Freelance accounting in Spain: The good, the bad, and the ugly

✓ verified by Elena Garro Accounting and Tax Specialist

As freelancers, we've got a laundry list of obligations to keep up with. Registering with the tax authorities and social security, paying those pesky monthly fees, and don't forget about the quarterly and annual tax returns. But hold up, there’s one more thing to add to the list — freelance accounting. 

But here’s the thing. If you switch your perspective, you can see freelance accounting as less of  a chore and more as a challenge to be overcome. I mean, it’s quite simple. If you're juggling a bunch of clients and invoices, you need to know where your cash is coming from and where it's going for you to measure profitability. 

And you don’t have to go it alone. Xolo’s team of English-speaking local experts can consolidate all your bills, expenses, and invoices into one official freelance accounting book for just €45 a month!

If, however, you like a (serious) challenge and wanna go it alone, here is the ultimate guide to keep you on track. Happy accounting!

Why is accounting so important for freelancers in Spain?

For starters, freelancers simply have to stay on top of accounting. It’s a legal obligation in Spain. But as we said earlier, it’s seriously good for your financial health.

As freelancers, we have to file quarterly and annual VAT and personal income tax returns and a proper accounting system is key to avoiding any tax-related scares. By keeping track of all our income and expenses, we can calculate the exact amount we owe and avoid any screw-ups that might cost us a fortune. Plus, you’re way more likely to get a healthy rebate if you fill in your forms correctly.

Keeping tabs on the economic situation of your business

Not having a proper accounting system in place is just plain foolish. 

Imagine this: you're a freelance community manager and you've just spent the whole month managing the Benidorm Fest social media accounts. It's been hectic and chaotic, and you've made some good money. 

But now, you have to submit all the paperwork for the quarter to the tax agency, the Agencia Tributaria, and you've got nothing prepared. You start scrambling through invoices, bills, and expense receipts, and it's all a hot mess. You have no idea how much you've earned, how much you've spent, or how much you need to survive each month. All of this leads to an even hotter mess of stress, anxiety, uncertainty, and blind decision-making.

Bookkeeping: the boring but necessary part of freelance life

Irrelevant side note: bookkeeping and bookkeeper are the only words in the English language with three consecutive double letters 🤠.

BACK TO WORK. STOP GETTING DISTRACTED!

As a freelancer in Spain, you have to keep a record of all your personal income tax and VAT transactions for six years. That's a long time, we know. But if you don't, you might have to show your books in certain situations. 

• Universal succession (an unchallenged inheritance)
• Liquidation of companies or business entities
• Employment regulation files
• When partners or the legal representatives of employees are entitled to direct review
• When an involved person has an interest or responsibility in a matter that demands them to be shown
• Bankruptcy proceedings

The exception: freelancers who don't need to keep accounts

There's always an exception to the rule. If you're a freelancer registered on the objective estimation regime (or by modules), you don't have to keep accounting books. Basically if you’re in the retail trade; catering, hotel, and nightlife; construction materials; beauty and care; or vehicle mechanics. But keep those invoices on hand, because the Agencia Tributaria might ask to see them.

What bookkeeping does a freelancer in Spain have to do?

So, apart from the exception mentioned before, the freelance accounting records you have to do are divided into two groups: Income and expenses.

Income: invoices issued and other sources of income

In essence, your income books tell you what you’ve made over a month, a quarter, and a year.

Record of invoices issued

Keep a record of all those invoices you're sending out. You want to make sure you're getting paid for your hard work, right? So don't forget to include:

• Invoice number and series
• Issue date and payment date
• Recipient of the invoice, including all details
• Total amount, income tax retentions, VAT rate, and amounts of both taxes

Record of other sources of income

As a freelancer, you must record your income that comes from this activity on your accounting books. So keep a sales and income record book that includes:

• Notation number
• Date of operation
• Short description and income amount with a VAT breakdown

Expenses: invoices received, capital goods, and other expenses

Nobody wants to be reminded of all their outgoings, but if you don’t keep track of them, how will you know you're not losing money left and right? 

For your expenses, there are three different record books:

• Received invoices
• Investment property
• Purchases and expenses

Record of invoices received

This book is all about the invoices you’ve received over time. 

Clearly, you can't just include any old expense here. We know you might want to add in the last-minute flowers you sent on Mother’s Day, but sorry, it's a no-go. Only include expenses that were essential to your professional work. Like your record of invoices issued, you need to keep track of the details:

• Invoice number and series
• Issue date and payment date
• Recipient of the invoice, including all details
• Total amount, income tax retentions, VAT rate, and amounts of both taxes

Record of capital goods

This record book (or let’s be honest, Google Sheets) is for capital goods. But what does that mean exactly?

For VAT purposes, the Agencia Tributaria calls a capital good anything you acquire that will be useful for more than a year and that costs more than €3,000 before VAT. 

For personal income tax, a capital good is the same, but the limit is set ten times lower, at €300.

In both cases, what you pay on your capital good is reviewed over four years. During that time, the Agencia Tributaria determines what percentage of that VAT or personal income tax is deductible each year.

A capital good can be something as simple as a top-end computer, which is a great investment that certainly lasts more than a year.

We’re sure you’re getting an idea of what doesn’t qualify by now. A cheeky dinner out with friends, or the massive leg of ham you decided was a great idea to take home afterwards — no. No no no.

The details you need to include in your capital goods records in terms of VAT are as follows:

• Each asset, one by one
• Identifying data for each invoice, such as the number and date
• A record of usage over the item’s lifetime

The details you need to include in your capital goods records in terms of income tax are as follows:

• Initial payment amount
• Amount of payment installments
• The initial use date of the asset
• The residual value

Record of purchases and expenses

Your purchase and expense ledger is the equivalent of your sales and income records. You’ve got to include purchases that you have an invoice for, as well as expenses justified in another way, such as tickets, receipts, proof of payment etc. It goes without saying that these purchases have to be directly related to your business. 

The info you need to include is:

• Invoice date and number
• Provider or company name
• Expense amount
• A brief description of the purchase

Penalties in Spain for not keeping freelance accounting records (or doing them badly!)

When we say you have to keep track of your freelance finances, we aren’t blabbing about nothing. It's a legal obligation, and if you don't do it, you're going to be in hot water. You can be punished for not having your books up to date, for hiding information, or for falsifying documents. 

The Agencia Tributaria will dish out fines, and depending on the severity of your mess-up, you could be looking at some major financial hurt.

How to make a free income and expense book for freelancers

Yes, it’s complicated, but what all new expat freelancers in Spain will want to know is… can I do my accounting for free? 

Well… yeah, kinda.

• First off, you could go with free invoicing and accounting software. Are they the best out there? Nope. Are they gonna get the job done? Eh, maybe.
• You could go old-school with a pen and paper from your local office supply store. It ain't free, but it's a pretty cheap option. Plus, you get to keep track of everything by hand, like an authentic true freelancer warrior.
• If you paid attention in math class back in school, you can keep accounting books in Excel. You’ll have to trust your own skills on this one though — if you can’t recall information from different sheets or files, you’re going to find it tricky.
• You could hire an accountant or tax advisor, but that's gonna cost you some serious dough.

Here's the real winner — sign up with Xolo. They'll sort out all your freelance paperwork start-to-finish and you’ll get access to a simple platform for complex accounting. Is it free? Nah. Is it worth it? You betcha.