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How to calculate income tax and payroll levies

Each self-employed individual or person with a trade licence can choose whether to use single-entry bookkeeping, in which he (or she) records business-related expenses, or instead take advantage of a 40-percent lump-sum allowance for expenses, in which case he does not account for specific outgoings but merely deducts a flat 40 percent from his income in lieu of receipted expenses. From January 1, 2013 onwards this deduction has been capped at €420 per month or €5,040 per year. Depending on the approach one chooses, personal income tax is calculated as follows:

Each self-employed individual or person with a trade licence can choose whether to use single-entry bookkeeping, in which he (or she) records business-related expenses, or instead take advantage of a 40-percent lump-sum allowance for expenses, in which case he does not account for specific outgoings but merely deducts a flat 40 percent from his income in lieu of receipted expenses. From January 1, 2013 onwards this deduction has been capped at €420 per month or €5,040 per year. Depending on the approach one chooses, personal income tax is calculated as follows:

A/ Using single-entry bookkeeping
The self-employed individual deducts expenses related to the performance of his trade (including payroll levies paid to the state-run social insurance provider Sociálna Poisťovňa and to one of three public health insurance providers) from his trade-related income received in 2013, to find his tax base. The so-called non-taxable minimum, set at €3,735.94 per annum for 2013, is then deducted from the tax base. The individual must then pay income tax at 19 percent (or 23 percent for higher earners) on the remaining sum to the tax office in 2014.

B/ using the 40-percent lump-sum expenses option
The self-employed individual deducts 40 percent (up to annual maximum of €5,040) from his or her 2013 trade-related income. S/he then deducts the levies s/he paid to Sociálna Poisťovňa and his/her health insurer in 2013, to find his/her tax base. The non-taxable minimum, set at €3,735.94 for 2013, is then deducted from the tax base. The individual must then pay income tax at 19 or 23 percent on the remaining sum to the tax office in 2014.

Health and social insurance:
To simplify the calculation, we assume that the self-employed individual in question does his/her business during the whole year, generates gross income of more than €4,716 (before expenses) and is neither a student aged 26 or less, nor a pensioner receiving an old-age pension. Based on the law s/he is obliged to pay levies from his/her calculation base (see below): for social insurance at a rate of 33.15 percent, to Sociálna Poisťovňa (this comprises an old-age pension levy of 18 percent, a disability levy of 6 percent, a levy for the solidarity reserve fund of 4.75 percent, a sick-leave levy of 4.4 percent, and a (voluntary) unemployment levy of 2 percent; and for health insurance at a rate of 14 percent.

The calculation base for each year is calculated by adding together one‘s tax base and payroll levies from the previous year, then dividing the result by a coefficient defined by law. For 2013 the coefficient is set at 1.9; in 2014 it will be 1.6; and in 2015 it will be 1.486, where, according to the law as it now stands, it should remain. Monthly levies are paid to Sociálna Poisťovňa from July 1 to June 30 based on the previous year’s income; whereas monthly health insurance levies are paid from January 1 to December 31 using income data from the previous year but one as a proxy, with a mid-year reckoning (resulting in a lump-sum payment or repayment) recalculating the total amount owed based on previous-year income data. See the examples below to see how this works.

There is a minimum calculation base from which self-employed individuals must pay levies. For 2013 the minimum monthly calculation base has been set at €393 per month, so self-employed people must pay a minimum monthly social insurance levy of €130.27 and a minimum monthly health insurance levy of €55.02. Conversely, there is a maximum monthly calculation base, which is €3,930, so the maximum monthly social insurance levy is €1,302.90 and the maximum monthly health insurance levy is €550.20.

Example

To simplify the calculation, we assume that the self-employed individual did his/her business over the whole of 2011 and 2012 and received income only from his/her trade. S/he was neither a student aged 26 years or less, nor a pensioner receiving an old-age pension, and s/he does not make any deductions for children or for a spouse.

