Why do the self-employed pay higher taxes?

[Duke of Marmalade]

The point I was missing is that the tax status of "self employed" is a matter of choice. Any sole agent can chose between being taxed as self employed or "incorporating" and being taxed as PAYE. Indeed many do.

So it is a free choice as to which tax regime will apply to you and so prima facie distortions between the regimes are not a cause for street marches.

 

[Brendan Burgess]

There is a good summary of the case against higher taxes in last week's Sunday Business Post by Brian Keegan of Chartered Accountants Ireland.

How the state hammers the self-employed

"There is no administrative reason left for tax discrimination between those who rely on invoices and those who rely on payroll to make their way. Special credits and special rates which work against the self-employed are outmoded ideas"

 

[Sarenco]

The point I was missing is that the tax status of "self employed" is a matter of choice. Any sole agent can chose between being taxed as self employed or "incorporating" and being taxed as PAYE. Indeed many do.

So it is a free choice as to which tax regime will apply to you and so prima facie distortions between the regimes are not a cause for street marches.

That is not always the case. Solicitors, for example, are prohibited by statute from incorporating their practices.

 

[Duke of Marmalade]

There is a good summary of the case against higher taxes in last week's Sunday Business Post by Brian Keegan of Chartered Accountants Ireland.

How the state hammers the self-employed

"There is no administrative reason left for tax discrimination between those who rely on invoices and those who rely on payroll to make their way. Special credits and special rates which work against the self-employed are outmoded ideas"

Not sure, Boss. Solicitors notwithstanding, self employed people chose to be taxed that way. Self employment as a tax status is a choice which does not in any way preclude people being self employed in substance but not in the eyes of the Revenue (incorporation).

And BK misses the key point about Employers PRSI - perhaps that's the reason most self employed people do not incorporate.

Comparisons with civil servants are meaningless. Their employer is the taxman. They get pensions but their employer doesn't have to fund for it. They get reduced PRSI (I think). In theory civil servants could earn their income "tax free" - at lesser rates of course.

The thing that amazes me is that most people, like me, were not aware of this "discrimination" until the Budget speech but absolutely nothing was changed in that respect by the Budget.

 

[T McGibney]

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And BK misses the key point about Employers PRSI - perhaps that's the reason most self employed people do not incorporate.

I'm lost ???? Explain please.

 

[Duke of Marmalade]

I'm lost ???? Explain please.

Okay, I might have it wrong. But I thought incorporating meant setting up your own company and getting that company to employ you. Unless there are exemptions for small companies there would be an immediate tax friction of Employers PRSI which was not applicable under your self employed status.

 

[T McGibney]

Okay, I might have it wrong. But I thought incorporating meant setting up your own company and getting that company to employ you. Unless there are exemptions for small companies there would be an immediate tax friction of Employers PRSI which was not applicable under your self employed status.

With respect, I think you need to do a bit of research before sounding off.

Salaries and other remuneration paid to Proprietary company directors (directors owing 15% or more of a company, or their spouses) are not liable to employers PRSI - and never have been.

 

[Duke of Marmalade]

With respect, I think you need to do a bit of research before sounding off.

Salaries and other remuneration paid to Proprietary company directors (directors owing 15% or more of a company, or their spouses) are not liable to employers PRSI - and never have been.

Chill out man So there you go, no obvious reason why the self employed cannot incorporate (solicitors notwithstanding). Those who opt for self employed tax status obviously feel the greater flexibility in deductions or some other compensating factors (not necessarily foul play) outweighs prima facie higher tax rates.

Of course, the Employers PRSI argument of orka remains valid despite your own difficulty in grasping the point.

I was simply looking around for some obvious reason why the majority of self employed do not incorporate and thus apparently willingly accept the seemingly higher tax burden. Can you explain this latter point (for somebody earning say 200K for whom the costs of incorporation would be trivial).

 

[T McGibney]

I was simply looking around for some obvious reason why the majority of self employed do not incorporate and thus apparently willingly accept the seemingly higher tax burden. Can you explain this latter point (for somebody earning say 200K for whom the costs of incorporation would be trivial).

Already answered.

That is not always the case. Solicitors, for example, are prohibited by statute from incorporating their practices.

 

[Sarenco]

I was simply looking around for some obvious reason why the majority of self employed do not incorporate and thus apparently willingly accept the seemingly higher tax burden. Can you explain this latter point (for somebody earning say 200K for whom the costs of incorporation would be trivial).

Aside from the (non-trivial) on-going compliance costs associated with operating a business through a corporate structure, you should also bear in mind that the company itself will be liable for taxes on any profits that it generates in addition to any taxes that may become due on any income paid to employees of that company. In other words, there is often an element of "double-taxation" associated with operating a business through a corporate structure.

