By when do sole proprietors and non-corporate entities have to choose their form of taxation? Which is the most advantageous? This article analyses and explains the available options.
By when do you have to choose
At the beginning of each year, sole proprietors and non-corporate entities have the right to change their form of income taxation for the following tax year. In 2024, the deadline for making the choice is 20 February, except for entrepreneurs starting a business, where the deadline is the 20th of the month following the month of their first business income in the tax year.
What are the options
At present, taxable persons can choose between three forms of taxation of business income, i.e.:
- The tax scale (rates of 12% and 32%), i.e. income taxation under the general rules (Polish: opodatkowanie na zasadach ogólnych),
- Flat tax of 19% (Polish: podatek liniowy),
- Flat tax on registered revenue without deductible costs (Polish: ryczałt od przychodów ewidencjonowanych).
How do the three differ
There are a number of similarities between the tax scale and 19% flat tax. These can be used by sole proprietors and equity partners in partnerships, regardless of income limits. In both cases, the subject of taxation is income. When it comes to registered revenue tax, however, the subject of taxation is revenue. It is also worth noting that registered revenue tax is subject to a revenue ceiling of EUR 2 million per year.
Key advantages and disadvantages of the available options
When considering which form of taxation to choose, it is worth weighing up the advantages and disadvantages of the various options. The tax scale offers flexibility and the possibility of reporting different sources of income in a single tax return. In addition, the tax reliefs available to taxable persons subject to the tax scale can be a significant financial advantage. Joint taxation with a spouse is an attractive option, which is not available under 19% flat tax or registered revenue tax. The tax scale also offers a tax-free amount of PLN 30,000, which can be doubled for those who opt for joint taxation with a spouse.
This option also has negative aspects, such as an increase in the tax rate from 12% to 32% once a certain income is exceeded, which could have a significant impact on the efficiency of this form of taxation.
With regard to the tax scale, it should be noted that the amount of health insurance contribution is set at 9% of monthly income, which can be a huge burden for high-income businesses.
However, flat tax is set at 19%, so its calculation is easier. It also allows expenses to be deducted as taxable costs (which is also possible under the tax scale). This is certainly an optimal solution for cost-intensive businesses, e.g. those involved in production or distribution.
A major disadvantage of 19% flat tax is that you cannot take advantage of the multiple tax reliefs available under the tax scale. Examples include joint taxation with a spouse and the tax-free amount. Furthermore, as with the tax scale, the health contribution amount in the case of 19% flat tax depends on income and is 4.9%.
Registered revenue tax may be attractive to those who prefer simplicity and the ease of record-keeping, but it is only available to certain types of business. This means that not all taxable persons are eligible for this form of taxation.
When using registered revenue tax, different tax rates can be chosen, ranging from 2% to 17%. This allows taxable persons to choose the most appropriate tax rate – as opposed to the fixed statutory rate under the tax scale or 19% flat tax.
Importantly, there are three health insurance brackets under registered revenue tax, varying according to the amount of revenue. For monthly revenue of up to PLN 60 000, the contribution is PLN 376.16 per month. If revenue is between PLN 60 000 and PLN 300 000 per month, the monthly contribution is PLN 626.93. However, if monthly revenue exceeds PLN 300 000, the health contribution is PLN 1128.48 per month. This is relatively low compared to other forms of taxation.
One disadvantage of registered revenue tax is that you cannot recognise business expenses as tax deductible costs. Therefore, this option is most suitable for providers of intangible services, such as consultancy or IT services, who do not have high expenditure.
Which form of taxation is the most cost-effective for your business
The choice of the form of taxation has a significant impact on the annual tax burden. It is important to understand, however, that there is no clear-cut ‘best’ form of taxation – the choice should always be based on individual business characteristics and needs.
Any questions? Contact us