Tax & Being Self Employed. Everything You Need To Know

Self-Employed – The Advantages

Register your Business NameBeing self-employed means you are carrying on your own business rather than working for an employer. With this there are many advantages and disadvantages.

From a financial view point the primary advantage of being self-employed is that you are given greater flexibility in the expenses you can claim for tax purposes. Costs allowable under the PAYE system (where you are employed by another person or company) are very limited in comparison.

There are more tax planning opportunities available to the self-employed. For example, suppose you had intended carrying out some repairs during the next year. You also plan to travel for 6 months and you know that you won’t be earning much income. However, this year you’re earning quite a lot and you know your income will be taxed at the higher tax rate. You could bring forward the planned repairs to the current year, as it will be tax deductible at the higher tax rate.  Being able in part to control the timing of your expenses and income allows you to maximise the tax break.

As a self-employed person you may qualify for the certain Tax Exemptions. These tax exemption are only available to the self-employed – so you must be registered as self-employed to avail of these tax breaks.

You can be in employment part-time (earning PAYE income) while also being considered self-employed for your other work, which qualifies for certain tax exemptions. Note that you only receive the tax exemption on your self-employed income – that is your creative earnings. If you have a PAYE position that involves doing similar work to your self employed work, then it would not qualify for any tax exemptions on the grounds that it is a PAYE position. A PAYE salary is liable to income tax.

 

Other advantages of working for yourself include:

  • The flexibility it affords
  • Greater control over your work/life balance
  • Retaining responsibility for the direction of your career
  • Increased potential for financial reward
  • Added motivation

 

 

 

 

Self-Employment – The Challenges

One of the main challenges of being self-employed is that your income can be sporadic, especially when starting out. You alone are responsible for the amount you can earn so motivation and a determination to succeed is key.

To be self-employed and run your practice as a business you may need to broaden your range of business skills. You are responsible for every aspect of your work. You will also need to learn about book-keeping and cash-flow management.

If you’re not careful you may end up spending more time running your business than you are on doing the work that attracted you to self-employment in the first place.

Once you become self-employed you fall within the provisions of self-assessment for tax purposes. This means that you are personally responsible for ensuring that your tax affairs are kept up to date.

Keeping on top of your tax obligations requires discipline. Most self-assessed taxpayers pay their income tax in one lump sum each year, which requires effective budgeting so that the cost can be met on an annual basis.

So there are many additional stresses that come with working for yourself, another one being that as a self-employed individual you cannot receive holiday or sick pay from an employer.

Ultimately, being your own boss and making a successful business for yourself is hugely rewarding, and if you’re willing to accept the additional risk and stress involved it is worth the extra effort.

 

 

 

Registering as Self-Employed

Once you become self-employed it will be necessary to register with Revenue for Income Tax, if one of the following applies;

 

  1. You are registered for PAYE Anytime
  1. You are registered for the Revenue Online Service (ROS)
  1. You are represented by a Tax Agent (accountant or tax advisor)

 

Then you must use the Revenue eRegistration Service to do so;

Online registration must be done via ROS, which you can register for here.

Once you have ROS up and running you can set up your income tax registration and manage your tax affairs using the service.

 

If none of the above three scenarios apply to you then you can complete a paper form TR1, which is available on the Revenue website here.

Parts A & B need to be completed to register for Income Tax. This form is also used to register for VAT, PAYE (if you are an employer) and for RCT (Relevant Contracts Tax – It is used in the construction, forestry and meat processing industries). Thus, much of the form will not be applicable when you first register for income tax.

 

It is advisable to register for income tax as soon as you begin trading, although the registration can be backdated. Normally you must file and pay your tax for each year by 31 October of the following year, but Revenue offer a “year’s grace” for the first year of filing. For example, if you started trading in 2013 then you are not required to file your first tax return until 31 October 2015, at which point you must also file for the tax year 2014. So in this case you will need to register in time to file your first tax returns by 31 October 2015 (Note that the Revenue Commissioners currently offer an extension to the income tax deadline of approximately two weeks if the tax return is filed and paid online via ROS.)

