Hiring employees vs. hiring freelancers: Tax implications in Serbia

When considering workforce engagement in Serbia, it is crucial to understand the tax implications of hiring employees versus engaging freelancers. These choices have significant consequences for your business, including obligations to the state, workers’ rights, and overall costs.

Hiring employees

Employees work under an employment contract, which entails specific rights and obligations for both parties. As an employer, you are required to calculate and pay taxes and contributions on employees’ salaries. These costs include:

Income Tax: Standard payroll tax rate.
Mandatory Social Security Contributions: Includes pension and disability insurance, health insurance, and unemployment insurance.

However, Serbian legislation offers certain tax incentives for employers who hire new workers. For example, employers can receive a refund on a portion of paid payroll taxes and social security contributions when they employ unemployed individuals registered with the National Employment Service (NSZ). The refund amount depends on the number of newly hired employees:

65% for hiring between 1 and 9 employees.
70% for hiring between 10 and 99 employees.
75% for hiring 100 or more employees.

These incentives are available to private sector employers who establish an employment relationship with unemployed individuals registered with the NSZ, provided that this increases the total number of employees compared to a specified reference date.

Hiring Freelancers

Freelancers are independent professionals who provide services based on service contracts or temporary work agreements. Unlike employees, freelancers are responsible for paying their own taxes and contributions. As a client, your obligation is to pay the agreed fee, while the freelancer independently manages their tax obligations.

This engagement model can be financially advantageous for employers, as it eliminates additional costs associated with payroll taxes and contributions. However, it is important to note that freelancers do not have the same labor rights as employees, such as paid leave, sick leave, or severance pay.

From February 1st, 2025, changes in the taxation of freelancer income have been introduced:

Model A: Designed for freelancers with lower incomes. The tax-free amount has been increased to 107,738 RSD per month. Income above this threshold is taxed at 20%, with mandatory pension and disability insurance (PIO) contributions of 24%.
Model B: Suitable for freelancers with higher incomes. The tax-free amount is 64,979 RSD, plus 34% of earned income. The remaining income is subject to 10% tax and 24% PIO contributions. If earnings do not exceed this threshold, no tax is paid, but contributions are mandatory and calculated based on the minimum PIO contribution base.

Freelancers must submit quarterly tax returns, with the deadline for the fourth quarter being January 30th of the following year.

Comparison & conclusion

When deciding between hiring employees and engaging freelancers, consider the following:

Financial Aspects: Hiring employees involves higher costs due to taxes and contributions but allows for available tax incentives. Hiring freelancers can reduce direct costs but does not provide access to these incentives.
Legal Security: Employees have greater labor rights and protections, which can contribute to stability and loyalty within the team. On the other hand, engaging freelancers provides greater flexibility but comes with less control and potentially higher workforce turnover.
Job Specifics: For long-term projects and roles requiring continuous presence and team integration, hiring employees may be more suitable. For short-term tasks or specialized services, engaging freelancers can be more efficient.

TAX INTERNATIONAL – YOUR TRUSTED PARTNER FOR TAX & ACCOUNTING!

Looking for a reliable financial advisor? We’re here to help! Our expertise ensures smooth business operations, tax optimization, and professional administrative support.

Our Services: Accounting services
Tax consulting
Company and business registration
Payroll calculation
Freelance tax management
Invoice issuing and administrative support