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Social guarantees
SOCIAL SECURITY AND FREELANCERS
What are social guarantees?
The government provides services and benefits, some of which are directly related to the taxes paid by the person. Social guarantees in particular include health insurance, pension insurance, unemployment insurance and the related benefits, such as health care, sickness benefits, parental benefits, old age pension and unemployment benefits.
A large part of social security depends on the amount of taxes paid by the person, but services are provided on the basis of the solidarity principle – for example, the availability of health care does not depend on the amount of social tax paid for the person.
From 1 January 2016, health insurance is based on the principle of summed monthly social tax.
The income received and taxes paid by/for freelancers can be irregular, which is why, according to the current rules, the social guarantees available to them can differ from those available to people receiving regular salaries under employment contracts. However, it is possible to ensure social stability through informed choices and good planning. This requires an income corresponding to at least the minimum wage.
Who is engaged as a freelancer?
According to the Creative Persons and Artistic Associations Act, a creative person engaged as a freelancer is a person whose main source of subsistence is a professional creative activity in a fine arts field as listed in the Act, who does not work under an employment contract or other similar contract under the law of obligations and is not in civil service.
A creative person engaged as a freelancer may be self-employed or a member of a governing body of a private limited company and/or provide services under contracts or authorisation agreements.
In more general terms, all self-employed individuals and those engaged in various temporary and occasional forms of activity in a particular (creative) field can be regarded as freelancers.
What are social guarantees?
The government provides services and benefits, some of which are directly related to the taxes paid by the person. Social guarantees include health insurance, pension insurance, unemployment insurance and the related benefits, such as health care, sickness benefits, parental benefits, old age pension and unemployment benefits.
A large part of social security depends on the amount of taxes paid by the person, but services are provided on the basis of the solidarity principle – for example, the availability of health care does not depend on the amount of social tax paid for the person.
Legal forms of working as a freelancer
Self-employment
Many people working in fields of culture have chosen to operate as self-employed persons. For this form of business, social guarantees are available through advance payments of social tax and business expenses can be deducted from their income. The main disadvantage concerns liability – a self-employed person is liable for their business with their entire personal property (business is guaranteed with the personal property of the natural person), which can be risky, considering the low income base in many creative fields. The obligation to pay social tax in advance can also be burdensome if the person’s income is small.
Private limited company
The legal form of a private limited company is suitable for small businesses, as the business risks do not cover the founder’s property and there is no obligation to pay taxes in advance. A member of a governing body of a company is not automatically an employee: remuneration has to be paid in a private limited company under an employment contract, which can also be used to provide health insurance and pension insurance. The company owner can also take out income in the form of dividends, while dividends cannot be paid as compensation for work and dividends are not subject to social tax, which is why they don’t come with social guarantees.
Working under contracts under the law of obligations
Private individuals usually work under contracts under the law of obligations. The most permanent of these contracts, which also best ensures the rights of the worker, is an employment contract, which is signed under the Employment Contracts Act for longer-term employment. Workers under employment contracts get all the guarantees arising from regular tax payments. Individuals engaged as freelancers (including self-employed and private limited companies) most likely work under authorisation agreements or contracts for services, which are the two types of contracts for providing services. These contracts also require the payment of all taxes on remuneration, therefore providing social guarantees if the contract is made for a longer term. The various types of contracts are chosen mainly depending on the content and form of work, rather than any taxation differences. There is one exception: members of governing bodies always act under authorisation agreements, in which case an unemployment insurance premium is not paid.
Working under licence agreements
In creative areas, it is common to sign licence agreements. It is important to know that a licence agreement, by which the author authorises others to use their work, is only subject to income tax and does not provide social guarantees. When new works are created as commissioned work for clients, the work carried out has to be remunerated. A client can pay a fee to a creative person acting as a self-employed person or a company, which is treated as business income (and from which the creative person can deduct work-related expenses and pay taxes), while in the event of a contract for services, the income is subject also to social tax, unemployment insurance contributions and contributions to a mandatory funded pension as prescribed by law. In the event of larger creative projects, a private individual would rather benefit from an authorisation agreement or contract for services for the entire period of work, which would then give social guarantees for the entire period. Copyright and licensing matters can be regulated by the same contract. If the whole amount is received as remuneration in a single payment, all taxes would be paid, but no social guarantees received.