It is important to note that although the income tax registration can be backdated as is necessary, certain Tax Exemption applications are not as flexible. The exemption must be applied for before the end of the current year if it is to apply from the 1st January of that year. So for example if you started trading in 2014 and needed the exemption in place for that year, then you will need to register for income tax as well as apply for the Tax Exemption by 31 December 2014.

Being Employed as well as Self-Employed

There are specific Tax/PRSI/USC implications if you are both in employment as well as being self-employed. Many individuals have a PAYE position (i.e. are in employment part-time) in addition to their self-employed income. This can provide a good balance, which works well in practice. The PAYE employment provides a regular income as well as entitlements to social welfare benefits that might otherwise be foregone. You can also claim a PAYE tax credit for each year of employment, which is equal to 20% of your PAYE salary in the year, subject to a maximum credit of €1,650 (as per 2014 list of tax credits).

When earning income from both PAYE/employment and self-employment it is still necessary to register for income tax under the self-assessment system. The employer will deduct the necessary PAYE/PRSI/USC from the employment income and you will need to account for any additional tax due when filing your tax return.

The total income i.e. employment and self-employed income is declared to Revenue. The tax is calculated on the total income and the taxpayer receives a credit for the deductions that the employer has taken at source. Any taxable welfare payments received in the year should also be declared on your income tax return. A list of taxable and non-taxable social welfare payments can be found here.

 

Being Unemployed as well as Self-Employed

As a self-employed taxpayer you may still be entitled to some form of unemployment benefit (but not much) from the Department of Social Protection, and you do not need to de-register as self-employed in order to claim such benefits.

There are two separate unemployment benefits available, Jobseekers Benefit and Jobseekers Allowance.

Jobseekers Benefit is a set weekly payment, and is taxable when added to your other income in the year.

Jobseekers Allowance is means tested and is non-taxable, regardless of how much other income you earn in the year.

 

In order to qualify for Jobseekers Benefit you must have worked as an employee (full time or part time) in the last 4 years, paying Class A PRSI on that income.  A qualifying condition for the full rate is that you must be available for full time work.

More details on Jobseekers Benefit, including further conditions and current rates, can be found here.

Self-employed taxpayers pay Class S PRSI, which only covers you for certain social welfare payments.  It does not entitle you for Jobseeker’s Benefit.  For this reason, and also for the fact that you may not be available for full time work as a self-employed individual, it is possible that you do not qualify for full Jobseekers Benefit.

If you do not qualify for Jobseekers Benefit, or if you only qualify for a reduced rate, you can ask to be assessed for Jobseekers Allowance, which may be more beneficial to your circumstances.  Jobseekers Allowance also has the advantage that it is not taxable when added to any other income you might earn in the year.

In order to qualify for Jobseekers Allowance your means must be below a certain level to qualify.  As well as assessing your existing household income, the Department of Social Protection will also ask for details on any assets, investments, savings…etc that you own.  This is known as means testing, the conditions of which can be found here.

More details on Jobseekers Allowance and current rates can be found here.

The Department of Social Protection has also introduced a new service called Intreo, which will provide a single point of contact for all employment/unemployment and income supports.  Full details of the service can be found here. If you think you may be entitled to some form of unemployment benefit you should contact your local Intreo office, which can be located through here.

 

 

Books and Records

Once you become self-employed it is necessary to maintain proper books and records to enable you to make your returns to Revenue. This is a requirement according to Revenue legislation, and becomes important if your business and tax affairs are ever selected for a Revenue audit. More details on this here.

 

 

Recording Income & Expenses

 

When invoicing clients the following information should be included:

  • – your name and address
  • – name and address of the customer
  • – date of issue of the invoice
  • – date of supply of the goods or services
  • – full description of the goods or services
  • – the quantity or volume of the goods supplied
  • – cost of the goods or services
  • – sequential invoice number

 

As well as keeping copies of all invoices issued and received you will need to record the details of all your sales and purchases.

