Daily situations when companies and individuals engaged in individual activities overpay taxes
Getting employed because of fear
Suppose a person wants to work and provide translation services. Not knowing that he can carry out such activities by issuing an individual activity certificate, and fearing the state authorities, the person works in several places of employment. The latter pay State Social Insurance Contributions, Personal Income Tax, Compulsory Health Insurance Fee. In this case, the state budget is paid more taxes than the person would pay from his profits made, if he issued an individual activity license. There may also be a project work with one employer. If it were not qualified as an employment relationship, an individual activity certificate would be enough.
The „Sodra“ ceiling is not taken into account
Working individually “Sodra” taxes are paid from half of the profit, so the rate is 14.85-15.85%. In addition, there are fixed ceilings for VSD and PSD condributions. A person engaged in individual activity can not pay contributions bigger than 28 VMU per year – EUR 20 753,60. For this you need to earn 40-60 thousand. euros per year.Sodra overcharges those who receive very low income, while people earning very high income win, because the ceiling is the same for everyone, regardless of how much you earn. It doesn‘t matter if you get 20 thousand euros a year or 200 thousand euros, ceilings apply the same. Those who receive a large amount of income receive a relatively low Sodra tax rate. And if a person receives 20 thousand, his tax rate is relatively high. Of course, it’s more profitable for the state to pay more taxes, but for business it is an additional and sometimes very heavy burden. Therefore, you should not be afraid to consult a tax specialists.
Do not pay attention to the term of the employment relationship
Individual activities can be “issued” in cases where the employment relationship in one workplace is temporary. Suppose that a person works 10 months for one employee , and then another 6 months for the other. Very often, out of fear or ignorance, an employment relationship is formalized, although it could be handled according to an individual activity statement. An employment contract should be made when the employee works for a long time with a single employer, complies with the company’s internal rules, the company provides him with working tools, i.e., meets all the characteristics of an employment relationship. During the inspection, the tax administrator assesses the number of service purchasers, as individual activities should be independent from one employer / source of income. If the employment relationship is long-term, let’s say, accounting is carried out for three years, working from 8 am to 5 pm, vacation, bonus, sickness compensation, then it is a labor relationship and it’s hard to recognize individual activity.
Opaque pays twice
Individuals engaged in individual activities must pay PSD on a monthly basis. However, if a person has a permanent workplace while working individually (this is allowed), he pays the PSD from his wage, then there is no need to re-pay the PSD every month from individual earnings. It is commonplace that people do not know it, they think that they have to pay taxes if they have a certificate. Then, the same taxes are paid by both him and the employer.
There is no time or knowledge to carefully account the costs
In terms of individual activity, you need to choose how the expenses are deducted from the income. You can choose to deduct 30 percent from income, without providing supporting documentation, or the costs incurred can be documented and the actual costs incurred. The 30 percent option is much simpler to pay, so many people choose this cost accounting method. How to calculate costs should be chosen according to the activity being performed. Let’s say a person who is engaged in an individual activity is an translator. It is intellectual activity, it will not suffer a lot of expenses (if you do not have an office, many trips, etc.).In this case, it is easier to deduct 30% of your income. But if a person provides, for example, a transportation service, then the costs may be incurred by more than 30 percent: fuel, car repair, tires, etc. In this case, it is likely that actual costs may be higher than the fixed 30%. – It is worth collecting bills, checks, and calculating accordingly, thus reducing the taxes due. Unfortunately, there are limits to the cost of attributing actual costs. You need to know what law to follow, which rules, for example, what part of the amount spent on fuel or telecommunications can be attributed to costs. A lot of people just do not want to go deeper and choose what’s easier. And that is why they reduce the profit and pay a higher income tax rate and other taxes.
Do not know they can refund VAT
Whether you are a lawyer, a woodcarver, an MB, or a company, if during the last 12 months you reached 45 thousand, you must register as a VAT payer. You can register as a VAT payer without reaching the amount of your established turnover. If it is seen that within 12 months the threshold is reached, there is a registration obligation. As soon as you register, you can already refund VAT paid to suppliers. Not everyone knows that it is possible to declare and deduct the amounts of VAT incurred before registering as a VAT payer. Small-scale economic entities (individual activities, MB) often do not even think that they can do so and overpay VAT. They think that only after signing up, you can you recover the VAT, and that which was before the registration can not be refunded. Only in some cases this is not possible.
Works under a copyright agreement, although individual activity is more appropriate
In the past, author’s contracts were taxed at only 15%. GPM, but several years ago, taxation has changed, and from now on the same taxes apply as to labor relations, so in this case it is really necessary to see if certain authors could / should not take out a certificate of individual activity, in which case they would certainly not overpay taxes .
