Hire in Finland with Confidence

Businesses hiring in Finland should understand the legal distinction between independent contractors and employees. Businesses hiring independent contractors under the guise of employment risk facing fines in addition to increased taxation. In Finland, several important aspects must be considered by both companies and contractors before establishing a relationship. It’s crucial to work with a partner like Worksuite when engaging contractors abroad to establish a compliant and legal hiring framework. 

There are two distinct legal statuses that govern the relationship between a hiring organization and its employees (työntekijät) or independent contractors (riippumattomat toimeksisaajat), or self-employed traders, as they are called in Finland. A standard employment contract (työsopimus), a well-demonstrated presence of subordination among other specific contractual obligations, indicates the traditional relationship between an employer and an employee. An assignment agreement made as a self-employed trader (itsenäisenä ammatinharjoittajana tehty toimeksiantosopimus) indicates a freelance engagement whereby an independent contractor, acting as a legal enterprise, agrees to provide a defined piece of work for a set amount of money. 

Finnish independent contractors are highly valued among businesses across the globe thanks to their skills, expertise, and proficiency in English.

Finnish labor and civil laws are constantly subject to revision and policy changes. In addition, the country’s legislation defines very distinct taxation rates and procedures for independent contractors. It is important to work with a partner like Worksuite to ensure that you have an engagement framework that properly classifies freelancers able to work as independent contractors.

Self-employment as an independent contractor is a popular income model for many individuals. The latest pandemic restrictions have prompted more and more Finnish professionals to work as self-employed independent contractors. Moreover, hiring independent contractors from Finland is currently a booming trend among organizations from all over the world. More and more representatives of Finland’s highly-educated workforce choose to be their “own employers” and engage with companies as established self-managed businesses.

In Finland, independent contractors are defined as “self-employed traders” rendering services as an enterprise. Independent contractors and companies conclude a one-off assignment agreement that stipulates such cooperation. When the distinction isn’t clear between employee vs contractor, the tax authorities start evaluating the overall situation and its characteristics to reach a conclusion.

Who is an Independent Contractor?

Any individual who independently and consistently carries out a gainful activity in the form of providing services for profit to a given organization, while not abiding by its internal legal directives under an employment contract, and acting as a registered business, is considered an independent contractor. Independent contractor engagement implies no professional subordination between the worker and the employer. In Finland, funds paid to independent contractors are considered “trade income” (työkorvaus). Hence, a worker that renders services to companies on behalf of his/her business and for remuneration clearly defined as “trade income” in an agreement, is an independent contractor. 

Under Finnish law, an independent contractor is NOT obliged to:

• Complete work for a set period of time each day, nor from a specified location
• Make arrangements with the employer to take time off from work
• Follow the employer’s disciplinary procedures

The following aspects also distinguish between employees and independent contractors:

• Lack of legally-binding supervision
• Possibility to provide services to more than one organization at the same time
• An ability to assign the work to another person

The following facts are evaluated by the Finnish tax authorities when it is challenging to determine whether a worker is an employee or an independent contractor:

• Whether the worker/operator is a registered, self-employed entrepreneur or an owner of a corporate entity
• The arrangements that cover the worker’s/operator’s social insurance (social security benefits are sponsored by companies only for employees and not for independent contractors)
• Whether or not the worker/operator is on the Prepayment Register
• Whether or not the worker/operator is on other registers
• Submittal of the legally required reports to authorities
• The existence of a permit, license, authorization
• The matters agreed upon in the text of the contract
• Worker’s/operator’s degree of personal autonomy and independence
• Tools, materials and supplies the worker works with
• The time when the work is done
• The place where the work is done
• The principles of compensation
• How direct expenses are reimbursed to the worker/operator
• Responsibilities, warranty agreements and insurance policies
• Termination policy
• The existence of restrictions against taking on other assignments, the existence of a non-compete rule and confidentiality agreements

To become a contractor in Finland, a person must establish a business. For this, a registered address and an individual tax card are needed. The simplest way to become a freelancer or a sole trader is to register as a private entrepreneur (toiminimi) with the Finnish tax authorities through an online portal. Alternatively, a contractor may also set up a limited company, in case if there is going to be more than one employee in the organization, although this would require a startup capital of at least EUR 2,500. Some contractors must also register in the Finnish Prepayment Register. Independent contractors must also register for VAT.

Self-employed workers with their own business are classified as sole traders or limited companies.

There are two primary engagement models for working with independent contractors in Finland.

A. Direct engagement of the worker as self-employed and registered via their own company. Under this model, the hiring company engages directly with the independent contractor and draws up an agreement for the provision of services. The hiring company then pays the independent contractor directly.

B. Umbrella company. Companies operating under Employer of Record services in Finland come under one of  two categories, but both are essentially designed to vet and engage freelancers compliantly as either contract employees, or independent contractors on your behalf.

• Staffing agency: Some contractors may work under an umbrella company. In this case, the contractor is responsible for finding and performing their work, but they are an employee of the umbrella company, which manages payroll and applies an administration fee on the contractor’s earnings.
  
• Hiring partner: The hiring company can also work with a hiring partner who helps them vet potential contractors, set up contracts, ensure the contractor is properly classified, onboard and manage contractors, and make payments to them.

Independent contractors are typically paid upon issuing an invoice on net 30-day terms to the employer at the end of each month unless otherwise stipulated in the contract. Payments are made through direct deposits to their bank accounts or another preferred method stipulated in the contractor agreement. 

Alternatively, companies may partner with wage processing providers. They can process wage calculations, prepare tax statements, and make deposits and withdrawals for contractors. 

Terms, conditions, and frequency of payments can be settled between a contractor and an employer. Currencies other than the Euro can be used in Finland, and they are subject to fluctuating exchange rates, which may have an impact on the contractor’s paycheck. 

If you work with a hiring partner like Worksuite, it becomes significantly easier to streamline contractor payment processes. A dependable partner can help you hire contractors legally and pay them quickly, accurately, in euros, and in a way that complies with Finnish regulations.

Independent contractors submit their own income tax reports. Moreover, since they operate as businesses, their annual tax reports are more detailed. Contractors file annual personal income tax reports and pay social security contributions online upon receiving a tax assessment notice in April or May. The deadline for submission is specified in the notice. The process involves entering general company information and an overview of earnings. The majority of contractors also receive a tax decision indicating the amount of a tax refund or the amount of back taxes, and payment dates. If such a decision is not received, its status can be checked online through the MyTax platform. 

Independent contractors are personally liable for self-employed pension contributions (YEL) and other insurance costs if their estimated annual work compensation income exceeds EUR 8,261,71. A self-employed person who takes up self-employment for the first time is entitled to a 22% discount on the insurance contribution during the first 48 months of operating. Social security contributions can be paid via the Finish Center for Pension’s online portal. 

Gross Income Tax

Income tax in Finland is progressive depending on the contractor’s annual earnings. The following tax rates applied in 2022:

Less than EUR 19,200 – 0%

EUR 19,200 – 28,700: 6%

EUR 28.700 – 47,300: 17.25%

EUR 47,300 – 82,900: 21.25%

EUR 82,900 and above: 31.25%

Non-Finnish tax residents working as independent contractors in Finland are taxed at a flat rate of 35%. 

Value-Added Tax

The majority of services, imports of goods and services, and the sales value of items are subject to a VAT of 24%. Contractors must file VAT returns every month, quarter, or a year online before the deadline specified by the Finnish tax authorities.