Future entrepreneurs frequently wonder about the basic tax liabilities that will arise when they start operating.

In this post, we’ll go over the relevant fees that apply to entrepreneurs who do their bookkeeping and pay themselves a salary. This analysis will focus on direct taxes. We will exclude VAT obligations for now.

These are the basic tax forms that we will analyze:

1. Taxes and contributions on personal earnings
2. Tax on the net income
3. Annual income tax

Personal earnings are the result of the arbitrary monthly “salary” that the entrepreneur set for themselves. The tax rate on these earnings is 10% and the total contributions amount to 37.05%.

Entrepreneurs who don’t have personal earnings, pay contributions based on their total profit. As the total profit is usually more substantial, this is not a profitable option. Entrepreneurs are encouraged to pay themselves a salary and thereby accrue a much smaller tax burden (on the arbitrary personal income rather than total profits). Read more about personal earnings here.

The profit that an entrepreneur generates is their net income. It amounts to the difference between gross income (value of sold goods and services) and all business expenses. It carries a 10% net income tax rate. Once all tax obligations are settled, an entrepreneur is free to take possession of their net income (profit).

Taxes are paid on the basis of real income, so it’s necessary for entrepreneurs to maintain accurate business records, unlike entrepreneurs (paušal) who pay a flat-rate lump-sum tax assessed by the Tax Administration. Taxes are paid in advance on a monthly basis and the final obligation is assessed at year-end. Should the final tax burden be higher than the total monthly payouts, the entrepreneur will be liable for the difference. The entrepreneur is responsible for projecting yearly earnings and profit for their first year in business.

Annual income tax is a personal tax. Unlike the previous two, this tax must be paid from a personal bank account. However, given the nature of entrepreneurs as natural persons conducting business, our analysis will not be complete if we don’t include this tax in our assessment. You can find more details about the annual income tax for 2018 here.

Now, let’s take a look at tax expenses in an example.

In our example, we’re projecting earnings of seven million dinars in a calendar year. For our tax analysis, the entrepreneur’s VAT obligations are irrelevant. In this example, we’ll be tracking the monthly and annual taxes. We’ll start by dividing the projected income into 12 months. The monthly income then amounts to 583.333,33 dinars.

Every month, the entrepreneur is required to pay themselves a salary and the salary-related levies to the government. In our example we can see that out of a total 30,000 dinars, 17,415 belong to the entrepreneur (net salary). The remaining 12,585 dinars go to the Tax Administration.

After making this payment, the entrepreneur is left with 553,333.33 dinars of monthly income. A net income tax of 10% is collected every month. In this case, 55,333.33 dinars. If their financial liquidity is solid, the entrepreneur is free to collect the remaining 498,000 dinars of net income (profit) every month.

Therefore, to settle these two taxes the entrepreneur will set aside 67,918.33 dinars a month, which is to say 815,020 dinars a year. The entrepreneur is thereby entitled to collect 6,184,980 dinars of tax-free profit for that year.

If we assume the entrepreneur’s projection perfectly matched actual earnings, which will most likely never be the case, the entrepreneur will have no further tax burden on net income. However, if business records indicate earnings above the projected amount, the entrepreneur will have to make up the difference between the payments made during the year and the actual tax burden.

Finally, let’s look at how an entrepreneur’s business success impacts their annual income tax (tax on “extra” income).

Remember that this is a tax that is levied on a natural person, not a business entity. This tax includes any additional income collected by the entrepreneur (such as that from property rental, temporary service agreements, and the like). Additional income from employment in other firms is also considered.

In the example, we simplified the calculation of the annual income tax. The amount we arrived at was 338,000 dinars. Read more about personal deductions you can use to reduce your tax liability here.

To summarize, the entrepreneur from our example who earned 7 million dinars will be liable for 1,153,500 dinars for taxes and contributions which covers the three tax forms outlined. Of the 7 million, they get to “collect” 5,846,500 dinars. This amounts to 84% going to the entrepreneur and 16% to the Tax Administration.

If you’re interested in what these calculations would look like for other income amounts, let us know in the comment section below.