Salary Cost Calculator Ukraine

Value Calculation Comparison Upwork - Employment - Private Entrepreneur

Value cost calculation and comparison between Upwork Freelancer - Outstaffed Employee and Private Entrepreneur

Without having a legal entity in Ukraine, foreign companies and individuals have three general options for hiring Ukrainian workers remotely.

  1. Upwork: Engagement via Upwork or similar freelance platform.

  2. Employment Outstaffing: Legal employment in Ukraine with the help of an outstaffing service.

  3. Private Entrepreneur: Long term service agreement and engagement of the Ukrainian worker as “Private Entrepreneur” self-employed status

 

Our team developed a dynamic tool that helps compare the options based on per-hour and monthly costs.

How to use the tool?

Taxes and Social Funds

UPWORK

Upwork income is taxed as other income in the following year without additional social fund taxes. Transactions from Upwork to the private bank account of the freelancer are typically challenged by their bank currency and compliance controls. 

Freelancers also reported about blocked accounts with European payment services where they had to prove their Ukrainian tax compliance.

EMPLOYMENT BY OUTSTAFFING 

Income tax of 18% and defense tax of 1.5% are charged from the gross salary of the employee. The employer acts as tax agent. Salary is paid twice per month as required by law.

The employer pays 22% of gross salary in unified social taxes up to a maximum gross salary amount of 15 times minimum salary.

PRIVATE ENTREPRENEUR

The 3rd category of private entrepreneur allows the use of simplified revenue based tax of 5% for businesses with an annual turnover of up to 7.000.2000 UAH (2021).

Unified social funds are calculated as of 22% of the monthly minimum salary independently of the revenue.

Other expenses (fees, expenses)

UPWORK

Upwork fees are based per customer of the freelancer based on the total annual turnover.

TOTAL FREELANCER FEES COLLECTED FROM CLIENT
(per Engagement Relationship)
SERVICE FEE RATES
$500.00 and below
20%
$500.01 to $10,000.0010%
$10,000.01 and up5%

Upwork Fee Structure with Examples

EMPLOYMENT BY OUTSTAFFING 

Outstaffing fees vary based on type of employment, payment structure, job description and additional service requirements. We assumed here a market typical 10% markup fee on gross monthly salary of the employee.

PRIVATE ENTREPRENEUR

The business relationship with a private entrepreneur is directly with the client. We assumed here at a minimum service outsourced accounting, tax reporting and currency control reporting to secure the compliance level for the client at a monthly cost of 36 Euro.

Alternatively, the additional use of private entrepreneur management would include also invoicing from a European legal entity, work control and reporting via activity tracking software and escrow services to come to the same service level as with Upwork. We are charging 5% mark-up fee on gross private entrepreneur income for this service.

Effective Annual Work Hours (vacations, sick leave, training etc.)

Freelancing via Upwork, legal employment, and official freelancing via private entrepreneur are not compatible on a simple monthly cost basis due to different work hours and in the case of upwork paid vs. none paid work assumptions.

UPWORK

Freelancers on Upwork do not receive paid vacations, sickness leaves, or training hours from their clients. Thus, their theoretical annual workload is 2080 hours. 

However, keep in mind that they do not have a long-term relationship with their clients and have to factor in non-paid working time when they are without a contract and have to write proposals to new potential clients. 

In our calculations, we assumed that only 80% of Upwork freelancers’ 2000 annual working hours were paid by clients and that Upwork freelancers adjusted their hourly rates accordingly upwards to reflect the nonpaid working hours.

EMPLOYMENT BY OUTSTAFFING

Ukrainian employees of outstaffing service providers are subject to Ukrainian labor laws and regulations.

Their effective annual work hours are reduced by a minimum of 24 days paid vacations, paid sick leave, and other paid days off.

We calculate therefore with an effective annual work hour rate of 1726 hours.

PRIVATE ENTREPRENEUR

Private Entrepreneurs are not subject to labor regulations. Actually, nothing within their service agreement shall be linked or replicate labor law regulations. We assume therefore 2000 effective work hours per year.

Other than with Upwork, Private Entrepreneurs with long-term service agreements with advanced cancelation notice periods are not forced to factor in any paid working hours.

What are the benefits of Ukrainian employment versus Upwork and Private Entrepreneur solutions?

Our calculation shows that the use of private entrepreneurs is much cheaper for the same service compared to employment or the use of Upwork. 

When should you still consider the use of employees either by outstaffing or by direct employment in your own Ukrainian company or representative office?

  1. Professions not allowed for Private Entrepreneur

    There is a list of types of activities that Private Entrepreneurs are not allowed to perform in Ukraine. These are licensed activities that are also difficult to transfer to outstaffing agencies.

    Typical examples are legal services or architects.

  2. Confidentiality protection
    The protection of confidential information is much stronger with employees compared to freelancers in Ukraine. We would not recommend to outstaff or outsource in any way accounting and legal services in Ukraine.

  3. A higher degree of protection against side jobs

    You cannot prevent an Upwork freelancer to work for other clients in parallel or to subcontract your work to other freelancers instead of doing to work by him/her self. 

    You have the possibility to limit the risk of multiple customer service agreements and subcontracting of Private Entrepreneurs in their service agreement but they have in principle the right to act as an independent contractor. That is also the reason why we recommend our private entrepreneur accounting outsourcing service to provide our clients at least a warning if their contractor works also for other clients.

    The Ukrainian employment law provides here the best protection for direct or outstaffed employees for the client. On the other hand, we can see a lot of full-time employees who are working in parallel as freelancers on Upwork.

  4. Intellectual proper right protection

    Many clients argue that the use of employees guarantees better protection of intellectual property rights in comparison to the use of freelancers. We share this concern with Upwork freelancers but cannot share this opinion for the use of Private Entrepreneurs as you have much more leverage in the creation of the service agreement.

    We recommend engaging the use of a Ukrainian intellectual property rights lawyer to assess your concerns and to mitigate potential risks.

  5. End customer contract requirements
    Some end customer contracts require the use of employees for the provision of services or have a contract clause prohibiting subcontracting of tasks out of a service agreement.

    The use of freelancers via Upwork or directly via Private Entrepreneurs would violate such terms and conditions. We advise, however, also to clarify with your end customer if the use of outstaffing agencies is allowed by your client.

  6. Business substance establishment
    The concern to establish and prove business substance in Ukraine becomes important for your own Ukrainian legal entity as the Ukrainian tax authorities do not recognize freelancers and outstaffed personal as business headcount.

    Depending on your turnover your company should have a reasonable minimum number of direct employees to prevent attention by the tax and social fund authorities.

     

When should you use freelance platforms like Upwork?

Freelance platforms like upwork.com are designed for project-based short-term work assignments and offer here a cost-effective and efficient service.

You should be aware, however, that the permanent use of a specific contractor could become quite expensive and possess a serious business risk for you. 

You need to be aware that an Upwork freelancer is permanently offering services to other clients on the platform to have alternative client offers in the case when you order less work or cancel suddenly your order.

Let’s say you have a very trusted and long-term relationship with your Upwork freelancer. That means for the freelancer that he/she will not stop offering services to other clients but they will step by step increase their hourly rates. Also, they will use the work experience and project references from you to justify their higher prices to other clients.

You are ending up with a bidding war for your freelancer, getting subcontracted, or moving to a lower service priority as your hourly rate over time becomes less competitive.

Also, please be aware, that you cannot simply transfer an Upwork freelancer to a private entrepreneur or employee status. The terms of services of Upwork require in such case that you or the freelancer have to pay to Upwork an Opt-Out fee. Art 7.3 of the Upwork user agreement. 

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