For some people, being self-employed, which means having a license to run one’s own business, is a viable way to earn a living and avoid unemployment. However, recent legislative changes to the Labour Code that pertain to this group have already caused a number of the self-employed to change their status, observers have warned.
At the end of 2012 the number of self-employed in Slovakia stood at 359,575, according to the Slovak Statistics Office’s data. Yet, compared to data from 2011, the number of self-employed has shrunk by 16,147, which represents a 4.3-percent decrease.
“Conditions for running businesses are not improving,” Viola Kromerová, general secretary of Slovenský Živnostenský Zväz (SŽZ), an association representing self-employed trade and craft workers, told The Slovak Spectator, adding that the legislation has been constantly changing, so “it gets difficult when each new government changes all laws [related to self-employment]”.
Yet Kromerová also said that there are several factors that affect the number of self-employed, including the economic crisis, demographic developments as well as changes to the Labour Code, among other things.
What it means to be ‘self-employed’
People over 18 years of age wishing to set up their own businesses must register with the local self-employment authority (Obvodný Úrad - Odbor Žinostenského Podnikania), which issues trade licences. These departments also serve as unified places of contact, interconnected with the trade registry, the tax offices, the register of criminal records as well as the health insurers. There are three basic types of trade licences: craft-related or professional, fixed and free. When applicants apply for a professional licence they have to prove they have studied the specialisation and have the relevant number of years of experience in the field, according to the current legislation. The fixed trade licence also requires applicants to prove they have experience, while those applying for the free trade licence do not have to show proof of either experience or a certificate showing that they studied the profession or activity they wish to perform, the law stipulates.
After submitting the application the authority checks to see if the applicant satisfies the requirements for the trade licence, and if so, the document is issued in five days.
Unlike ordinary employees, the self-employed have to pay taxes and payroll taxes, including payments to health insurers, on their own. The new legislation introduced by the government of Robert Fico increases the minimum assessment base that self-employed people can use to calculate their social and health insurance contributions from the beginning of 2013, boosting it from the current 44.2 percent of the average wage to 50 percent of the average wage in Slovakia two years ago. This will result in an increase of the minimum social and health insurance contributions of the self-employed from the current €160.24 per month to €185.30, the SITA newswire wrote.
Moreover, coefficients used to calculate contributions made by self-employed people for social insurance and health insurance should be reduced over the next three years. The coefficients used to divide the tax base in order to calculate the assessment base for payment of contributions are currently set at 1.9 for both social and health insurance. They will gradually fall to 1.486 for both in 2015, according to SITA.
In addition, the maximum assessment base for payroll taxes will increase to five times the average wage. The current 40-percent flat-rate deductible expenses for the self-employed will be replaced by a fixed sum of €420 per month, or €5,040 a year. Until January 1, 2013 the self-employed could deduct up to 40 percent of their expenses without providing any bills. The self-employed who assume higher expenses than the limit set by the ministry can make the additional deductions if they conduct their own accounting and submit bills as proof of their expenses.
When introducing the changes, Labour Minister Ján Richter argued that higher payroll taxes are being considered for the self-employed because 87 percent of them currently make the minimum contribution allowed to the state-owned social insurance provider, Sociálna Poisťovňa. This, he said, puts them at risk of not contributing enough to qualify for the minimum pension when they retire.
“Many self-employed people are surprised when they get to the point of retirement and get their pensions,” Richter told SITA in June 2012.
While in 2010 the number of the self-employed stood at 384,202, in 2011 it dropped to 375,722 and to 359,575 in 2012. Of these people only 26,134 obtained a new trade licence in 2012, Kromerová said.
Kromerová nevertheless listed several factors that could have influenced the decline in the number of self-employed, including the financial crisis, which has affected the economic situation in Slovakia, the European Union as well as in many other countries around the world. According to her, other factors include people who were born in the 1950s and who are reaching retirement age, measures passed by the previous as well as the current government, the new amendment to the Labour Code and the seizure of property of people with unpaid debt.
Yet, some self-employed are changing their legal status to limited liability companies, a move that allows them to avoid paying payroll taxes to the social insurers. This option is only available, however, if their company employs other workers, Kromerová said.
Peter Goliaš, head of the Institute for Economic and Social Reforms (INEKO) economic think tank, believes that to solve this situation it is necessary to “moderate the differences in the tax and payroll tax burdens of employees and the self-employed”.
Yet, since the main problem of the system is a higher burden on people with low incomes, “many of them end their business rather than pay significantly higher taxes and payroll taxes [when having] low salaries”, Goliaš told The Slovak Spectator.
“The solution in favour of an increase in employment should be a decrease in payroll taxes for people with low incomes, [regardless of] whether they are [ordinary] employees, employees working based on limited employment agreements or self-employed,” he added.
Ján Dinga from the Institute of Economic and Social Studies (INESS), says that not only weaker economic growth, but also the stagnating consumption of households has contributed to the drop in the number of the self-employed.
The recent changes in the legislation pertaining to the self-employed, such as restricting the lump-sum allowances and higher assessment bases, are among the problems that “negatively affect the whole business sector”, Dinga told The Slovak Spectator.
“Regarding the stable increase in the number of the limited liability companies, despite the inconvenient economic development, we should expect that some self-employed will set up companies in order to optimise their tax and payroll tax burdens,” Dinga said.
The changes in the tax and payroll tax system have resulted in more than half of the self-employed wanting to set up their own limited liability companies, according to a recent poll among 3,507 respondents, carried out by Superfaktura, a company that operates an internet portal that deals with accountancy.
Yet, tax advisors do not assume that the self-employed will start setting up their own firms en masse. While at the moment they can switch in order to avoid the minimum payroll taxes, after the recent changes it may not be as advantageous as before.
Peter Furmaník from Libertax Consulting adds that establishing limited liability companies might be advantageous only for a small group of the self-employed since “within their own limited liability [the self-employed] cannot deduct their lump-sum allowances, but only the real expenses”, as cited by the Hospodárske Noviny daily.
For more information about the Slovak labour market, HR sector and career issues in Slovakia please see our Career & Employment Guide.