 

Allowable Expenses

You can claim for any business expense that you have incurred in order to earn your profits. These expenses are normally referred to as revenue expenditure. Revenue expenditure can be seen as the day to day running costs of your business, and may include such items as:

 

  • – Materials specific to your trade
  • – Training Specific to your trade
  • – Telephone/internet
  • – Office/computer supplies
  • – Rent of business/studio space
  • – Professional/legal/accounting fees
  • – Agent commission
  • – Research – books, journals, subscriptions etc
  • – Visits to clients
  • – Postage/couriers
  • – Motor expenses
  • – Travel & subsistence

 

 

 

 

Disallowed Expenses

Any expense, not wholly and exclusively incurred for the purposes of your profession is not allowed. This would include any private or domestic expenditure. For example food & clothing (except protective clothing) cannot be claimed. Also, business entertainment expenditure – i.e. provision of accommodation, food, drink or any other form of hospitality to clients or buyers is specifically disallowed.

 

 

 

Mixed Expenses

Where expenditure relates to both business and private use, only that part which relates to your business will be allowed. Examples of such expenditure are rent, electricity, telephone charges etc., where a business is operated from home. These expenses will need to be apportioned to exclude the element of private use.

Revenue will accept estimates for business use. For example if someone works from home they would typically claim 1/3 of their light and heat bills as business expenditure.

 

 

 

Motor Expenses

You can claim a deduction for the running expenses of a motor vehicle used for business purposes. This includes a suitable portion of insurance, motor tax, NCT and general maintenance, as well as petrol and diesel. However if you have a regular place of work then journeys between here and home are normally treated as private and not business.

 

 

 

Capital Expenditure

Expenditure is regarded as ‘capital’ if it has been spent on acquiring or altering assets which are of lasting use in your business, for example, the purchase of a computer or other equipment. You cannot deduct the cost of this type of expenditure in arriving at your taxable profit. You can, however, claim capital allowances on expenditure incurred on items such as office equipment and business vehicles.

Capital Allowances are calculated at a rate of 12.5% (per year) of the net cost. The allowance is granted for 8 years until the full cost of the asset has been claimed. For example, if you purchase a computer for €1,600 in 2014 you can claim €200 (12.5% of 1600) of the cost as a tax-deductible expense each year from 2014 to 2021 inclusive. By claiming €200 each year for 8 years you are getting a deduction for the full €1,600 paid for the computer. Note that in the first year of purchase a full capital allowance is given regardless of when in the year the asset was purchased. As long as it was in use on the last day of your accounting year the full allowance is afforded at 12.5% for that year.

 

Keeping Books & Records

Under the self-assessment system you do not have to present your books and records to Revenue when filing your tax return.  When you submit a return you must give details of your income and expenditure, but you do not provide any supporting documentation.  However you must retain your books and records for 7 years as Revenue have the right to audit your return and request access to your accounting information at any time during this period.  In the event of an audit, Revenue will want to see sales invoices, purchase invoices/receipts bank statements and credit card statements.

Preparing Your Accounts

Once you have recorded your income and expenditure you will be in a position to prepare your accounts.  This is simply a matter of transferring your totals from your sales and purchases books into an income and expenditure account.  The result should look something like the example below.  Once done, you are ready to input the figures onto your tax return.

Mr. Joe Public
Income & Expenditure Account
Year Ended 31st December 2015
Income
Sales/Income 20,000
 Total Sales/Income 20,000
Expenditure
Materials 1200
Research 300
Utilities 250
Rent 1200
Telephone 600
Motor Expenses 800
Travel & Subsistence 200
Total Expenditure 4550
NET Profit 15,450
LESS: Capital Allwance @12.5%
Computer Bought for €1600 200
Profit After Capital Allowance 15,250

Filing Your Return

The due date for filing your 2015 income tax return is 31 October 2016, with the availability of an approx. two week extension if return is filed and paid online via www.ros.ie. Further benefits of using ROS include quicker filing/processing times, more tailored and straightforward forms to complete, and access to your tax calculation before filing your return.

The tax return itself is filed on a ‘Form 11’, the paper version of which is available on the Revenue website here (for 2014 but it will be updated annually).