Employment has to be registered in the employment register maintained by the Tax and Customs Board.
All natural and legal persons providing jobs have the obligation to register their workers; the employment of all natural persons subject to taxation in Estonia have to be registered regardless of the form or duration of the contract. A self-employed person need not register themselves in that register, but has to register any employees and also their spouse if the spouse wants health insurance, as the data in the register is part of the basis on which social guarantees are given.
Social tax
Social tax is applied to income received from actual activities (employment, entrepreneurship) to provide social guarantees to the taxpayer.
Social tax income is broken down as follows:
health insurance (13%)
pension insurance (20%)
The social tax rate is 33% on the gross salary.
The minimum social tax obligation in 2019 is 165 euros per month. The monthly income corresponding to the minimum social tax obligation is 500 euros.
Various guarantees (such as health insurance) are conditional on regular social tax payments (at least on the minimum amount every month). The employer pays the social tax on the employee’s gross salary.
In the event of authorisation agreements or contracts for services with self-employed persons, the parties can agree that the self-employed person pay their own taxes. A self-employed person pays social tax in advance four times a year. The Tax and Customs Board calculates the eventual social tax obligation of a self-employed person on the basis of the declared business income.
Paying monthly social tax on at least the minimum wage ensures health insurance, while the amount of tax paid is important for many other guarantees: the larger the income on which social tax is paid, the larger the resulting benefits.
For example, the pension qualifying period is calculated from the amount of social tax paid. The pension qualifying period is important for the future pension, and also for the work incapacity pension if the person loses their capacity for work in part or in full due to an accident or illness. If the pension qualifying period is too short, the work incapacity pension is calculated as a percentage of the national pension rate.
From 1 July 2016, the work incapacity pension was replaced by the work incapacity benefit, which does not take the pension qualifying period into account, but involvement in the labour market may be required for paying the benefit.
Various other benefits, such as parental benefits, are calculated from the amount of social tax paid. As a rule, a monthly parental benefit is 100% of the recipient’s average monthly income that was subject to social tax during the previous calendar year. If the applicant did not receive income subject to social tax in the previous year, a minimum rate of benefit is paid as approved by the parliament in the state budget. In 2019, the minimum rate of monthly parental benefit is 500 euros.
For individuals engaged as freelancers, it is important to know that from 1 January 2016, health insurance is guaranteed for everyone working under contracts under the law of obligations, on whose remuneration at least a minimum amount of monthly social tax has been paid (165 euros in 2019).
Social tax need no longer be paid by a single employer and the term of the contract is irrelevant; it is important that the monthly total declared social tax on all received remuneration is at least the minimum established by the state budget.
If a person has several short-term contracts under the law of obligations in one month, the social tax payments made under these are summed. In such a case, health insurance coverage begins without a waiting period and is suspended without a guarantee period (for people working under employment contracts, health insurance remains valid for two months after the end of the contract) and continues as soon as the required amount of social tax is declared.
The minimum has to be reached every month to keep the insurance cover in force:
it is not enough if, for example, three times the minimum is paid for a person in one month and none in the next month.
To receive health insurance, social tax has to be paid to the Tax and Customs Board and a declaration submitted by the 10th date of the next month.
Creative individuals who have no or very little income from creative activities can apply for support for creative activity from artistic associations, which guarantees health insurance and a financial grant for a period of six months to one year. The amount of support corresponds to the national minimum wage established by the Government of the Republic. In 2019 the minimum wage is 540 euros. In addition, the creative association pays a social tax of 33% to the Tax and Customs Board. Creative individuals who are members of a creative association have to apply to their association; non-members can apply to the Ministry of Culture.