Comparing Flat-Rate Taxpayers and Employees? They Are Pears and Apples

Changes and amendments to the Income Tax Act are coming soon, primarily affecting flat-rate taxpayers, who have reacted quite vehemently to the proposal from the Ministry of Finance. This is evident on e-Consultations, and one of the reasons for the apparent anger is the comparison between flat-rate taxpayers and employees in companies and institutions…

To remind, in the proposal effective from January 1, 2027, the most significant change for flat-rate taxpayers is for the sixth and seventh brackets. For the sixth bracket (annual income of €40,000.01 – €50,000), recognized expenses will decrease from 85% to 70%, and for the seventh (from €50,000.01 to €60,000) from 85% to 55%. For the first to fifth brackets (up to €40,000), the tax remains the same – 85% of income is recognized as an expense. The consequence is a higher flat-rate tax for taxpayers with incomes above €40,000, especially for those close to €60,000. Concurrently, amendments to the Contributions Act are proposed, which will further increase contributions for flat-rate taxpayers with higher incomes: the coefficient from 0.4 for the sixth bracket rises to 0.45, and for the seventh to 0.5.

A Debatable Argument

There have always been those who believed that higher incomes should be taxed more. While this is a legitimate stance, I am not entirely sure about such a measure because someone earns more simply because the field they work in is worth more, or their skills and knowledge are better than those of others. In that sense, whether flat-rate taxpayers in the sixth and seventh brackets should have their income tax and contributions increased is open for discussion.

However, the argument for which the Ministry of Finance wants to implement these legal changes is debatable. In the explanation, it states: ‘In the existing system, there are significant differences in the overall burden of public contributions based on the tax and contributions of employees in employment and conducting activities through a flat-rate business…’ However, a very agile commentator on this document, Nikolina Horvat, warns that it is unclear on what methodology the mentioned forms of work were compared and whether essential differences in their economic positions were included in the analysis. It seems to me that the authors of the amendments to the law have, in line with the topic (flat-rate taxpayers), made a blanket comparison of two examples from practice, where it appears an additional erroneous step was made by comparing pears and apples.

The gross salary of an employee and the total income of a flat-rate taxpayer are not directly comparable categories, Horvat emphasizes. Namely, she explains, an employee earns a salary without the obligation to finance business expenses, without business risk, the risk of uncollectible receivables, costs of finding clients, investments in equipment, marketing, administration, and other business expenses. They also enjoy rights arising from employment, including paid annual leave and other forms of worker protection.

On the other hand, a flat-rate taxpayer cannot equate their income with personal income because, unlike employees, they must finance what employees do not have to – the aforementioned business expenses, contributions, taxes, equipment, administration, procurement, insurance, marketing, and other costs, while simultaneously bearing full business risk.

Another Reason for Changes

Therefore, the mere fact, concludes Horvat, that a flat-rate taxpayer can achieve a higher disposable amount than an employee after paying the prescribed contributions does not automatically prove the existence of tax injustice and is not a sufficient basis for increasing their tax burden.

I can confirm this myself, as I am registered as a taxpayer and issue invoices to my clients (for example, Lider) in gross amounts for my articles. From that, I must pay contributions to the state, but also other costs (fuel, utilities…), so I end up with a smaller amount than what I received in my account.

Thus, the argument of the Ministry of Finance is very poor, and it should be openly stated that these changes are intended to address previously uncovered hidden employment relationships, due to flat-rate taxpayers who actually work for companies but are not in permanent employment. There is no doubt that there are such cases, but why should everyone pay for the mistakes of some?!

POST SCRIPTUM

Many commentators, like Nikolina Horvat, have poorly received the argument from the Ministry of Finance that there is a disproportion in income tax between employees (dependent work) and flat-rate taxpayers. Many have also said that the government has uncovered the problem of possible hidden employment relationships but has not proposed a targeted measure against such relationships. Instead, as a substitute criterion, it applies the level of income and increases the tax for everyone who exceeds a certain threshold, including completely legitimate self-employed entrepreneurs.