Calculating your tax – Rates & Allowances

There are 2 concepts to understand in calculating your income tax.  These are “Tax Bands” and “Tax Credits”.

Tax Bands

There are two income tax rates. The standard rate is 20% and the higher rate is 40%. In 2015, for a single person the first €33,800 of income is taxable at the lower rate and the balance is taxable at the higher rate. The tax band represents the amount that is taxable at the lower rate. This is also known as your “cut-off point”.

For married people tax bands and tax credits can be transferred between spouses so they are best utilised for tax purposes.

Tax Credits

Tax credits are offset against the income tax payable. There is a standard personal tax credit of €1,650 for 2015. A married couple would have a joint personal tax credit of €3,300 (€1,650 x 2) that can be divided between the spouses in the most tax efficient manner.

A full list of tax credits and the various tax bands for 2015 can be found here. The Revenue guide to taxation of married people is available here.

Tax bands and credits are best illustrated by way of an example.

Income Tax Calculation for 2015 (assuming single person & ignoring Universal Social Charge/PRSI)

Taxable Profits (from trade)

€40,000

€33,800 @ 20%

Equals: €6,760

€6,200 @ 40%

Equals: €2,480

Total Tax

€6760 + €2480 = €9,240

Less Tax Credit (Single Person)

(€1,650)

Net Tax

€7,590

Universal Social Charge (USC)

The Universal Social Charge came into effect on 1st January 2011, and it replaces the old income levy and health levy. It is payable on gross income, after relief for most capital allowances, but before pension contributions. It is also payable on artist exempt profits, but is not charged on social welfare payments.

All individuals pay the USC if their income exceeds €12,012 per annum. The rates and thresholds for self-employed individuals for 2016 are as follows:

  • 1% – on income up to €12,012 per annum
  • 3% – on income between €12,012 and €18,668 per annum
  • 5.5% – on income between €18,668 and €70,044 per annum
  • 8% – on income between €70,044 and €100,000 per annum
  • 11% – on income over €100,000 per annum

Exemptions to USC

Those earning less than €12,012 per year are exempt from the USC.

All social welfare payments are exempt from the USC.

Full details on the Universal Social Charge, including FAQs and a list of exemptions, can be found here.

Penalties & Interest

Failure to file an income tax return on time will lead to a tax-geared penalty. Late filing within 2 months leads to a 5% penalty and after 2 months the penalty is 10%. Revenue can also charge interest on late payments of tax at a rate of approx. 8% per annum.

Preliminary Tax

The 31 October deadline is also the due date for preliminary tax (extended for electronic filing). Preliminary tax is a payment of tax, on account, for the current year. PAYE workers have their income taxed as they earn it so there would be a huge cashflow advantage to self-employed people if they didn’t have to pay tax on earnings until 10 months after their year end.

To redress this, Revenue attempt to tax a self-employed person’s income in the year they earn it by way of preliminary tax. So preliminary tax for 2015 is due by 31 October 2016 and it is fully refundable to the extent that it covers the final tax liability for the year. If preliminary tax does not cover the final liability for 2015 then the balance is payable by 31 October 2016 (extended for ROS filing).

In order to avoid a potential charge to interest (approx. 8% per annum) on any underpayment, Revenue offer two main methods to calculate preliminary tax;

  1. To pay preliminary tax at 100% of the prior year’s liability

– This is the most common method, and guarantees that, even if you underpay in preliminary tax, you will be considered to have met your preliminary tax obligation, and avoid any potential charge to interest. Many taxpayers prefer this method for the certainty it provides.

  1. To pay preliminary tax at 90% of the actual current year liability

– This method is normally used if the taxpayer is confident that their tax liability for the current year will be a lot less than the tax liability of the prior year (for which they are filing). Option 1 would amount to an overpayment of preliminary tax, and would likely be an amount that they could ill afford (if their tax liability is due to decrease, then this is probably due to the fact that they have earned less in the year, meaning they cannot afford to be paying tax at the previous year’s rate).

