Who are “contracting entities”?
For Social Security purposes, contracting entities are companies or self‑employed business owners that receive more than 50% of a freelancer’s total annual income. Companies within the same corporate group are treated as a single entity for this calculation.
What are the consequences?
Entities classified as contracting entities must pay Social Security contributions calculated on the income paid to that worker:
- 7% rate when billing from that worker exceeds 50% of their total annual income.
- 10% rate when billing exceeds 80% of their total annual income.
How are contributions assessed and paid?
The Social Security Institute identifies contracting entities based on information in the freelancer’s annual tax return (IRS Model 3). The entity is then formally notified of the amount due. Because companies do not know the worker’s income from other clients, it is difficult to anticipate whether these thresholds will be exceeded, which complicates cash‑flow planning and accounting. With a 5‑year statute of limitations, notifications can cover several past years and result in significant unexpected liabilities.
Tânia Franco | [email protected]
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