Billingz Guides · Taxes
VAT, income tax, corporation tax: which ones apply to you
Short answer
They are not four versions of the same thing. VAT is charged on the sale and belongs to the state from the moment it arrives. Income tax is charged on what is left after costs, and whether it is personal or corporate depends on how you registered, not on what you do. Sales tax is American and does not reach you. Only one of them is a tax on you.
VAT is not your money, it is only in your account
You add VAT to your price. The client pays the whole figure into your account, where it looks exactly like income, because nothing about a bank statement distinguishes the two. At the end of the period you deduct the VAT you paid on your own business purchases and send the difference to the state.
So a client settling a 1,000 invoice at 20 percent has paid you 1,200 and given you 1,000. The other 200 was in transit through your account, and it was never available to spend.
This is the single most expensive misunderstanding in freelancing, and it is not caused by carelessness. It is caused by one account holding two kinds of money and telling you a single number. The quarter it catches people is the quarter a large invoice lands and the balance looks like a good month.
Sales tax is a different machine, in a different country
Sales tax is charged once, at the final sale to the consumer, by a seller registered in that US state. There is no deduction for tax paid earlier in the chain, because it was not charged earlier in the chain.
VAT is charged at every stage and every business in the chain deducts what it paid, so only the final consumer carries the cost. Same objective, opposite mechanism.
For you this matters in one practical way. A US client sometimes asks why there is no tax line on your invoice, or asks for a resale certificate. There is no tax line because you are not registered to collect a tax that exists in their state and not in your country. What they may legitimately send you is a W-8BEN, which is about withholding and has nothing to do with sales tax.
Income tax: same work, two different taxes
The tax on your profit has two forms, and which one applies is decided by a registration choice, usually made at the beginning by someone who had not yet had this explained to them.
- Trading as a person - sole trader, self-employed, freelancer, or the local equivalent. The profit of the business is your income, and personal income tax applies to it directly. One layer.
- Trading through a company - the company is a separate person in law. It pays corporation tax on its profit, and you are taxed again, personally, on the salary or dividend you draw out of it. Two layers.
Neither is automatically better. One layer at a higher rate can cost more than two layers at lower ones, dividend treatment varies enormously between countries, and the answer changes as your profit grows. What is worth knowing is that the question exists, because a great many people are paying one of these without ever having compared it to the other.
The fourth thing, which is not a tax and behaves like one
Social contributions buy pension and health entitlement, so they are not a tax in the strict sense. They leave the same account, on a schedule you do not set, and for a large share of freelancers they are bigger than the income tax.
Any figure you have in mind for what you owe is wrong if it leaves them out, and most figures people carry in their heads do.
Price the tax in before you agree the price
Knowing which taxes reach you is only half of it. The other half is when to think about them, and the answer is before the signature, not when the bill arrives.
Every transaction carries tax somewhere: on the income, on the profit, on the transfer itself in a few places, and again on the salary or dividend you eventually take out of the company. The price you agreed is never the price you keep, and the gap is not small.
Which makes it a pricing question rather than an accounting one. The amateur meets the tax when it is assessed and discovers the job was worth less than it looked. The professional worked out what would be left before quoting, and quoted accordingly. Same work, same client, entirely different year.
What a rate actually has to carry, once tax, contributions, unpaid days and business costs are counted, is worked through in what your rate has to cover.
What the balance in your account actually contains
On a normal day, the number your banking app shows you is made of at least four things: money that is yours, VAT that belongs to the state, income tax on profit that has not been assessed yet, and contributions that will be due whether or not next month is a good one.
That is not an argument for anxiety. It is an argument for the balance not being the number you make decisions on. The habit that fixes it is in how much to set aside for taxes, and it works because it separates the money before you get used to seeing it.
Two things decide the size of the VAT question specifically: whether you have crossed your country’s registration line, set out in VAT thresholds across Europe, and whether you invoice businesses in other EU countries, which changes the mechanism entirely and is covered in VAT on cross-border invoices.
Common questions
Is the VAT I collect my money?
No. You add it to your price, hold it, and hand it over at the end of the period, minus the VAT you paid on your own business purchases. It arrives in the same account as everything else and looks identical to income, which is exactly why it gets spent. A client paying 1,200 on a 1,000 invoice has given you 1,000.
Do I charge sales tax to a client in the United States?
No. Sales tax is a US state and local tax on the final sale of goods and certain services, collected by sellers registered in that state. As a European freelancer invoicing a US business you are not registered for it and are not collecting it. Your invoice carries no US tax. Whether the US client owes use tax on the purchase is their side of the transaction, not yours.
So why did my US client send me a W-8BEN form?
That form is unrelated to sales tax. It tells the US payer that you are not a US taxpayer, so they do not withhold US tax from what they pay you, and it lets you claim any treaty rate your country has agreed with the US. It is a routine part of being paid by an American company. Give it to the client, not to a tax authority.
Do I pay personal income tax or corporation tax?
It depends on how you are registered, not on what you do. If you trade as a person, sole trader, self-employed or the local equivalent, the profit is your income and personal income tax applies. If you trade through a company, the company pays corporation tax on its profit and you are taxed separately on what you take out. Same work, same money, different tax, decided by a registration choice usually made before anyone explained this.
If my company already paid corporation tax, am I taxed again?
On what you take out, generally yes. The company pays tax on its profit; you then pay personal tax on the salary or dividend you draw from it. Rates, reliefs and the treatment of dividends vary widely by country, and in some the combined result is lower than personal rates while in others it is higher. It is the main reason the choice of legal form is worth an accountant's time rather than a forum's.
Are social contributions a tax?
Technically no, they buy you pension and health entitlement. Practically they leave the same account on a schedule you do not control, and for many freelancers they are larger than the income tax. Any answer to "how much do I owe" that leaves them out is wrong, which is why they belong on this page next to the taxes.
Built for this
Billingz does not calculate your tax and does not file anything. What it does is stop the account from telling you one number: it shows what you invoiced, what actually arrived, and what is set aside, so the money that was never yours is not sitting in the figure you plan on.
See how Billingz worksThis guide is general information, not tax advice. Rates, thresholds, legal forms, dividend treatment and contribution rules differ by country and change frequently, and the right answer for you depends on facts this page cannot see. Billingz is not an accountant, does not calculate or file tax, and does not warrant that this page reflects the rules that apply to you. For anything that turns on a number, ask a local accountant or your tax authority.