His/her annual trade-related income in 2011 and in 2012 was €20,000, and his/her annual expenses in each year based on bookkeeping were €10,000 (including €3,000 in levies paid to Sociálna Poisťovňa and in compulsory health insurance). The non-taxable minimum for 2012 was set at €3,644.74. The self-employed individual opts to pay for unemployment insurance.

Income tax calculation for 2012
A/ Based on bookkeeping:
Tax base = €20,000 gross income - €10,000 trade related expenses (including payroll levies) = €10,000
Tax duty = €10,000 tax base - €3,644.74 non-taxable minimum = €6,355.26 x 19% income tax = €1,207.50
B/ Based on 40-percent lump-sum expenses:
Lump-sum = €20,000 gross income x 40% lump-sum = €8,000 (however, note that from 2013 40% lump-sum expenses will be capped at €420 per month, i.e. €5,040 per year)
Tax base = €20,000 annual income - €8,000 lump-sum expenses = €12,000 - €3,000 payroll levies = €9,000
Tax duty = €9,000 tax base - €3,644.74 non-taxable minimum = €5,355.26 x 19% personal income tax rate = €1,017.50

Calculation of payroll levies for 2013
Social insurance (monthly levies paid from July 1, 2013 until June 30, 2014):
A/ Based on bookkeeping:
Calculation base = €10,000 tax base (for the previous year, i.e. 2012) + €3,000 levies paid in 2012 = €13,000 ÷ 1.9 (the coefficient valid for 2013) = €6,842.11
Monthly calculation base = €6,842.11 ÷ 12 = €570.18 Monthly social insurance duty = €570.18 x 33.15% = €189.01
B/ Based on 40-percent lump-sum expenses:
Calculation base = €9,000 tax base (for the previous year, i.e. 2012) + €3,000 levies paid in 2012 = €12,000 ÷ 1.9 (the coefficient valid for 2013) = €6,315.79
Monthly calculation base = €6,315.84 ÷ 12 = €526.32
Monthly social insurance duty = €526.30 x 33.15% = €174.47

Health insurance (monthly levies paid from January 1 to December 31, 2013):
A/ Based on bookkeeping:
Calculation base = €10,000 tax base (for the previous year but one, i.e. 2011) + €3,000 levies paid in 2011 = €13,000 ÷ 1.9 (the coefficient valid for 2013) = €6,842.11
Monthly calculation base = €6,842.11 ÷ 12 = €570.18
Monthly health insurance duty = €570.20 x 14% = €79.82
B/ Based on 40-percent lump-sum expenses:
Calculation base = €9,000 tax base (for the previous year but one, i.e. 2011) + €3,000 levies paid in 2011 = €12,000 ÷ 1.9 (the coefficient valid for 2013) = €6,315.79
Monthly calculation base = €6,315.84 ÷ 12 = €526.32
Monthly social insurance duty = €526.32 x 14% = €73.68

Note 1: During 2014 the health insurer will recalculate the amount owed for 2013 using 2013 income data filed by the individual with the tax office (thereby replacing the 2011 data used as a proxy to calculate 2013 monthly levies). It will then either request a lump-sum payment or send a repayment to cover the difference.
Note 2: Unlike the health insurers (see Note 1 above) Sociálna Poisťovňa does not recalculate the amount owed during the year, as monthly social insurance levies (paid from July 1) are already based on the previous year’s income data. However, those paying the minimum social insurance levy must increase their monthly payments to the new minimum from January 1 (see Note 3 below).
Note 3: If the self-employed individual in 2011 and 2012 had a gross income above €4,716 but his monthly calculation base was reduced by expenses to only €200, for example, he would be obliged to pay levies in 2013 based on that year’s minimum monthly calculation base (€393). The minimum social insurance levy would therefore be €130.27, and the minimum health insurance levy €55.02 – both payable from January 1, 2013.

DISCLAIMER: The information above is provided as an overview and is not intended to be comprehensive. The Slovak Spectator cannot be held liable for any actions taken or arrangements entered into on the basis of the information presented here. For financial or tax-planning advice please consult a professional financial advisor.

For more information about the Slovak labour market, HR sector and career issues in Slovakia please see our Career & Employment Guide.

Topic: Career and HR


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