Are you planning to start your own business? You have a lot of decisions ahead of you to make that could prove crucial to the future of your business. One of them is the choice of taxation method. In a sole proprietorship, you can choose from three forms of it. What are they based on? What are the differences between them? You will find out in this text.

From the beginning of 2022, when starting a sole proprietorship (JDG), you can choose one of three forms of taxation - general tax, flat tax, lump sum on registered income. The simplest form of accounting with the tax authorities in the form of a tax card is also still used. However, it can no longer be chosen. It is used only by entrepreneurs who paid taxes in this way in previous years.

Taxation under the general rules

General taxation (tax scale) is the default form, adopted by the tax office automatically if you do not select another when setting up a sole proprietorship. It is the same as that used by non-business persons.

Tax thresholds and health contribution

In this solution, tax progression is applied. Annual income up to PLN 120,000 is subject to a tax of 127 percent, and those exceeding this sum - 32 percent. In addition, every month you must pay a health contribution of 9 percent of income. If you do not earn income in a given month, or if its sum does not exceed the minimum wage, you must calculate the health contribution on the amount of the minimum wage in effect on January 1 of a given year. In 2022, this is PLN 3010, so the minimum monthly health contribution for those running a JDG is PLN 270.90.

Costs and allowances - how to pay less tax

However, when settling under the general rules, you can take advantage of the various mechanisms available to reduce the tax base. First of all, you are bound by the tax-free amount, so you will deduct PLN 30,000 from your annual income for 2022. You can also report deductible expenses, in accordance with current regulations.

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The amount of taxes due is also reduced by the reliefs that you can take advantage of when settling under the general rules. These include a family allowance and the ability to make a joint tax return with your spouse, which is particularly beneficial when there is a large disparity in the earnings of spouses.

Middle class relief - how much is it and how to calculate it (ceases July 1, 2022).

A special relief is also available for general taxpayers whose annual income is between PLN 68,412 and 133,692. This is the so-called middle class relief. It is intended to compensate employees and entrepreneurs for the increase in the tax burden compared to before 2022.

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For those earning between PLN 68,412 and PLN 102,588 per year, it is calculated according to the formula:

Relief = (annual income x 6.68 percent - 4566) ÷ PLN 0.17

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However, for those earning more than PLN 102,588 and no more than PLN 133,692, it is calculated as follows:

Relief = [annual income x (-7.35 percent) + 9829] ÷ PLN 0.17

Thus, depending on earnings, it ranges from less than 16 zlotys to almost 13,500 zlotys per year.

Flat tax

The flat tax for a sole proprietorship is a much simpler solution than accounting under the general rules. Regardless of the income you earn, you will pay one tax rate - 19 percent. 

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The health contribution, which you also have to pay with this form of taxation, is lower than the one covered by general taxpayers. With flat tax, it amounts to 4.9 percent of income.

Costs yes, concessions no

With a flat tax, as in the case of the tax scale, you can reduce the amount owed to the tax authorities through deductible expenses. Of course, they must be directly related to your business and properly documented.

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As of July 2022, those accounting for the flat tax can deduct health premiums from their income or include them as a deductible expense. However, a limit has been introduced, which in 2022 is PLN 8700. It is to be indexed annually, and information on its new amount will be published in the "Monitor Polski."

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Unfortunately, with this form of settlement you will not be able to take advantage of other tax-reducing mechanisms. The tax-free amount of 30,000, the possibility of joint accounting with a spouse and various tax reliefs are reserved exclusively for those settling under the general rules.

Flat tax - when does it pay?

The total burden in the case of a flat tax - 19 percent tax and 4.9 percent health contribution (which can at least in part be written off), is lower than in the case of general taxation - 12 (32) percent and 9 percent, respectively. At first glance, therefore, it might seem that a flat tax is more profitable for those running a JDG.

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However, the lack of tax breaks and the tax-free amount makes the flat tax profitable only from a certain level of income. If you can't take advantage of any of the reliefs and accounting together with your spouse, the flat tax is more favorable with an annual income above 120 thousand. However, with joint accounting, the limit moves above 150 thousand - this is due to the application of the double free amount.

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Each additional deduction you can take advantage of in the general tax return pushes the threshold for paying a flat tax even higher.

Lump sum on registered income

The third form of taxation you can choose when running a sole proprietorship is a lump sum from registered income. This is the simplest way, but also subject to certain conditions.

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The lump sum is intended for entrepreneurs operating in one of the areas listed in Article 12 of the Law on Lump Sum Income Tax on Certain Income Earned by Natural Persons. In addition, in subsequent years of running a JDG, you can stay with this form if you have not exceeded the limit of EUR 2 million (calculated according to the average exchange rate of the National Bank of Poland on the first working day of October of the previous year).

No concessions or costs

As the name suggests, in the case of a lump sum, the tax due is calculated on the total income, not the income. Therefore, if you choose it, you will not be able to deduct your expenses. You won't be able to take advantage of tax allowances and joint taxation. The tax base, as in the two previous forms, is reduced only by Social Security contributions.

Health and tax contribution rates in a lump sum.

In a flat rate, the health contribution is 9 percent. However, unlike the other two forms of taxation, it is not calculated on the basis of the company's actual income. The basis is "the average monthly salary in the enterprise sector in the fourth quarter of the previous year, including payments from profit, announced by the President of the Central Statistical Office in the Official Journal of the Republic of Poland."

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If the company's income from the beginning of the year does not exceed PLN 60 thousand, the monthly health contribution is calculated on 60 percent of the aforementioned average salary. With revenues between 60 and 300 thousand zlotys, the total contribution is calculated on the basis of 100 percent, and with higher revenues - 180 percent of the average salary.

You need to remember that as your income increases, you may exceed more thresholds during the year. Then your monthly health contribution will increase, but so will your final annual contribution. You will have one month from the deadline for filing your tax return to make up the resulting difference.

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With the changes, which came into effect on July 1, 2022, entrepreneurs accounting for lump sums will be able to write off half of the health premiums they pay against income.

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As for tax rates, there are 10 of them in the flat rate, and they range from 2 to 17 percent. Which one applies to you depends on the industry you operate in, but also on the income you earn. Details can be found in Article 12 of the aforementioned law.

For whom the lump sum is beneficial

Although the tax rates for lump sums are generally lower than for the tax scale and flat tax, the inability to deduct expenses and take advantage of allowances makes it a no-win situation.

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According to experts, it is worth using a flat rate if your business is highly profitable, that is, if your costs do not exceed 20-30 percent of revenue. This depends, of course, on the tax rate, and therefore the industry in which you operate. If your costs exceed 30 percent, you should rather choose one of the other two forms of taxation.