Compared to other forms of professional activity of an individual (for example working under an employment contract or contract of mandate), individual business activity allows the individual to benefit from a range of forms of income taxation. Thus, before generating their first business revenue in Poland, individuals they should examine their activity to find the most appropriate form of taxation. Below we present the available forms of taxation for business income, with their main advantages and disadvantages.
Progressive taxation is the basic form of income taxation and applies if the taxpayer does not opt for another taxation form. It leads to taxation at the rates of 17% and 32%: annual income up to PLN 85,528 is taxed at 17%, and the excess above that amount is taxed at 32% (after taking account of potentially tax-exempt amounts). The subject of taxation is income, and therefore the taxpayer may decrease business revenue by expenses related to the activity, so long as tax deductibility is not excluded by law. Also, to be able to deduct certain expenses, the taxpayer needs to be able to prove that the expenses were incurred (for example by having an invoice).
- In case of annual income below PLN 85,528, the low tax rate of 17%
- Tax-deductible expenses
- Tax relief may be applied (e.g. joint taxation of spouses or tax relief for internet).
- Relatively high tax rate of 32% for income exceeding PLN 85,528 within the tax year
Flat-rate taxation of 19%
The flat rate of 19% is a taxation form that applies to the whole business income generated by the taxpayer. There is no threshold above or below which the flat tax of 19% would not apply. Rules regarding tax deductibility of expenses apply accordingly. However, this form of taxation is not available to an individual who provides services to his former employer, when the scope of services is the same as the duties the individual used to perform under an employment contract (this exclusion applies only during the tax year when the business operator was employed).
To benefit from flat-rate taxation, the taxpayer must submit a statement to the head of the tax office by the 20th day of the month following the month in which the first business income was generated, or by the end of the tax year if the income was generated in December. This may also be done as part of the procedure for obtaining an entry in the Central Registration and Information on Business (CEIDG).
From our experience, this form of taxation is the most common option chosen by sole traders.
- Relatively low 19% tax rate
- Tax-deductible expenses
- No tax relief applies.
Lump-sum tax based on recorded revenue
This is a simplified form of taxation applicable to business revenue generated from activities with respect to which use of this form of taxation is not excluded. Because it is a lump-sum tax based on recorded revenue, taxpayers are not able to decrease the tax base by any expenses (except for social insurance payments). The lump-sum tax rates range from 2% to 20%, depending on the taxpayer’s activity. However, in our practice, the most common are 8.5% (applicable among other things to services and sale of food and drinks, including beverages with more than 1.5% alcohol) and 17% rates (applicable among other things to issues of computer software). From 1 January 2021, the 17% rate will also be applicable to activity of the free professions.
This form of taxation cannot be chosen by business operators whose revenue in previous years exceeded EUR 250,000 (starting from 1 January 2021, this threshold is increased to EUR 2,000,000). This form of taxation requires submission of a proper statement.
- Low tax rate
- Simplified tax accounting
- No tax-deductible expenses
- Not applicable to all business activities
- Cap on annual revenues
This form of taxation is considered the easiest one. The taxpayer has no tax reporting and accounting obligations. Tax is calculated by the tax authority on a monthly basis based on certain assumptions related to the given business activity.
This type of taxation is limited only to certain types of activity, e.g. educational activity or certain service activities or food and drink sales if no drinks with more than 1.5% alcohol are offered.
- Relatively low tax
- No tax reporting and accounting obligations
- Applies to limited types of business activity
- Tax is due also when the taxpayer has a tax loss.
Joanna Goryca, Tax practice, Wardyński & Partners