Legal Eye: Outing of self-employment

But when it comes to self-employed individuals, 2007 bodes uncertainty.

A taxing tale

A mere three years ago in the land of the Republic of Poland, where proposals for an upper progressive tax threshold of 50 percent were being debated, a different tack was taken for self-employed persons. A flat tax of 19 percent for individuals conducting economic activity was enacted. Everywhere in the land, self-employed persons rejoiced. Many decided that this incentive was sufficient to overcome any remaining doubts as to declaring themselves consultants or similar appellations, rather than employees.

But not everyone in the land was happy about the increase in self-employment. All this new-found entrepreneurial activity smacked some as an attempt (egad!) to avoid paying higher taxes. Various governmental authorities, including tax and labor inspectors, questioned these new arrangements, with varying degrees of success. A truce of sorts was eventually reached, and many remained willing to forgo the statutory protections of being an employee for the simplicity and savings of a 19-percent flat tax.

Self-employment in 2007

But alas, the budgetary pressures of running a solidarity, but not cheap, state caused the government to review self-employment again. As of January 1, 2007, amendments to the personal income tax law introduced a set of conditions designed to differentiate employees from the self-employed. The use of a set of criteria to determine whether someone is more an employee than a self-employed person is not unusual. As an example, the US Internal Revenue Service uses a preponderance of factors test involving 20 question to assess this same issue.

Coming back to Poland, the recent amendments list three conditions, and all three must be met to determine that you are really an employee. For all those entrepreneurial types out there, it may be first time that you wanted to fail at something.

Vital criteria

The conditions are the following:

1) responsibility vis-á-vis third parties for the results of your work and its performance, except for liability for illegal actions, is borne by the person requesting the work;

2) your work is performed under the supervision, and at a place and time set by the person requesting the work; and

3) you do not bear economic risk in connection with your economic activity.

The first of these standards will probably be satisfied by many who are working as consultants. If your work is contracted for by a company, for use by that company, most likely the company will act toward its customers as if your work was done by the company.

The second may be easier to fail. If you are allowed flexibility in your work arrangement, such as working out of your home or flexible time, you may be able to claim self-employment.

Finally, "economic risk" is the most slippery of these conditions. It's not quite sure what this means. Would using your own equipment or having your wages based on work results be sufficient? This condition is likely to create headaches in the future.

Some good news

All is not uncertain for self-employed persons in 2007. Another recent tax amendment serves to spare trees and postage stamps. Self-employed persons no longer need to file monthly income tax returns.

Judith Gliniecki is a partner with Rymar and Partners e-mail: j.gliniecki@rymar.pl