Do not know about Labor Exchange compensation
The Lithuanian Public Employment Service compensates the employer with part of the salary and Sodra’s tax on the person registered in the Public Employment Service and emplyed for the first time based on acquired qualification. Unfortunately, the Lithuanian Public Employment Service or Sodra does not inform the employer about this opportunity. He must know it himself. In addition, a considerable amount of administrative work is required when submitting an application or sending a lot of additional information on wage payments and payouts on a monthly basis. So, if the employwe doesn‘t want the extra hassle, he does not use it.
It is too late to report a changed situation
The company can pay advance tax on the planned result of the current year or the profit of the previous year. If this year’s turnover and profits fall sharply, and the business fails to inform the STI at the beginning of the year, it is necessary to pay according to the result of the last year. In this case, an overpayment is received, which can only be recovered by the business after having submitted the final corporate tax return (next year).
Shareholders act carelessly
5 percent Income tax for small businesses is a significant tax relief. In order to receive it, you must meet certain conditions: up to 300 thousand annual turnover and not more than 10 employees. If the company recruits another employee, it will lose this tax relief and will have to pay more taxes. But the fear of higher corporate tax should not stop the company from developing.
In addition, the company will save 5 percent relief, if its shareholders will not be participants in other units. Suppose a shareholder is going to set up another company for his wife and he becomes a shareholder as well. He should think before he does it.
Commented by Arvydas Strankauskas, „Lewben Group“ Head of Lewben Group Tax Services
In Lithuania, business is taxed at two levels – a legal entity and a natural person. Let’s say, we are setting up a private limited liability company that pays state tax depending on profits. The owner of the company, a natural person, who receives dividends, pays 15% personal income tax. In order to avoid double taxation, establishing a small business requires a very careful choice of its form of business.
There are two possible business models: the establishment of a legal entity (UAB, MB, IĮ) or natural person issues a license of some form (business certificate, individual activity). By acquiring a business certificate, a person pays a flat tax once. For example, a business license of EUR 1000 is paid, then the proceeds from this activity are not subject to tax. If in a year you earn, say € 38,500, they will not be charged extra.
Business certifications are suitable only for the smallest businesses and only for certain activities. After acquiring a business certificate, you can not get more than 45 thousand income in the last twelve months. Otherwise, it will no longer be possible to register as a VAT payer and work under a business license. On the tax side, small businesses are advised not to rush to establish a legal entity, but to operate under a business license if the income does not exceed 45 thousand. EUR per year or to pursue individual activities if they exceed that amount. By registering an individual activity, there is an unlimited amount of income that can be obtained by a person engaged in this activity.
Personal Income Tax (GPM) tariffs applied for the taxation of individual income: • 5% for trade, production or provision of services; • 15%, applied to the activities of liberal professions and income from securities. If a legal entity (IĮ, MB, UAB) is established, it will be obliged to pay 5 or 15%. profit tax. Receiving up to 300 thousand annual turnover, legal entities pay 5% profit tax, over 300 thousand. – 15% profit tax.
When a natural person engages in an enterprise under an employment contract and receives a salary, the fees paid from the salary are relatively high (55-57% of the salary paid). Perhaps it is not necessary to say that it is very important not to pay relatively high wages, since taxes paid from wages will “eat” a huge part of income.
There may be a situation in which two, three or more persons work together to carry out their individual activities. For them it is inconvenient to work individually or to purchase a business license. So when the activity becomes more complex, it is more rational to establish a legal entity. There are certain activities that require the establishment of a legal entity (tobacco, alcohol).
Before choosing a form of activity, you need to understand very well what kind of activity it will be, where the income will come from, what kind of income will it be, how much money will be reinvested, how much will be needed for personal needs. In these circumstances, it is possible to decide which business activity is most appropriate.
Individual activity in Lithuania is very well-taxed, because individual activities of social insurance contributions are subject to “ceilings”. When a certain amount of individual income is reached, income that exceeds that amount is exempt from social security contributions. It takes about 60-70 thousand euros a year for the “ceiling to activate”. Exceeding the limit, income is taxed only on personal income tax (15%) Social security contributions, as I mentioned, are not paid from the rest of the income.
When choosing an activity form, value added tax (VAT) is an important aspect. You should watch what your business customers are. If they are VAT payers, i.e., other businesses, not end users, then it would be worthwhile to register as a VAT payer. Registering is worth even if you do not exceed 45 thousand euro income limits. When registering as a VAT payer, a person can deduct all input VAT from all costs incurred for the economic activity. It is very useful for business.
If the final buyer is a consumer then voluntary registration for a VAT payer is not beneficial as the final price of goods or services will increase, which will reduce the competitiveness of the business.