The end of the self-employed or better social guarantees

It is not yet possible to know for sure what awaits the self-employed from 2018, because at the time of writing the article, amendments to the relevant Cabinet regulations have not been approved. Also, as history shows, everything can still change by the end of 2017. Therefore, in this article I will only review the news that is currently known, with the caveat that they can also change. Especially if the self-employed understand the situation and decide to somehow collectively express their opinion.

First of all, who are the self-employed? The Law "On State Social Insurance" explains that the self-employed group also includes the following:

* A natural person carrying out an economic activity;

* The owner of a peasant (fisherman) farm, not being in an employment relationship with the manager of his farm, performs the management of the farm if a manager has not been appointed to this farm;

* Individual entrepreneur.

This time I will only highlight a few aspects that will be new.

Compulsory State Social Insurance Contributions (CSIC) and Pension Insurance (PI)

In addition to the current self-employed social security contribution rate, an additional 5% PA will be paid from 2018. I will examine the changes using the example of a grain-growing farm, which carries out economic activities by receiving income from the sale of grain and paying for farm expenses. The owner is a self-employed person.

1. Example according to the current version of the law from 1.01.2018

From January to June, there are losses every month, totaling 25,000 euros (because expenses are higher than income, the grain is still growing). VSIOI and 5% PA not necessary must pay (but can also pay if they want).

In July, the crop is harvested and sold, the revenue from the grain sold is 26,000 euros, expenses are 6,000 euros, income in July 26,000-6,000 = 20,000 euros. Social security contributions must be paid at least from the minimum wage (you can also choose a higher amount), which is from 430 euros, but 5% PA must be paid from the difference between income (not revenue) and the amount from which the Social Insurance Institution will pay, that is, 20,000-430 = 19,570 euros. The rate of social security contributions for next year is not yet known, I will assume that it will be 1% higher than in 2017, which is 32.13%. Therefore, it turns out that for July you have to pay SSAOI+5% PA = 430×32.13% +19 570×5% = 138.16+978.50 = 1116.66 euros.

In August, income is 1000, expenses 700, income 1000-700 = 300 euros. Social security contributions do not have to be paid (because the monthly income does not reach the minimum monthly wage of 430, and also, counting from the beginning of the year, the limit of 12×430 has not been exceeded, in total, from the beginning of the year there are even losses (-25,000+20,000+300 = -4700), but since the income in August is just below 430, then 5% PA still has to be paid, which is 300×5% = 15 euros.

From September to December, the farm again has losses every month, totaling 12,000 euros. VSIOI and 5% PA not necessary must be paid.

The first table more clearly shows how much social contributions should be paid if the minimum wage is 430 euros, according to the 2017 and 2018 procedures.

Table 1. Self-employed social security contributions according to the law in force as of 1.01.2018

2. Example if amendments to the law will be made

At the end of October, the Ministry of Agriculture submitted to the Saeima proposals for amendments to the law, which provide that self-employed persons who earn income from agricultural activities must calculate and pay mandatory pension insurance contributions once per tax year.

If this proposal is supported, then the situation in the example discussed above will be as follows:

1. The SSSI is calculated in the same way as in example 1.
2. 5% PA changes, that is, determines year income -25,000+20,000+300-12,000 = -16,700 (loss). Consequently, no taxable object is created under 5% PA.

The second table reflects the amounts payable if the aforementioned amendments are adopted.

Table 2. Social Security Disability Insurance for the Self-Employed after amendments to the law

Hopefully, this issue will be clarified by the end of the year, because as the example shows, the difference can be in the thousands of euros. However, although in 2018 the self-employed may have to pay more, it should be noted that in return they will receive more social security in old age in the form of a pension. It is planned to pay a pension at the 1st, 2nd or 3rd level in 5%.

If you do not want to pay the above, you can change your status. For example, a farm can appoint a manager by registering it in the Enterprise Register, after which the manager can hire the owner. In this case, you will not have to pay self-employment contributions, but you will have to pay all labor taxes, as well as comply with all the provisions of the Labor Law, for example, you must ensure that purchases for the needs of the farm are made during working hours, you will not be able to work 24 hours a day, 7 days a week, etc. To understand what would be more profitable, you need to make calculations.

Personal Income Tax (PIT)

When calculating PIT at the end of the year, only 80% of income may be charged on expenses. The exception is depreciation of fixed assets, wages and employer's social security contributions, real estate tax (PIT), which may be charged in the amount of 100%. The good news is that "subsidies" will not be included in taxable income for a few more years, and farmers will also retain non-taxable income of 3000. For example, annual income 20,000, expenses 21,000, including depreciation 8000, wages and social security contributions 5000, PIT 800 (total full expenses 13,800). You can put 80% of 20,000 = 16,000 in expenses. Taxable income = 20,000-13,800-(16,000-13,800) = 4,000. If the farmer's 3,000 is applied, then the taxable income is 1,000.

Conclusions

What exactly awaits the self-employed in 2018 is not yet completely clear. If the “most expensive” option (July 1, for example) is in force, the self-employed will have to pay sometimes as much as 8 times more in social contributions. In that case, it will be necessary to understand what kind of social security awaits, or even more. The number of payers who will have to pay PIT for their economic activities will also increase, especially if they are not farmers. A comprehensive explanation is currently needed from the state, which would also show the benefits of the tax reform for the mentioned group of residents, as well as clarifications of regulatory acts, expressing the norms more precisely and delving deeper into practical cases.

The information discussed in the article should not be used as a basis for calculations for 2018, it is only an informative explanation. In the future, "Lauku Lapa" will inform about changes in this area.

Source: Anda Skadiņa

Accounting consultant

LLKC