– The problem with option 2 is that you need to make the preliminary tax decision by 31 October in the year. With potentially two months still left in the year it can be difficult to make an accurate estimate of what your tax liability might be for the year.

It may be best to explain this in more detail by way of an example. Let’s take an individual who has been trading for a number of years and their income tax liabilities have been calculated as follows:

Tax year 2013 2014 2015
Tax Liability €1,500 €5,500 €3,500

The 2013 income tax is due for payment on 31 October 2014. This is also the due date for preliminary tax for 2014. For 2014’s preliminary tax we can pay either 100% of the 2013 liability (€1,500) or 90% of the 2014 liability (€4,950). 100% of the 2013 liability is less so that is the minimum amount we should pay. The total paid at 31 October 2014 would be €3,000, being €1,500 for the 2013 liability (assuming no preliminary tax had been paid already for that year) and €1,500 towards 2013.

The balance of the 2014 income tax then falls due on 31 October 2015, which is also the due date for 2015’s preliminary tax. The balance owed for 2014 is €4,000, being €5,500 less the €1,500 paid in October 2014. The preliminary tax for 2015 again can be 100% of the 2014 liability (€5,500) or 90% of the 2015 liability (€3,150). As 90% of the 2015 liability is less, this is the amount we might want to pay. The total payable on 31st October 2015 will therefore be €7,150.

In practice you will not know the exact 2015 liability at the time of filing in October 2015, so a conservative estimate should be made at that point. For example some people might aim to cover 95% of the estimated liability instead of 90%, just to be safe.

When the final liability for 2015 is filed in October 2016, Revenue will look at the payments retrospectively to see if either 90% of the 2014 liability, or 100% of the 2014 liability, was covered by preliminary tax. If neither figure was met then the taxpayer faces a potential interest charge at approx. 8% per annum on the full underpayment.

Notice of Assessment

Once you have filed your income tax return, Revenue will issue you with a notice of assessment. This will reflect the figures you have submitted on your “Form 11” and show Revenue’s calculation of your Income Tax and PRSI/USC for the year under review, along with any balance of tax due or refundable.

PRSI and Social Insurance Benefits

Pay Related Social Insurance (PRSI)

PRSI payments go into the Social Insurance Fund which helps pay for Social Welfare benefits and pensions.

‘Reckonable income’ for the purposes of PRSI is profit after capital allowances but before reliefs and deductions. The current rate of PRSI is 4%, which is charged on all reckonable income.

Using the same example as before, but this time including USC & PRSI

Income Tax Calculation for 2016 (single person)

Taxable Profits (from trade)
€40,000
33,800@ 20% €6,760
6,200@ 40% €2,480
Total Tax €9,240
Less Tax Credit -€1,650
Net Tax €7,590
PRSI: 40,000 @ 4% €1,600
USC:
12,012 @ 1% €120
6,656 @ 3% €200
21,332 @ 5.5% €1,173
Total USC: €1,493
Total Tax, PRSI & USC €10,683

Minimum PRSI Payment

As a self employed individual, you pay Class S PRSI of 4% on all your income for tax purposes, that is, gross income less allowable expenses. You must pay 4% of all your income or €500, whichever is greater.

If you earn less than €5,000 from self-employment in a year you are exempt from PRSI, but you may pay €500 as a voluntary contributor (if you meet the other conditions).

Social Insurance Benefits

There are a wide range of benefits that are available to people who have paid social insurance. Entitlement to these benefits is dependent on a number of conditions other than the social insurance requirements. The payments that are available include:

  • Jobseeker’s Benefit
  • Illness Benefit
  • Maternity Benefit
  • Adoptive Benefit
  • Health and Safety Benefit
  • Invalidity Pension
  • Widow’s/Widowers Contributory Pension
  • Guardian’s Payment (Contributory)
  • State Pension (Contributory)
  • State Pension (Transition)
  • Bereavement Grant
  • Treatment Benefit
  • Occupational Injuries Benefit
  • Carer’s Benefit

It should be noted that some social welfare benefits are taxable and some are not. A list of benefits and their tax status is available here. The USC is not chargeable on any social welfare payments.

