What is IRPF and how does it affect workers
Taxes are a headache for all workers. However, while for salaried employees everything is reflected in the payslip and the calculation responsibility lies with the company, for self-employed workers it is important to fully understand how tax mechanisms work. In particular, it is essential to understand how IRPF affects them, one of the main taxes citizens are required to pay to the State, and the most universal one. What is it, who pays it, and how does it work?
Definition of IRPF
IRPF is the Personal Income Tax, applicable to both salaried and self-employed workers. It is a progressive tax that increases proportionally as income increases. IRPF is fully regulated by Law 35/2006 and Royal Decree 439/2007, which establish how citizens must be taxed and what deductions can be applied to reduce their tax burden. Everything is governed by the principles of equality, universality, and progressivity.
IRPF is due based on the possession of different types of income: real estate income (buildings and land), capital income, employment income (including pension or unemployment benefits), self-employment income, and business income.
How to calculate IRPF?
Since calculating IRPF can be complex, it is useful to have some prior guidelines to simplify the process and avoid paying more than necessary. It is also advisable to seek help from a professional tax advisor. To make the calculation easier, the tax percentages are divided according to income type.
For 2024, the IRPF brackets in Spain are as follows:
- From €0.00 to €12,450.00 = 19%
- From €12,450.00 to €20,200.00 = 24%
- From €20,200.00 to €35,200.00 = 30%
- From €35,200.00 to €60,000.00 = 37%
- From €60,000.01 to €300,000 = 45%
- Over €300,000 = 47%
How is IRPF calculated on a payslip?
IRPF is a personal and direct tax that is withheld monthly from the employee’s gross salary and paid to the Tax Agency. The company is responsible for withholding and paying this tax through tax forms such as Model 111 (monthly or quarterly) and Model 190 (annual summary).
The calculation of IRPF is not simple and depends on several individual factors for each employee. In fact, two employees with the same gross salary may have different IRPF withholdings due to their personal circumstances. The contribution base used for Social Security is different from the taxable base used for IRPF.
Payroll management is usually handled by HR managers, who may have trained, for example, with a Master’s in Human Resources.
The payslip is structured into:
- Earnings: Salary components generated by the employee in a month.
- Deductions: Withholdings applied, including IRPF.
The calculation mainly considers annual gross salary, personal and family situation, type of contract, and deductible expenses (such as Social Security contributions). Form 145 allows employees to declare their personal and family situation, which affects the IRPF withholding percentage.
Withholding percentages are set by the Tax Agency and vary each year. For contracts shorter than one year, a minimum withholding of 2% applies, which may be higher depending on total income and the employee’s personal situation. The tax authority also provides tools such as calculators and comparison tables to help determine the applicable withholding in each case.
In summary, IRPF calculation on a payslip considers several factors:
- Annual gross salary: The higher the salary, the higher the IRPF rate.
- Type of contract: Temporary contracts have a minimum withholding of 2%.
- Place of residence: Withholding rates vary depending on the autonomous community.
- Disability level: Affects the amount of IRPF withheld.
- Family situation: Influences IRPF withholding (children, single-parent families, etc.).
How does IRPF affect self-employed workers?
As mentioned, IRPF taxes the income of all individuals with tax residence in Spain, including self-employed workers, who must pay IRPF quarterly using forms 130 or 131 (for those under the objective estimation system) and annually through the income tax return, which is the yearly process used to settle IRPF payments.
If a taxpayer has overpaid through monthly withholdings, the tax authority refunds the difference. If they have underpaid, they must pay the remaining amount. In this way, self-employed workers can adjust their advance IRPF payments throughout the year. To do so, they must declare all income and expenses, including income outside their business and personal situation (marital status, children).
From the moment a self-employed worker registers with Social Security and the Tax Agency, they take on two main obligations: paying the self-employed social security fee and filing and settling IRPF through different forms. IRPF follows a progressive system, so the more you earn, the more you pay, with rates ranging from 19% to 47% depending on income and personal circumstances. The tax applies to various types of income, including salaries, property income, and business activity income, as well as benefits such as unemployment or retirement pensions.
Basically, self-employed workers must advance IRPF payments to the Tax Agency whenever they earn income: professional freelancers apply IRPF withholding on each invoice, while business-type self-employed workers make quarterly payments using form 130. In addition, some self-employed professionals must apply a 15% withholding on invoices, although new self-employed workers may apply a reduced 7% rate during their first three years of activity.
There are three IRPF taxation regimes for self-employed workers:
- Objective estimation (modules): Pays a fixed percentage based on objective indicators (e.g., square meters of premises), regardless of actual income.
- Direct estimation: Pays a variable percentage between 19% and 47% based on annual profits.
- Simplified direct estimation: Similar to direct estimation but with fewer accounting obligations.
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