Ending a contract, freelancers' invoices and paying in with modelo 111

This summer Lucía's bakery paid the statutory compensation to a shop assistant dismissed on objective grounds, €1,000 of fees to its accounting firm and a job to a newly established translator. Modelo 111 for the third quarter falls due on 20 October, and Lucía does not know which amounts go into it and which stay out.

Ending a contract: settlement and final receipt

When a contract ends, article 49.2 of the Statute requires the employer to attach to the notice of termination, or to the advance notice, a proposed settlement of the amounts owed. The worker may ask for a legal representative to be present when signing the final receipt, the finiquito, and the receipt must record it.

The settlement gathers what is owed up to the last day: the current month's salary, the unpaid share of the extraordinary bonuses and, where applicable, the compensation. The first two are salary and follow the rules of the previous module; compensation has rules of its own, in labour law and in tax law, which this module keeps apart.

Three compensations, three scales

When a fixed-term contract expires, article 49.1 c) grants compensation equal to the proportional share of twelve days' pay for each year of service. Training contracts and the replacement contract do not give rise to it, and specific regulations may set a different amount for certain working relationships.

For a dismissal on the objective grounds of article 52, article 53.1 requires a written notice stating the reason, making available to the worker at the same moment twenty days' pay per year of service, up to twelve months' pay, and granting fifteen days' advance notice.

If the decision rests on article 52 c) with an economic cause and the company cannot make the compensation available to the worker, it may refrain from doing so by stating this in the letter; the worker may claim it once the termination takes effect.

If a court rules the dismissal unfair, article 56.1 gives the company five days from notification of the judgment to choose between reinstating the worker or paying thirty-three days' pay per year of service, up to twenty-four months' pay. If it makes no choice, reinstatement is presumed, with back pay for the proceedings.

In objective and unfair dismissals, periods shorter than a year are pro-rated by month; article 49.1 c) speaks of a proportional share, and the calculator in this path applies the same monthly pro-rating. For contracts signed before 12 February 2012, an unfair dismissal counts forty-five days per year for the service before that date.

That transitional regime, laid down in the eleventh transitional provision, has its own ceiling: seven hundred and twenty days' pay, unless the pre-2012 service alone produces more days, and never more than forty-two months' pay. The calculator converts each month's pay into thirty days: the seven hundred and twenty days match the twenty-four months' pay of an unfair dismissal.

The daily wage by which those days are multiplied is not fixed by the Statute. The calculator in this path asks for it as an input, as it appears on the final settlement or as the adviser states it, and does not derive it from the payslip. A mistake in that figure shifts the whole compensation in the same proportion.

The part of severance pay that is not taxed

Article 7 e) of the IRPF Law exempts compensation for the dismissal or termination of a worker up to the amount the Workers' Statute makes compulsory. Amounts set by collective agreement, private arrangement or contract are not exempt, although those agreed at conciliation before the administrative service are not treated as privately agreed.

In collective dismissals and in objective dismissals under article 52 c) for economic, technical, organisational or production reasons or force majeure, the exemption covers the part not exceeding the unfair-dismissal limits. It also has an absolute limit of €180,000. Anything above is employment income: the company withholds on the excess, not on everything it hands over.

Article 75.3 of the Regulation spells out the practical consequence: there is no duty to withhold on exempt income. The statutory part of the compensation is paid in full and does not appear in the withholding boxes of modelo 111, although it does appear in the company's annual return, which also lists exempt income.

The freelancer's invoice: 15 % or 7 %

When the company pays an individual professional, such as the adviser who runs Lucía's accounting firm, a lawyer or a translator, article 95.1 of the Regulation requires it to withhold 15 per cent of the gross income paid. Modelo 111 counts as recipients only individuals and income-attribution entities: a company is not among them.

The rate drops to 7 per cent in the tax period in which the professional starts the activity and in the two following ones, provided no professional activity at all was carried on in the year before the start. The professional must tell the payer, who keeps the signed statement; without it, the company applies the general rate.

The calculator in this path computes withholding on the fees before VAT and declares that as an assumption, since article 95.1 speaks of gross income without referring to that tax. VAT, at the standard rate of 21 % when the service bears it, is added to the invoice and the calculator applies no withholding to it.

A private individual hiring a professional does not withhold: the duty in article 76 covers legal persons and entities and those carrying on a business or profession when they pay in the course of that activity. The bakery withholds on its accounting firm's invoice; Lucía would not when paying an architect for work on her own home.

Modelo 111: one self-assessment per period

Withholding and payments on account are declared on modelo 111. According to the Tax Agency's instructions, the self-assessment is single for each withholding agent and covers all the data of the period, quarterly or monthly. You do not file one 111 per employee or per supplier: a single return gathers payslips, fees and benefits in kind.

Article 108.1 of the Regulation sets the general rhythm: return and payment within the first twenty calendar days of April, July, October and January, for the preceding calendar quarter. According to the form's instructions, a deadline falling on a Saturday or a public holiday moves to the next working day.

The return is monthly, within the first twenty calendar days of the following month, for large companies, which that article defines by referring to article 71.3 of the VAT Regulation, whose turnover threshold is €6,010,121.04 in the preceding year, and for public administrations with an annual budget above €6 million.

Individuals carrying on an activity, such as a self-employed person paying one salary, may file with Cl@ve, with an electronic certificate or on the paper produced by the online printing service. Public and private limited companies, like Lucía's, have no such option in the Tax Agency's table: they file online with an electronic certificate.

The boxes a small business uses

The settlement section separates employment income from business and professional income and, within each, what was paid in cash from what was paid in kind. Every block of three boxes asks for the same things: the number of recipients, the amount of income subject to withholding, and the withholding or payments on account.

Boxes 13 to 27 cover prizes, forestry gains of local residents from public woodland and assignments of image rights, all rare in a small business. A sales representative's car would go into boxes 04 to 06, with its valuation as the amount received and the corresponding payment on account.

Nil, blank or supplementary

If the company paid income subject to withholding in the period but none of it led to any actual withholding, for example a salary below the exempt amount, it files modelo 111 as a nil return. There is nothing to pay, but the return records that payments were made.

If it paid no income subject to withholding at all, it does not file the form: the instructions forbid sending a 111 with every settlement box left empty. Instead, it reports the end of its withholding obligation on a census amendment return, modelo 036 or 037, within one month of the end of the period.

When it starts paying income subject to withholding again, it must report the obligation anew on another census amendment return. And if it finds a mistake in a 111 already filed, a supplementary return is only available when the earlier result was lower than it should have been, so it always produces an amount to pay.

After the last quarter

The cycle closes in January. Article 108.2 requires the withholding agent to file an annual return of withholding and payments on account within the first twenty calendar days of January, or by the 31st if it is filed in computer-readable form or with the authorities' printing modules, together with the list of recipients.