IRPF withholding on invoices (retención de IRPF)

What it is

When a freelancer or professional invoices a company or another professional, the invoice usually carries an IRPF withholding. The client pays the professional the invoice total minus that withholding and pays it to the tax authority in the professional’s name. It is a payment on account: the professional later credits it against the tax due in the annual income tax return.

How much

For income from a professional activity, the personal income tax regulation sets 15% of gross income (article 95.1). Someone who starts a professional activity applies 7% in the tax year of the start and the two following ones, provided they carried on no professional activity in the year before starting. To use it, the professional must tell the payer in writing, and the payer must keep the signed notice. The same article sets 7% for some specific groups, such as municipal collectors and certain performers, and provides reductions for particular situations.

Who must withhold

The obligation falls on legal entities and other organisations, and on taxpayers carrying on economic activities when they pay income in the course of that activity (article 76.1). A private individual who hires a professional in a personal capacity does not withhold. That is why an invoice from a freelancer to a final consumer carries no withholding, while one addressed to a company does.

What the professional does with it

The withholding is not a cost: it builds up as an advance of the tax. The professional subtracts it when working out the quarterly instalment payment (modelo 130), because the regulation allows deducting the withholdings applied from 1 January to the end of each quarter (article 110.3). If at least 70% of the previous year’s professional income was subject to withholding, no instalment payment is due (article 109.2).

Common mistakes

• Withholding 15% from a professional who has given notice of the 7% start-up rate.
• Applying 7% when the professional was already active the previous year.
• Withholding from a private client, or not withholding from a company.
• Forgetting to keep the signed notice that supports the reduced rate.

How Frihet handles it

Frihet calculates the withholding on the invoice lines and posts the accounting entry separately. For the payer, it builds a preview of modelo 111, the quarterly return for withholdings on employment and professional income. The rate applied to each professional, and whether 7% is justified, is for you and your advisor to decide; the tool does not check it.