Self-employed (IDV) / freelancer accounting

Accounting for self-employment: taxation methods, costs and tax summary

Self-employment in the country takes one of two main forms. Financial management and declaration differ depending on whether the activity is carried out under a certificate or a business licence.

Two ways of taxing IDV activities: business licence vs. certificate of individual activity

The main difference between the two forms is the tax treatment and the restrictions on activities.

With a business licence, the amount of tax is fixed. Personal income tax is paid in advance by purchasing a certificate for a selected number of days, and the price depends on the rates set by the municipality and the area of activity. However, this form has strict limitations: services can only be provided to natural persons (companies can only sell goods or services for a limited amount per year) and the annual turnover cannot exceed the limits set.

There are no upfront fees for self-employed persons working under a certificate. All taxes are calculated at the end of the year on the actual profit earned. This form has no time limits, allows cooperation with both natural and legal persons without special constraints, and the tax rate depends on the amount of annual income.

Which expenses are deductible in a sole proprietorship?

Persons operating under a certificate are entitled to reduce their taxable income by the costs they incur. There are two ways of declaring expenses under the law.

The first and simplest way is to opt for the default 30% rule. In this case, the resident does not need to collect any receipts or invoices. Thirty per cent of the total income is automatically recognised by the national tax office as an operating expense and tax is charged on the remaining seventy per cent.

The second way is to declare the actual expenditure. This option is useful when the expenses incurred in carrying out the activity exceed 30 % of income. Allowable deductions include the purchase of goods for resale, the purchase of equipment, computers or software, the rental of a workplace, communication services, advertising costs and part of the cost of maintaining a car if it is used for the activity. In this case, it is necessary to have all supporting documents and invoices.

Can a sole trader have employees?

No, self-employment is by its legal nature a private activity of a natural person, so a resident cannot employ workers under standard employment contracts in his own name. All work and services must be carried out personally by the person in whose name the activity is registered.

If the size of the business grows and there is a need to hire permanent team members, the framework of individual activities is no longer sufficient. In this case, it is recommended to set up a legal entity – a small partnership or a private limited company. An alternative to self-employment is the conclusion of service contracts with other self-employed persons, but this cannot have the characteristics of a permanent employment relationship.

Tax summary for self-employed activities based on a certificate

Tax on self-employed persons is calculated once a year, with a declaration of income by 1 May. The main tax rates apply to taxable profits (income minus actual or 30 % of expenses):

• Personal income tax (PIT). The tariff is progressive, ranging from 5 to 15 percent. If annual profits do not exceed €20,000, a minimum rate of 5% applies. The rate increases proportionally as the amount of profits rises to EUR thirty-five thousand, and above this threshold it reaches the standard rate of 15 %.

• State Social Insurance (SSI). This tax ensures entitlement to pension, sickness or maternity benefits. The standard rate is 12.52 per cent, rising to 15.52 per cent if the person makes additional contributions to the pension funds from his/her own resources. The SSD tax is calculated on 90 per cent of taxable profits.

• Compulsory Health Insurance (CHI). This payment guarantees the right to free medical treatment. The rate is 6.98 per cent, which is also calculated on 90 per cent of taxable profits. If you are working on the basis of your main job, you have to pay an additional minimum fixed monthly contribution to the PSD.