Flat tax in business activities

One of the main responsibilities of every entrepreneur, which arises at the very first stage of setting up a business, is to choose a form of income taxation. Although there are several options, many business owners choose to use the flat tax. What is it and when does it become profitable? What are the advantages and disadvantages of choosing this form of entrepreneurial income taxation?

When deciding to start their own business, every entrepreneur should think carefully about the choice of the form of taxation. Currently, he or she must determine it already when registering the company in CEIDG. In Poland, a business owner can choose between taxation:

• on general principles,
• lump sum,
• flat tax.

What is a flat tax?

The flat tax is one form of taxation on entrepreneurial income. It is characterised by a fixed rate of 19 per cent, which means that it will remain the same regardless of whether the entrepreneur's income is low or high. This form of taxation is available both to a person running a business on their own and to taxpayers who are partners in companies that are not considered to be a legal entity.

When deciding on this form of taxation, the choice must be notified to the head of the appropriate tax office. Deadlines are also important, as the document must be submitted no later than on the 20th day of the month following the month in which the first revenue was earned in the current tax year.

Flat tax vs. general tax

When using the flat tax, income is calculated in the same way as for the general tax - i.e. by deducting the costs of obtaining the income from the income. However, the difference between the two forms is the amount of taxation. In the case of flat tax, the tax rate is always fixed at 19 per cent, irrespective of the income received.

On the other hand, general tax is settled according to a tax scale that takes into account the entrepreneur's income. Depending on the profit made, this tax amounts to 17 per cent or 32 per cent. For this reason, the flat tax is more profitable for those who generate a large income.

An entrepreneur deciding on this form of taxation is obliged to keep records of business income and deductible costs. This is done by means of a Tax Revenue and Expenditure Register (KPiR).

When is it worth choosing a flat tax?

The choice of flat tax as a form of taxation is advantageous when:

1. annual income exceeds PLN 102726, according to the progressive scale (so-called general rules)
2. the entrepreneur does not settle accounts with his or her spouse or does not bring up a child on his or her own (as beneficiaries of the flat-rate tax are not entitled to the corresponding allowances),
3. the business owner does not benefit from a child tax credit or an internet tax credit (these are also not eligible for the flat tax),
4. in addition to his/her activity subject to the flat-rate tax, the entrepreneur generates income from another source, taxed according to the general rules - e.g. he/she works on an employment contract (in such situations, most of the tax allowances are taken into account when settling the tax year; however, one should remember to submit two declarations).

Who can benefit from a flat tax?

It is worth remembering that this form of taxation may only be used by persons who are engaged in non-agricultural economic activity. Moreover, one of the basic conditions is not to provide services to a former or current employer. This involves the performance of work of the same nature as the services rendered by the taxpayer to the employer. This rule applies to the current tax year.

Advantages and disadvantages of a flat tax

There is no denying that each form of taxation has its advantages and disadvantages. Therefore, the selection of an appropriate one should be preceded by a detailed analysis of all factors. In the case of a flat tax, it is worth taking into account, first of all, the anticipated income, as well as any tax allowances to which the entrepreneur is entitled.

The main advantages of the flat tax include a fixed tax rate of 19 per cent, which is independent of the income received. This is particularly attractive for those who exceed the first tax threshold in general taxation, as they do not then have to deduct as much as 32 per cent tax from their income.

The flat tax also has the advantage of not being able to combine income subject to the flat tax with income from other sources

The main disadvantages of flat taxation include the lack of the possibility of joint taxation with a spouse, the lack of allowances that an entrepreneur receives in the case of taxation according to the general rules or the inability to deduct the tax-reducing amount. This option is also not the best for those who do not exceed the first tax threshold, because then the tax imposed on income is higher by 2 per cent.