Taxing times loom for the self-employed

Next Thursday is a key deadline in the tax calendar, the day the self-employed have to pay their tax for 2015.

While employees pay their tax on the drip, weekly, fortnightly, or monthly as they get paid, the self-employed pay it in a lump sum. For many of them, next Thursday is the day.

Self-employment is a fairly straightforward idea. The tax system has a knack of contaminating straightforward ideas, though.

Revenue expect to hear from traders and service providers this week, but also from a range of other people whom they classify as being within the self-assessment net.

Employees with taxable fees or other earnings greater than €3,174, outside of PAYE wages, fall into self-assessment, which might be expected. There are other people to whom the category is applied and these are less obvious.

Even if you do not earn any director’s fees or have any other non-PAYE income, the mere fact of being a company director with a shareholding of 15% or more puts you into the self-assessment bracket.

Share ownership, as a criterion for self-assessment, also applies to employees who have share options from their employers.

Revenue also use the self-assessment system to bolster their efforts in tackling tax evasion. Offshore accounts have often been used to hide hot money.

Revenue insists on a self-assessment return of income from anyone who has opened a foreign bank account, even though opening a foreign bank account is perfectly legitimate.

Nor do you have to be making any money. You might not be left with anything from rental property or some other venture, but if the total amount you receive before your own costs, deductions, and tax allowances is more than €50,000, you will be treated as self-assessed. (The €50,000 limit is to change to €30,000 next year).

The tax system is unkind to many people, but particularly so to the self-employed. Because they pay in November for all of 2015, they must pay tax on income they have yet to earn. That is especially tough on retailers whose earnings tend to be greater towards the end of the year, around the Christmas season.

In addition, the self-employed run the risk of tax surcharges where their tax returns are made late (even if there is no additional tax liability) and interest charges of 8% per annum where payments are not made on time.

These are risks that employees do not face, as their employers administer their taxes through the PAYE system.

Despite this discrimination, income tax payment compliance by the self-employed is running at 98%. According to its own figures, Revenue is, in fact, more likely to receive timely income tax payments from self-employed earnings than they are from the wages of those in employment.

Most galling of all, though, for the self-employed is that they are taxed more heavily than their PAYE counterparts. That is mainly because employees receive a tax credit of €1,650 which the self-employed do not.

So a single person earning €20,000 as an employee pays tax, PRSI, and USC totalling €2,045. Their self-employed counterpart earning the same amount, €20,000, pays €3,695. It is outrageous that people are taxed based not on how much they earn but on how they earn their money.

The discrimination between the tax bills of the employee and the self-employed person varies depending on the income figure. It is most noticeable both at the lower end of the income spectrum (as in this example) and at the higher end.

Self-employed people pay a USC surcharge of 3% on earnings above €100,000, a surcharge that is not applied to employees on similar wages.

The balance will be redressed a little in 2016 with the introduction of an earned income credit of €550 to be offset against self-employed income.

This will narrow the gap between employees and the self-employed, but the system still favours employees, particularly those on lower wages.

They will also benefit from another relief from PRSI being introduced in 2016 which is not available to the self-employed.

As in previous years, the self-employed will have paid disproportionately more tax than their fellow citizens. So much for entrepreneurship in the best small country in the world to do business. When it really matters, those who work for themselves are squeezed more by the system.

Brian Keegan is Director of Taxation with Chartered Accountants Ireland