Conditions for activities
But before we get to the forms of taxation, let’s explain what conditions an activity must meet to constitute a business for income tax purposes.
First: the activity must be a profit-making activity even if the entrepreneur incurs losses from the activity. A business person should be focused on… making money. Losses in the company may occur, so to speak, “by the way” – for example, as a result of investments made, the value of which exceeds the company’s revenues in a given period.
Second: the activity must fall into a minimum of one of three categories:
- Manufacturing, construction, trade or service activities;
- Activities relating to exploration and extraction of minerals from deposits;
- Activities that use property and intangible assets.
Third: the activity is carried out in its own name, and therefore for its own needs, not those of others.
Fourth: the activities undertaken are characterized by a certain degree of regularity and are repeated many times. In addition, the company has an infrastructure, which consists of the necessary tools, goods or materials needed to provide services.
Fifth: any income earned by the entrepreneur in this business activity cannot be included in another source of income.
Important!
For a business to be recognized as such for income tax purposes, it must meet at least one of the above conditions.
Forms of taxation in Poland
Currently, entrepreneurs can use four forms of taxation. They are:
- general principles;
- flat tax;
- registered lump sum;
- tax card.
General rules (tax scale)
This is the default form of taxation – this means that if you do not declare your choice of taxation form when setting up your business, you will automatically start your business with the obligation to account for income tax on a general basis.
The tax scale in a nutshell means that the amount of PIT will be 17% on earned income up to PLN 85,528 per year. If you exceed this amount in a given tax year, taxation of the excess will increase to 32%. If you account for the tax scale, you should deduct the tax-reducing amount from the amount of input tax.
Important!
The tax-reducing amount in 2021 has not changed from the previous year:
- if the tax base does not exceed PLN 8,000, the tax-reducing amount is PLN 1,360;
- if the base is within the range of PLN 8,001-13,000, the tax-reducing amount is PLN 1,360 – (834.88 x base – 8,000) / PLN 5,000;
- if the base is within the range of PLN 13,001-85,528, the tax-reducing amount is PLN 525.12;
- if the base is within the range of PLN 85,529-127,000, the tax-reducing amount is 525.12 x (base – 85,528) / PLN 41,472;
- if the basis is PLN 127,001 or more, the tax-reducing amount does not apply.
An important feature of general taxation is the possibility of taking advantage of numerous reliefs (including. per child, rehabilitation, Internet, thermal modernization or IP BOX relief).
The general rules require the taxpayer to account for every income and expense received. Even if you make a loss (expenses exceed income), you should account for all the components – in a given accounting period, of course, you will not pay income tax. What’s more, it will also be reduced accordingly in the next accounting period, in proportion to the loss incurred.
With general taxation comes the obligation to keep simplified accounting, i.e. a Tax Revenue and Expense Ledger. Read our guide on the subject of KPiR!
Flat tax
The flat tax is an option for those entrepreneurs who regularly earn income above the 2nd tax threshold (i.e. above PLN 85,528 per year). When settling a flat tax, they pay PIT at 19% of their income, regardless of how much they earn in a given tax period.
An important restriction is that the flat tax can only be used by those who earn income from business activities or from special departments of agricultural production.
When choosing a flat tax, also take into account that it blocks the possibility of joint taxation with your spouse, and will not allow you to take advantage of single tax benefits.
Recorded lump sum
Settling with the tax authorities on the basis of a registered lump sum differs from the previously discussed forms of taxation fundamentally – an entrepreneur settling on a lump sum does not take into account the costs incurred in the course of business. This means that even if he incurs a tax loss, he will pay PIT on the income he earned during the tax period .
Thus, a lump sum is a good choice for those people who do not incur a lot of expenses in their business. Tax rates, which range from 2% to 17%, may also prove attractive.
Important!
For a detailed list of the types of income and tax rates applicable to flat-rate accounting, see The law on flat-rate income tax, in Art. 12 paragraph. 1 pt. 1-7.
As with the flat tax, if you file a lump sum, you can’t file a joint return with your spouse and you won’t qualify for the single tax credit.
However, the lump sum is not available to everyone. It cannot be used by those who use a tax card in a given tax year, those who use a PIT exemption, those who trade in foreign exchange, operate pharmacies, sell parts and accessories for motor vehicles, and manufacture products subject to excise taxes (except energy derived from RES).
Tax card
This form of taxation is considered the simplest, mainly because the amount of tax in the tax card is fixed – it is set by the Head of the Tax Office once a year. The decision on the amount of the tax card is received by the taxpayer at the beginning of the year, and if the established amount does not suit the entrepreneur, he can opt out of the tax card and choose another form of taxation within 14 days of receiving the decision.
To use the tax card, you must:
- Conduct business in the territory of Poland;
- Apply for the application of taxation in the form of a tax card;
- Carry out activities that qualify for tax card accounting;
- Make sure the spouse is not engaged in a similar business activity taxed on a general or flat rate basis.
In addition, a person wishing to use the tax card cannot:
- manufacture products subject to excise taxes;
- use the services of non-contracted individuals outside of specialized services.
- conduct other business activities besides those indicated in the application.
Important!
All of the above conditions must be met for an entrepreneur to be able to settle using the tax card.
How to change the type of taxation?
The choice of the form of taxation you make when starting a business will only be binding for a while. Changing the type of tax ation differs somewhat depending on how you currently account for your business.
Are you paying flat tax and want to switch back to the general rules? Submit a statement to opt out of the flat rate by the 20th of the month following the month in which you earn your first business income for the year, or by the end of the year if you earned your first income in December. You will submit the statement through CEIDG or at the Tax Office. In an analogous way, you can switch from a lump sum to general principles and… vice versa. The same deadlines apply when coming from general principles to a flat rate or lump sum.
However, if you want to opt out of the tax card, you only have until January 20 of the calendar year to do so. Similarly, if you want to switch from another form of taxation to a tax card – you can submit the relevant application (PIT-16) by January 20 to the Tax Office or through the CEIDG. After sending the application, wait for the decision of the head of the US, who will also inform you about the amount of tax. In case you receive a negative decision, you can choose only a flat rate or general rules -. refusal decision on. switching to a tax card blocks the possibility of taking advantage of the flat tax.
