The Difference Between Category A and Category B Income for Tax in Portugal

If you earn income in Portugal, understanding how it’s classified is essential for filing your taxes correctly and for making sure you don’t overpay. Two of the most common income categories for individuals are Category A and Category B, and this distinction is especially important for expats, freelancers, and foreign-owned companies operating in Portugal.

While they may sound similar, they represent very different types of work and tax obligations. Here’s what you need to know.

Category A: Employment Income

Category A income covers earnings from a contract of employment, basically when you work for a company or organisation.

If you receive a regular salary from a company and have a work contract, you’re considered an employee under Category A.

Examples:

  • Full-time or part-time job with a Portuguese company
  • Working under a fixed-term employment contract
  • Receiving a monthly salary and payslip (“recibo de vencimento”)


How It’s Taxed:

  • Income tax (IRS) is automatically deducted from your payslip by your employer each month
  • Social Security (Segurança Social) contributions are withheld at source
  • Your employer handles all tax and social security reporting

In short: under Category A, your employer reports your Social Security and IRS amounts for you. This is relevant for UK or US businesses hiring Portuguese employees or managing payroll in Portugal.

See the essential Documents you need before starting work in Portugal.

Category B: Self-Employment or Business Income

Category B income applies when you’re self-employed, a freelancer, or running an independent business in Portugal.

If you issue invoices (“recibos verdes”) for freelance or independent work, you fall under Category B.

Examples:

  • Freelancers (designers, consultants, translators, photographers, etc.)
  • Independent contractors working for clients
  • Sole traders or small business owners operating without a company structure


How It’s Taxed:

Unlike Category A, your income isn’t taxed at source. Instead:

  • You must declare your income monthly to the Tax Authority
  • You submit your annual income on your IRS return
  • You may pay advance payments (“pagamentos por conta”) during the year
  • You’re responsible for registering with the Tax Authority and Social Security, issuing invoices, and maintaining Bookkeeping and Accounting records


Two possible tax regimes under Category B:

  1. Simplified Regime: for people earning under €200,000/year (expenses assumed by the government)
    1. For most services, 75% of income is taxable
  2. Organized Accounting: for larger businesses, incorporated companies, or those with higher expenses than the government assumption
    1. Traditional bookkeeping where all income and expenses are tracked, and tax is paid on net profit

This is particularly relevant for Expat Business Bookkeeping services in Portugal, remote English-speaking accountants, and accounting for foreign-owned companies.

Which Category Applies to You?

  • If you work under an employment contract, you’re almost certainly Category A
  • If you offer services independently, you’re Category B


Sometimes, people have both types of income (e.g., a full-time job plus freelance work). In that case, both categories appear separately on your tax return.

Final Thoughts

Understanding whether your income falls under Category A or Category B is more than a technical detail, it determines how you pay tax, how much Social Security you owe, and which deductions you can claim.

If you’re unsure how to register, declare income, or optimize your tax situation in Portugal, our team at Elevate Accounting can help. We specialise in assisting:

  • Freelancers and independent contractors in Portugal
  • Expat-owned businesses
  • Businesses expanding into Portugal
  • Payroll processing and subsidiary setup


Get in touch today to ensure you’re registered under the right category and not paying more tax than necessary, while staying compliant with Portuguese labor laws and bookkeeping requirements.

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