Your Hiring Budget Isn't Bad If You're Hiring in the Right Place

Let's imagine you are an early-stage startup, but you've got so much going on, and you need to get spare hands. You've got some decent budget, but then you discover a sad reality: after all the taxes and everything, your employee doesn't get much…

In this article, I'll use Spain as an example, but the numbers will be more or less similar in most EU countries (not all of course, and about those exceptions we will talk in other articles).

What our new employee will get

Okay, to give some concrete examples, I'll take one of the latest cases. We were looking for a Python software engineer with ~5 years of experience (there were some details, but I will drop them because they are not really interesting). Our budget for the role is 5000€.

Employee in Spain

Now, the most straightforward and traditional way to do it. Hire a person directly in Spain (and probably force that poor guy or gal to come to the office 5 days a week). If you decide to go this way, well, there are a lot of difficulties with this, but at the moment, we will concentrate only on the payroll.

Here is what the 5k will look like for your employee:

• Social Security contribution paid by the employer is ~31%, and we get ~1,183€ (so, your gross salary is ~3817€)
• Now, it's turn for employee to contribute to Social Security his/her 6,35%, which is another ~242€
• Finally, we are done paying social security, and now it comes to our income tax. It will depend on the place where you are living in Spain, but I will take the average values. You can count it by yourself, but the value I got is ~1,054€

At the end of the day, your 5000€ budget comes to 2,521€ net salary for your employee. A half.

Contractor in Spain

Okay, having an employee is quite expensive. How about hiring a contractor? Let's try to understand what your employee will put in his pocket in this case. I will do math for a general case (so, assuming he has 2+ years of autonomous experience), and he has to contribute the full amount of social security. So, let's get back to our math.

The topic with contractors is a bit more difficult because of VAT and tax retention, but I calculate what your invoices will look like every month:

• From you 5000€, VAT will be - 8,67€, and gross will be 4,133€
• With this, we fall into a bracket where we pay ~510€ contribution per month
• Now, we have 3,623€ / month of taxable income, and from it we will pay ~982€ every month
• Finally, we will put in the pocket something around 2,641€

To be fair, autonomos can declare some expenses and reduce the taxable amount, so my math can be way too conservative. But let's be honest: software engineers won't have many expenses (unless buying a new laptop or paying a couple of hundred dollars for servers). But still, we get something around the middle of our budget goes to the taxes of different kinds…

Contractor in Ukraine

Now we are coming to my home country. To give you context: we have a special tax regime for contractors, where we will pay a flat rate of 5% and 1% military contribution, since we are not EU - we do not charge you VAT.

So, taking into account this, what will your contractor get from your 5,000€:

• Tax + military contribution (6% in total) will be 300€
• Employee gets 4700€ net

Contractor in Mexico

In Mexico, there is a similar system, but contractors can pay 2,5% tax rate flat (it's called RESICO). Since you are not in Mexico, they won't charge you VAT, so the math here is extremely easy:

• The total tax we pay is ~125€
• Your employee keeps ~4,875€

Other countries

Those are just examples of countries I'm working with the most, but there are many options where your employees can make the most out of your money: Georgia, Colombia, Argentina, etc.

Conclusion

The purpose of this article is not to tell you not to hire full-time employees or people in the EU, but rather to give you something to think about: what is best for people working with you? Endless social security contributions and taxes, or the ability to get a decent paycheck and have the freedom to manage that money?

Personally, I would prefer money. At the moment of my life, I choose to live in Valencia and cry every time I have to pay taxes, but to be honest, I prefer to hire contractors in Ukraine and LatAm just because I know that what I pay them stays with them.