Taxation of private traders is based on income for the accounting period. This is the amount of money left when the expenses associated with earning income are deducted from taxable income. Expenses eligible for tax deductions include internet and phone bills, YEL pension insurance and office rental costs. Possible losses carried forward from previous years and the entrepreneur deduction are then deducted from the remaining earnings. The resulting business income is divided into earned income and capital income.
Throughout the accounting period, accounts – including the entrepreneur’s sales and purchases – are kept as the basis of the private trader’s taxation. When the accounting period (usually the calendar year) ends, the accounts are completed and the figures are filed for taxation. So year-round bookkeeping is critically important.
Taxation of private traders is divided between earned income and capital income
Regarding the taxation of private traders, it is crucial to understand that income earned as an entrepreneur is automatically taxed for the year in question alongside possible other earned income and capital income.
A five per cent entrepreneur deduction is made on the income before it is taxed. After this, the calculated business income is divided into the entrepreneur’s earned income and capital income. The company itself does not have to pay taxes on its income.
Capital income is 20 per cent of the company’s net worth from the previous year. Net worth is the amount left after deduction of liabilities from the company’s financial assets.
The tax rate on capital income is 30% up to 30,000 euros and 34% for the part exceeding that amount. The remaining income for the accounting period is taxed as earned income for the entrepreneur, on the basis of their personal tax rate.
For an entrepreneur, the tax burden represented by earned income is very similar to what it would be for an employee.
Many entrepreneurs on low incomes find it worthwhile to treat all their business income as earned income, because the tax rate on earned income is lower than the capital income tax rate if earnings are low.
Prepayment taxes paid by a private trader
Taxation of a private trader’s business income takes the form of prepayment taxes throughout the accounting period. In the case of a new entrepreneur, these are based on an advance estimate of income. For businesses that have been operating longer, they are based on taxes paid in the previous tax year.
If a private trader has not previously been in business, they must estimate their income for the coming year. A business plan and profitability forecasts made when starting out will help with this.
If the private trader earns more income than estimated, they will have paid too little in prepayment taxes. In such a case, they must pay the tax shortfall as an additional prepayment or as back taxes. At the latest, these must be paid as back taxes plus interest after the final decision is made. Alternatively, any prepayment tax overpayments will be refunded at the appropriate time.
The rules on the taxation of private traders are highly detailed. See the Finnish Tax Administration’s website for comprehensive instructions. New entrepreneurs will find all this challenging to learn right away – there’s a great deal to study and absorb. A good accountant is an important source of support for any entrepreneur, helping them to focus on their core competencies.
Learn more about the taxation of private traders from the Finnish Tax Administration’s website
New entrepreneur: how to set up a business and manage its taxes
Olavi Tuomi, Leading Tax Specialist at the Finnish Tax Administration, was interviewed for the article.