When we talk about taxes a lot of people immediately think about personal income taxes or corporate income taxes. You’ll also find a ton of articles out there with lists about the countries with the lowest tax rates. However, almost all of these articles forget about one thing: social contributions for digital nomads.
What are social contributions for?
If you receive professional income in your private name, for example a wage or business income as a freelancer, you will pay social contributions. The reason is that most countries levy some form of social contributions on your professional income. As an employee, you might even not be fully aware of it because your employer withholds them. Nevertheless, they lower your net income.
You pay social contributions in order to cover the social system of a country. How extensive the social network is, depends on the country. In some countries, they will only cover basic medical care in a (public) hospital. In other countries you might benefit from a more extensive coverage. Furthermore, some countries will grant you a pension if you have paid contributions in that country for a few years. Moreover, in some places you will get an unemployment payment if you lose your job. However, all of this depends on the country. Of course, the government needs money to cover all of these expenses and therefore you pay social contributions.
In a lot of countries, the rates for social contributions are even higher than the (average) tax rate. So, if you are looking at optimising your setup for taxes, you better also consider social contributions.
Calculation of social contributions for digital nomads
How you calculate social contributions and how much of your hard-earned money you’ll lose depends on the country. Just like with income taxes themselves, there are a lot of different systems out there.
In some countries you just pay a fixed percentage irrespective of how much you make. So, the same percentage is applied to your total income.
On the other hand, some countries apply progressive rates. So, the more you make, the higher your rate of social contributions.
Luckily, there are also some countries which have a maximum basis on which social contributions are calculated. This means that if you make more than a certain threshold, you basically don’t pay social contributions on the excess. So, the more you make, the lower your actual contribution on a percentage basis. Countries which apply such a limited basis are, for example, Bulgaria and Albania. At the same time, you might need to pay a minimal contribution in some places.
Furthermore, some countries give you the option to choose to pay a lower percentage of social contributions if you agree to a lower coverage.
If you pay social contributions in a country of the EU, you will also get a European Health Insurance Card which can benefit when abroad.
Conclusion: social contributions for digital nomads
Just like with taxes, there is no overall system that all countries apply when it comes to social contributions. Nevertheless, it’s imperative that you think about social contributions when you are looking at your tax setup as it could heavily impact your overall tax burden.