Voluntary Contributions

If your income is below €5,000 you will not have to pay PRSI, and if this is the case you might want to consider making voluntary contributions.(Currently €500 per year) These allow you to remain insured through times when you are not earning, and maintain entitlement to some social welfare benefits. Voluntary contributions cover for long-term benefits, such as State Pension, but do not cover short-term benefits such as those for illness, unemployment, maternity, occupational injuries and dental and optical treatment. More information on the scheme, and details on how to apply, are here.  The application form can be found here.

There are some restrictions on how and when you can make voluntary contributions. Below is an extract from the Welfare website that explains these in more detail;

“To become a voluntary contributor you must:

  • have paid at least 364 weeks [7 years] PRSI in either employment or self-employment

and

  • apply within 12 months of the end of the year during which you last paid compulsory insurance or you were last awarded a credited contribution

and

  • agree to pay voluntary contributions from the start of the contribution week that follows the week in which you leave compulsory insurance.

The amount of contributions required to become a voluntary contributor on or after 6 April 2014 are as follows:

  • you must have previously paid 468 weeks [9 years] PRSI if becoming a voluntary contributor on or after 6 April 2014
  • you must have previously paid 520 weeks [10 years] PRSI if becoming a voluntary contributor on or after 6 April 2015.”

Capital and Revenue Grants

Just as there is capital and revenue expenditure there are capital and revenue grants.

A revenue grant is one that is provided to fund revenue expenditure. For example a grant provided for the purpose of funding a research trip would be a Revenue grant. The income from a Revenue grant is allocated in full to the year it is received and the expenditure to which it relates is directly offset against it.

A capital grant is a grant that is provided for the purpose of capital expenditure e.g. a grant to fund the furnishing of a studio/purchasing of equpment. As the capital expenditure must be claimed at a rate of 12.5% over 8 years as explained earlier in this article, the capital grant is also amortised over the same period.

So let’s assume you have received a grant of €10,000 towards the purchase of a new equipment. The total cost of the fit-out came to €16,000. Each year for 8 years you need to record grant income of €1,250 and claim capital allowances of €2,000. This effectively means you are getting a tax deduction of €750 over 8 years which comes to a total of €6,000 being the difference between the actual cost to you and the grant income.

The safest way to deal with grants and awards is to assume that they are taxable until it can be shown that they are not.

Do You Need An Accountant?

An accountant is not a requirement. Revenue will accept returns direct from all members of the public. The main factors you would probably need to consider are:

  1. How comfortable you are preparing you own returns?
  1. The complexity of your return.
  1. The potential liability if the return is wrong.
  1. The cost of engaging an accountant.
  1. The time being taken up by preparing your own returns.
  1. Are there any other parties that require accountant’s confirmations?
  1. General awareness of other business issues.

If you are not sure about your return, but would like to prepare it yourself I would recommend that you contact an accountant with a view to looking over the return once you have prepared it, especially if it is your first tax return. An accountant should be able to quote a reasonable fee for simply reviewing a tax return.

For people in all businesses, bookkeeping and preparing tax returns isn’t a value adding activity. The time spent doing these tasks is always better employed in the office/studio. The cost of an accountant should be weighed against the time consumed by doing the work yourself.

There are 3rd parties other than Revenue that may require you to have an accountant from time to time. The most obvious example is your bankers. When looking for loans or mortgages, banks will frequently require an accountant’s certification of your income. Typically they look to certify 3 year’s accounts for mortgages. However this can be often done on an ad-hoc basis.

Finally, an advantage of having an accountant is that they will be aware of other issues that might arise, and with the constant changes to tax laws and exemptions in particular it may be useful to have someone at hand who is up to speed on these issues.

While every effort is made to ensure the information in this article is accurate, Kevin Barry can accept no responsibility for loss or distress to any person acting or refraining from acting as a result of the material contained herein.


Leave a Reply

Your email address will not be published. Required fields are marked *

Powered by WordPress. Design: Supermodne.