your bank account. Impulse buys of superfluous products are liabilities, even if they have a monthly payment plan that looks so good. But loans, credit card bills, and rent also fall into this category.

What we’re saying is to differentiate between wise purchases and foolish ones. Invest in necessary items and those with long-term returns, and resist the urge to splash out on needless items and subscriptions you’re never going to use. 

3- Run an honest analysis of your spending habits

Another key measure for managing income and expenses as a freelancer is to do an annual analysis of your accounts to know what needs improving, what you can cut back on, and what you should encourage. Seeing the numbers on paper and learning lessons from them is a critical part of the job. Anything else is flying blind.

4- Track your payments and income as a freelancer 

Budgeting apps are pretty useful for everybody, but even more so for freelancers. If you can instantly see the months when you’re making hay and contrast them with the hard times (looking at you, August 👀), you can budget for a little more effort in June and July. 

Similarly, you can set categories for your expenses, upload all your payments, and get a true reflection of how much you’re actually spending on eating out every month. Trust us, the food is cheap here, but if you’re having tapas and a beer multiple times a week, it can quickly add up. 

Managing income and expenses as a freelancer with Xolo 

As experts in dealing with freelancers and independent workers of all types, at Xolo, we have our own solution: an online billing platform, where you'll always have your accounts up to date.

We take care of:

✅ Social security payments and quarterly tax returns

✅ Submitting deductible expenses to reduce your tax bill

✅ An automated tool to create slick, compliant invoices

And yeah, we’re online, but we’re not a faceless algorithm. We’re a team of local experts who are on hand to help when you need it — like registering you with social security and the tax authorities for free. 

So if you want to get ahead in the freelance game, sign up to Xolo today and start managing your income and expenses like a pro.

Summary: Steps to manage income and expenses as a freelancer in Spain

  1. Collect receipts for deductible expenses to aid tax deductions.
  2. Distinguish between assets (future economic benefits) and liabilities (debts).
  3. Perform an honest analysis of spending habits to identify areas for improvement.
  4. Use budgeting apps to track income and expenses, enabling better financial planning.
  5. Manage your income and expenses with Xolo.

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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.

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