I need help understanding how does the Upwork service works from the payment side. I have a company registered in Poland. Lets say I am doing a $100 job for a client through Upwork. I understand that Upwork takes $20 of that and issues an invoice for me (without VAT, after I am verified, understandable). Now, do I issue an $80 invoice directly for my client, or for Upwork? How does this work?
I would appreciate explanation.
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Invoices are generated by Upwork. Upwork charges 20% on the amount of each job a freelancer completes: https://support.upwork.com/hc/en-us/articles/211062538-Freelancer-Service-Fees
For VAT and other information read here:
You can, of course, send an invoice to your client, but payment must always go through Upwork.
Sorry for the confusion. Invoice will be sent to the clients automatically after the week has ended, clients are billed each Monday for the hours of the previous week.
As I can see, some designers do prepare their own custom invoices, because the tax laws are different in different countries and sometimes UpWork invoices lack some crucial information.
I suggest that you read different threads concerning VAT for that matter: https://community.upwork.com/t5/forums/searchpage/tab/message?q=VAT
For example, Julie H explained quite clearly here how it works in her case: https://community.upwork.com/t5/Freelancers/Tax-and-VAT/m-p/406711#M248040
I will not advise you specifically how to handle invoices here (I've only just registered), but you definitely could (and sometimes should, as it seems) create your custom invoices.
I hate when people write answers without understanding the question, and with ZERO knowledge about the problem, like in this case.
Łukasz, when You do a service through Upwork for someone there are 3 parties involved: You (freelancer), Your client/customer, and Upwork, and there are 2 "contracts", between You and Upwork, and another one between You and the client.
So basically it works like that. You did a 100$ job for a client from Poland (assuming You are also in Poland):
OPTION1: You are a VAT-registered company (like DG or Sp.o.o. in PL)
1. You need to invoice the customer with VAT as it is required by law for VAT-registered entities. But the money goes throught Upwork and it is a gross amount. So You need to issue an invoice for 100$ gross (all invoicing software have this option of issuing gross invoices, in Poland "brutto"). Which in fact is 81,3$ net amount + 23% VAT (18,7$) = 100$ gross.
Obviously, then You need to transfer the 18,7$ VAT to the tax office at the end of month (in Poland it's VAT-7). The real cost for You customer is net amount (81,3$) as the client can claim the VAT back from the tax office, providing the customer is VAT-registered.
2. The 2nd invoice is between You and Upwork. Upwork charges You a 20$ fee and this is Your company expense, they issue You a VAT invoice but since You are VAT-registered, the invoice is without VAT as it comes from another EU country, but You still need to report the VAT to the tax office as reversely charged on the JPK (Google: import of services).
You book the 20$ as company expense in Your accounting software.
Depending on the company type, You also need to pay PIT (personal income tax) or CIT (Corporate Income Tax) from the net profits, rates vary depending on company type and status. Eg. if You pay 19% PIT then for the 100$gross / 81,3net invoice it will be:
81,3$ net revenue - 20$ expenses = 61,3$ gross profit
61,3$ * 19% tax = 11,65$ income tax (this tax can be minimized by other expenses such as telephone bills, office rental etc.)
So for this deal, assuming You have no other expenses, Your net profit is 80$ - 18,7$ VAT - 11,65$ PIT = 49,65$
OPTION2: You are a non-VAT-registered company (like DG or Sp.o.o. in PL)
1. You receive 75,4$ from Your client, the rest goes to Upwork (see below). You invoice Your customer 100$, without VAT as You are not VAT-registered. You do not need to report the VAT as there is no VAT on this invoice, and again, You are not VAT-registered. Client cannot claim any VAT back as there is no VAT on the invoice. In this case the cost to You client is 100$.
2. Upwork issues You an invoice for 20$ + 23% VAT = 24,6$. This invoice can be wholly booked as company expense in Your accounting software. You cannot claim any VAT back as You are not VAT registered.
Depending on the company type, You also need to pay PIT (personal income tax) or CIT (Corporate Income Tax) from the net profits, rates vary depending on company type and status. Eg. if You pay 19% PIT then for the 100$ invoice it will be:
100$ revenue - 24,6$ expenses = 75,4$ gross profit
75,4$ * 19% tax = 14,3$ income tax (this tax can be minimized by other expenses such as telephone bills, office rental etc.)
So for this deal, assuming You have no other expenses, Your net profit is 75,4$ - 14,3$ PIT = 61,1$
81,3$ customer cost (VAT is claimed back), 49,65$ net profit to freelancer.
~39% in taxes and Upwork fees.
Option2 (not VAT-registered)
100$ customer cost, 61,1$ net profit to freelancer.
~39% in taxes and Upwork fees
As You can see, regardless which option is chosen, the % of taxes and fees is more or less the same, the main question being whether or not the freelancer and client is VAT-registered.
1. I did not include upwork payment processing fees charged to the client (~3%).
2. If the freelancer is from one EU country and the client is from another EU country, the process is different, it's more difficult to claim VAT for the client, in this case I recommend that the freelancer is not VAT-registered (OPTION2).