If you decide to start as a self-employed person – in popular language: to become a ZZP – this has consequences for your income tax and your social security position. The consequences depend on the qualification of your activities: do you have income as an entrepreneur, income from other activities or does it qualify as income from an employment after all…
Relevance of the qualification as entrepreneur
The qualification as entrepreneur is relevant because in that case one is eligible for some substantial fixed tax deductions, being the ‘entrepreneurs allowance’ and the ‘small- business profit deduction’. Furthermore, business costs are tax deductible, there is an extra deduction in case of investments and a reservation can be made for old age.
The entrepreneurs allowance consists of several components with the most frequent being the ‘self-employed allowance’ (€ 7.280) and the ‘starters allowance’ (€ 2.123). If the entrepreneur has reached the official retirement age, the amounts mentioned are halved. For both deductions at least 1.225 hours per year have to be devoted to the company (‘hours test’). Therefore, it is wise to keep track of the hours spent in some way. Furthermore, as of the 6th year more time (>50%) has to be spent with the company than with other activities (for example if one has employment income as well).
The starters deduction applies 3 times in the first 5 entrepreneurial years. If the profit is (yet) too low to fully apply the entrepreneurs allowance, then the unused part can be carried forward to the next 9 years.
Small-business profit deduction
Subsequently the entrepreneur is entitled to a fixed tax deduction of 14% of the profit, i.e. after deduction of the entrepreneurs allowance.
The entrepreneur can deduct all business-related costs. However, a correction has to be made in as far as these costs contain a private element (such as with food, drinks, the telephone, the car, etc).
When investing in business assets (computer, telephone, etc) an extra amount can be deducted from profit. The deduction amounts to 28% in case of a total investment in a calendar year between € 2.301 and € 56.192 ex VAT. The percentage is reduced gradually and amounts to 0% if the total investment exceeds € 312.176 ex VAT. The separate investments must amount to at least € 450 ex VAT and some investments are excluded. In case of investments in energy saving business assets, sustainable energy and environment friendly business assets, additional deductions are possible. This means for example that an investment in a car does not give right to the investment deduction, but an investment in a fully electrical car does give right to an additional deduction.
Reservation for old age
An entrepreneur is allowed to annually reserve part of the profit for old age. In that case taxation is postponed until the moment the reservation is released (for example when the company ends) or – in case a pension product is acquired – until the moment the pension payments take place.
The annual reservation amounts to 9,8% of profit with a maximum of € 8.946 under the condition that the ‘hours test’ is met and that the company has sufficient equity.
Hours test not met?
If one dóes qualify as an entrepreneur but one does nót meet the hours test, then the entrepreneurial deduction does nót apply and nó reservation can be made for old age. However, one is still entitled to the small-business profit deduction, the deduction of business costs and the investment deduction.
But when does one qualify as an entrepreneur?
The criteria whether or not one qualifies as an entrepreneur for income tax purposes arise from the Tax Act and from government regulations, but mainly from the explanation of these in case law. Briefly said entrepreneurship is assumed in case the activities are performed independently and on own account and there is entrepreneurial risk.
Although case law provides for numerous examples, unfortunately there is no specific ‘turning point’ or something like that. The assessment of the qualification has to take place from case to case. The ‘Entrepreneurial check’ on the website of the tax office could help to make this assessment (in Dutch only).
What if nót an entrepreneur?
If one does not qualify as entrepreneur than the income either qualifies as income from other activities or as employment income. Briefly said:
- The person with income from other activities (a.k.a freelance income) can deduct business costs, but is nót entitled to the entrepreneurs allowance, the small-business profit deduction, the investment deduction nor to making a reservation for old age.
- The tax office could take the position that the income qualifies as income from employment. If this is the case, nóne of the deductions apply ánd the hiring party is obliged to withhold wage tax and social security contributions and pay these to the tax office.
When in doubt about the entrepreneurship, a ‘model agreement’ between the service provider and the client should provide clarity about the entrepreneurship. This as a consequence of the ‘Act DBA’ which entered into force on 1 May 2016. In that case the hiring party knows that no wage tax and social security contributions have to be withheld. However, the Act DBA does not yet seem to provide for the desired legal certainty.
Taxes and social security contributions
Depending on the qualification of the income, income tax, national insurance contributions, employee insurance contributions and/or healthcare insurance contributions are due.
Income tax and national insurance contributions
All income is subject to income tax in box 1, i.e. whether it is income as an entrepreneur, income from other activities or employment income. The tax rates in box 1 increase from 36,55% up to a taxable income of € 19.981 to maximally 52% on the income exceeding € 67.072. The tax rates include the national insurance contributions, i.e. the contributions for the General Old Age Pension Act (AOW), the Surviving Dependents Act (Anw) and the Long-term Care Act (Wlz).
Employee insurance contributions
In case of an employment, the employer is obliged to withhold employee insurance contributions and pay these to the tax office. It regards contributions for the Unemployment Insurance Act (WW), the Work and Income Act (WIA) and the Sickness Benefits Act (ZW).
In case of income as an entrepreneur or income from other activities this obligation does not exist. As, in that case, the entrepreneur or the individual with income from other activities is not insured for these risks, it could be wise – depending on the personal situation – to have these risks (partially) covered.
Healthcare insurance contribution
Furthermore, an earnings-related contribution for the Healthcare Insurance Act is due. This contribution comes on top of the contributions which are due to the health care insurance company.
In case of an employment, the employer pays the Healthcare Insurance contribution. In case of income as an entrepreneur or income from other activities, one will receive an assessment amounting to 5,4% of the profit up to a maximum contribution income of € 53.701. The assessment will, therefore, amount to € 2.900 maximally.
Summarizing: entrepreneur, income from other activities, income from employment
The above can be summarized as follows:
|Qualification:||Entrepreneur||Income from other work||Employment income|
|‘Hours test’ is met:||Yes||No|
|Small-business profit ded.|
|Business costs deduction|
|Reservation for old age|
|Income tax + nat.insurance||yes||yes||yes||yes|
|Employee insurance contr.||not obliged||not obliged||not obliged||employer|
|Healthcare insurance contr||yes||yes||yes||employer|
The qualification of income as either being income as an entrepreneur, income from other activities or income from an employment, leads to rather diverse income- and social security positions. The background and/or the desirability of this is not a subject of this article. It can be wise though to be aware of these differences when starting new activities. Certainly in case doubt could arise with regard to the qualification of the activities.
All amounts mentioned relate to the tax year 2017. The article is with reservation of possible changes of Tax Acts, government regulations and case law after publication of this article.