 

[Sarenco]

Of course, the Employers PRSI argument of orka remains valid despite your own difficulty in grasping the point.

Not really.

In the US social security (broadly equivalent to PRSI) is actually paid into a separate fund so, unlike to position in Ireland, it actually matters whether a payment is characterised as social security or income tax. Currently, an employee and his/her employer each pay a 6.2% social security tax on up to €117,000 of net earnings. The self-employed pay the combined employee and employer amount (i.e. 12.4%). However, net earnings from self-employment are reduced by half of the total social tax for the purposes of calculating income tax. This is similar to the way employees are treated under US tax laws because the employer's share of the social security tax is not considered wages to the employee. We could of course do the same thing in Ireland to arrive at the same position but it is not really necessary as all income tax, PRSI and USC get paid into the same pot.

 

[Sarenco]

The thing that amazes me is that most people, like me, were not aware of this "discrimination" until the Budget speech but absolutely nothing was changed in that respect by the Budget.

Duke, I can assure you that the self-employed have been acutely aware of the discrimination in treatment for some time!

What surprised advisers in the current budget was that the original self-employed USC surcharge contained a "sunset clause" and was anticipated to fall away at the end of the current year and would have put employees and the self-employed on the same footing in this regard. Obviously this provision will now be repealed and the degree of the surcharge will be extended. This has echoes of the Minister's apparent about-turn on the private pension levy last year.

 

[Duke of Marmalade]

Aside from the (non-trivial) on-going compliance costs associated with operating a business through a corporate structure, you should also bear in mind that the company itself will be liable for taxes on any profits that it generates in addition to any taxes that may become due on any income paid to employees of that company. In other words, there is often an element of "double-taxation" associated with operating a business through a corporate structure.

Retaining profits within the company can lead to double taxation, on the other hand it could be used to manage distributions to minimise personal taxation. In any case, a sole trader can always ensure that she gets paid all of the earnings of the company and thus avoid any possibility of double taxation.

I didn't understand your ER PRSI point. Possibly the system in the US is symmetrical, it does not seem so in Ireland. ER PRSI seems a straight discrimination against employment versus self employment.

I have no axe to grind here, but on the balance of what I am hearing from AAM contributors the situation does not seem to be as tilted against the self employed as my OP intimated.

 

[Purple]

As far as I am aware doctors are also prohibited from incorporating.

 

[Duke of Marmalade]

As far as I am aware doctors are also prohibited from incorporating.

I'm getting above my pay grade here but there may be some confusion in terminology. I can accept that doctors and solicitors may not be able to hide under a limited liability shelter but cannot unlimited companies be set up?

 

[Sarenco]

Retaining profits within the company can lead to double taxation, on the other hand it could be used to manage distributions to minimise personal taxation.

Corporation tax is chargeable on all profits (income and gains), wherever arising, and not simply on retained profits.

Obviously a shareholder will not be taxed on profits retained by a company. In respect of such profits, the shareholder will certainly minimise personal taxation for the simple reason that the shareholder will not receive anything!

 

[Sarenco]

...In any case, a sole trader can always ensure that she gets paid all of the earnings of the company and thus avoid any possibility of double taxation. QUOTE]

With respect Duke, this sentence makes absolutely no sense. A sole trader refers to a self-employed individual who does not trade as a member of a partnership. If a sole trader receives earnings through carrying out a trade then obviously these earning are not being received by the company. You can't have it both ways!

 

[Sarenco]

I didn't understand your ER PRSI point. Possibly the system in the US is symmetrical, it does not seem so in Ireland. ER PRSI seems a straight discrimination against employment versus self employment. QUOTE]

My point is simply that even in a jurisdiction where a self-employed person pays a higher level of social security (to reflect the fact that there is no employer's social security paid in respect of that individual), this is subsequently netted out under the income tax system to ensure that the employee and self-employed are ultimately put in the same net position. There is simply no discrimination against either the self-employed or the employee.

 

[Sarenco]

I have no axe to grind here, but on the balance of what I am hearing from AAM contributors the situation does not seem to be as tilted against the self employed as my OP intimated.

Could you point to any previous contribution in favour of the discriminating treatment of the self-employed under the tax code that has not been comprehensively refuted? I'm trying not to be argumentative but you are adopting a very strong position for somebody with no axe to grind.

 

[Sophrosyne]

There is a good summary of the case against higher taxes in last week's Sunday Business Post by Brian Keegan of Chartered Accountants Ireland.

How the state hammers the self-employed

"There is no administrative reason left for tax discrimination between those who rely on invoices and those who rely on payroll to make their way. Special credits and special rates which work against the self-employed are outmoded ideas"

It would be a good summary if the only tax reliefs available were the Personal and PAYE credits. Since that is not the case, it has little value.