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Self-employed face payroll tax hike

SELF-EMPLOYED people in Slovakia will not get off lightly during the government’s crusade to push the public finance deficit below 3 percent of gross domestic product, as required by the European Union. Labour Minister Ján Richter has proposed that payroll taxes – social and health insurance contributions – by the self-employed will rise, and that the lump-sum allowances that self-employed taxpayers are currently able to deduct from their gross income before calculating tax will be cut as part of the plan.

SELF-EMPLOYED people in Slovakia will not get off lightly during the government’s crusade to push the public finance deficit below 3 percent of gross domestic product, as required by the European Union. Labour Minister Ján Richter has proposed that payroll taxes – social and health insurance contributions – by the self-employed will rise, and that the lump-sum allowances that self-employed taxpayers are currently able to deduct from their gross income before calculating tax will be cut as part of the plan.

Richter argues 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 the SITA newswire.

While Slovenský Živnostenský Zväz (SŽZ), an association representing self-employed trade and craft workers, concedes that the existing system of transfers is not perfect, it also argues that lower payroll taxes represent a form of legitimate government support for the self-employed.

Self-employed people currently pay payroll taxes from an assessment base calculated by dividing their income (after tax allowances and other expenses are deducted) by a so-called coefficient. The assessment base is subject to a minimum level, which the government plans to increase from 44.2 percent to 50 percent of the average wage in the national economy, based on an agreement that Richter has reached with SŽZ representatives.

Furthermore, the coefficient used to calculate the assessment base for social insurance contributions, currently set at 2, would, under Labour Ministry plans, fall to 1.35 in order to bring the contributions of the self-employed broadly into line with the payments made by firms and regular employees.

“We agree that in Slovakia the mechanisms are not tuned well and thus the lowest-income self-employed are ultimately eligible only for very low pensions,” Viola Kromerová, general secretary of SŽZ, told The Slovak Spectator. “But we also know that the sole support that governments have been providing to these smallest entrepreneurs has been [in the form of] lower payroll taxes.”

Kromerová also questioned whether one can talk about low payroll taxes at all since the lowest contribution level is at €168 per month, even when a self-employed person has no income at all.

Martin Vlachynský, an analyst with the Institute of Economic and Social Studies (INESS) think tank, sees two solutions to the problem. The first, he says, is the government’s scheme, which he believes will mean increased costs for those self-employed people who are in the process of starting their businesses and those with low income – for whom the change could mean bankruptcy.

“The second possibility is to let self-employed people decide on their own pension and make the pensions correspond with the low payroll taxes they pay,” Vlachynský told The Slovak Spectator. “The fact that the self-employed have taken the path of business signals that they are willing also to think about their future and actively take care about their current and future economic situation.”

The government also argues that it is looking at changes which would bring more equality between self-employed people and regular employees when it comes to payroll taxes.

The previous government made an attempt to overhaul what it called deformations in the country’s income tax and payroll levy legislation. Among the tax changes it proposed, those affecting the self-employed proved the most divisive, prompting opposition even within the then ruling coalition.

The SŽZ at that time also strongly opposed scrapping the 40-percent personal allowance that self-employed persons receive. But the association argued that the lump-sum allowance for one group of self-employed people had already been reduced in 2011 from 60 percent to 40 percent, and that a further cut would be unfair.

The debate over allowances

Labour Minister Richter has proposed that the lump-sum be subject to a ceiling of €3,600 per year, equivalent to €300 per month.

But Kromerová argues that the scheme considered by the ministry does not make sense.

“You either have a lump sum or you have restrictions,” Kromerová said, adding that the proposed changes work against the self-employed, who use the allowance as an alternative to itemising business expenses in order to claim them against tax.

Kromerová noted that the previous 60-percent lump sum for craft workers was terminated without any negotiations, and now even the 40-percent lump-sum seems to be at risk.

“There are continual attempts to cancel the lump-sum allowance,” Kromerová told The Slovak Spectator. “We are for their preservation because they help the smallest businesses, and those starting up.”

Vlachynský said that the measure would affect those self-employed people who do not have real expenses but can apply the lump sum.

“Many of these self-employments were created [in order to take advantage of] the lower tax burden and in an environment without the lump sum they would no longer be profitable,” said Vlachynský. “Some of them can transfer to regular employment, but for some of them this will be the final end to their business activities.”

The SŽZ would prefer pro-development changes which could help the smallest firms to grow, said Kromerová, adding that in Slovakia 0.4 percent of companies fall within the category of large enterprises of over 250 employees and only 1.9 percent are medium-sized companies with 50 to 249 employees; the rest are small and micro-companies which cannot develop due to continual changes in the laws and regulations affecting businesses.

“Each government proposes increases in payroll taxes for the smallest-income groups and we continually talk about how much we are supposed to deposit in the system, while still no one is able to give us the numbers about where the money is going, which groups benefit from the system and by how much,” Kromerová said. “I cannot agree with the continual accusations that everybody else in society is paying for the self-employed.”

Kromerová said the self-employed should get the same level of support as foreign investors.

In general, the lowest possible taxes and the lowest administrative burden are essential to support economic activity, regardless of its form, Vlachynský said.

“In the case of the self-employed we consider the most effective way is to unbind their hands and allow them to choose the volume of their payroll taxes, but at the same time to tune their right to draw from the social system proportionally,” said Vlachynský.

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