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Revenue and income are words often, and incorrectly, treated as synonyms. In practice, they are usually two completely different amounts. Confusing these concepts is therefore risky: people unaware of the differences who take on work with revenue of, for example, PLN 50,000 per month will feel deeply disappointed when the income reaching their account is several times smaller. Learn how revenue and income differ and avoid unpleasant surprises!
Revenue and income — what are they?
Entrepreneurs, people working under civil-law contracts and employees working under employment contracts should all understand the difference between revenue and income. It is crucial to calculating taxes. As its name suggests, income tax is calculated on income, although some forms of taxation depend on revenue earned. An inability to distinguish these concepts can lead to poor financial decisions.
Below, we explain in detail the difference between revenue and income, what employee revenue is and what sales revenue means.
What is revenue?
Revenue is the total value of amounts or economic benefits which a business or an individual receives or is to receive in a given period. Typical sources of revenue are:
Remuneration earned under an employment contract;
Amounts receivable from selling goods;
Revenue from services provided;
Fees, licences, rental and leasing;
Receipts from non-agricultural business activity.
For tax purposes, the time when revenue arises is important. It is defined differently for different industries and forms of taxation: it may be when goods are released, a service is performed or an invoice is issued.
What is sales revenue? It is the total amount due from customers for goods delivered or services performed. Sales revenue can be divided into three main categories:
Revenue from sales of products — relating to items manufactured by the business itself, such as windows for a window manufacturer;
Revenue from sales of goods — relating to products purchased for resale;
Revenue from sales of services — relating to revenue earned from services provided, such as organising a reception, transport or renovating premises.
Revenue arises when goods are released or a service is performed, rather than on the day remuneration is recorded in the account.
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What is income, and what are tax-deductible costs?
The revenue amount alone does not tell us how much a business or an employee actually earns. From the money received into the account for performing a service or selling goods, costs of delivering the service, storing the goods or employee salaries must also be paid — in short, expenses relating to the service or goods must be incurred. These are tax-deductible costs, known in Polish accounting as KUP, one of the more important items in business finances.
Tax-deductible costs are defined in Article 22(1) of the Personal Income Tax Act. It states that they are expenses incurred to generate revenue or maintain or secure a source of revenue.
However, not every expense incurred by an entrepreneur can be classified as a tax-deductible cost. Article 23 lists expenses that do not constitute tax-deductible costs. They include:
Representation expenses;
Interest for late payment of tax and budget liabilities;
Expenses for repayment of loan and credit instalments; only the interest component of a loan instalment may be a cost if actually paid;
Depreciation charges exceeding PLN 150,000 for passenger cars and PLN 225,000 for electric cars;
Passenger-car comprehensive insurance expenses exceeding the portion determined in the proportion corresponding to PLN 150,000.
Taking into account the definitions of revenue and tax-deductible costs, we can define income: it is revenue less the costs of earning it.
Examples:
A journalist running a sole proprietorship prepared a report for which she was paid PLN 1,500. The costs of gathering material, including travel and accommodation, amounted to PLN 600. Her income was therefore PLN 900. If she settles tax under the progressive scale, she will pay income tax on PLN 900.
A dressmaker sold a dress made from scratch for PLN 300. She paid PLN 170 for the fabric. Her income from this order was PLN 130, or less if she also deducts other tools and expenses necessary to provide the service, such as rent for the premises or utilities.
What is net income, and how does it differ from gross income?
Another issue is the distinction between net and gross income. Tax-deductible costs also come into play here. Net income is revenue less tax-deductible costs and income tax. Net income is the amount of money the taxpayer actually receives after social and health insurance contributions are deducted.
Gross income is revenue. It is the pre-tax amount, meaning the amount on which income tax must be paid. From the gross remuneration of an employee working under an employment contract, the employer remits social insurance contributions, health insurance contributions and income tax advance payments to the tax office. Only after these deductions do we know the employee’s net income, meaning the amount credited to their bank account.
Revenue, income and tax consequences — avoid mistakes
The difference between income and revenue is crucial for taxation and business profitability. This matters not only to entrepreneurs but also to people working under civil-law contracts and salaried employees. A failure to understand the mechanisms governing revenue and income can also lead to serious errors in settlements. The most common mistakes are:
Failing to include tax-deductible costs which significantly reduce the tax base;
Failing to account for the specific features of lump-sum taxation in tax settlements;
Errors in determining when revenue arises.
These are just examples of errors that can be prevented, thereby avoiding the consequences of penalties imposed by tax authorities. The experienced team of tax advisers at TaxCoach will plan beneficial tax settlement arrangements, while our accountants will ensure correct and timely settlements.
We encourage entrepreneurs, people working under civil-law contracts and all other taxpayers who want to be sure they fulfil their tax obligations correctly and also optimise their amount to contact us.
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Summary
Frequently asked questions about the differences between revenue and income
Which expenses can be classified as tax-deductible costs?
Article 23 of the Personal Income Tax Act specifies expenses which cannot be classified as tax-deductible costs. Other expenses incurred by an entrepreneur in connection with their business constitute tax-deductible costs. These include:
- Purchases of trading goods;
- Sales tools;
- Accounting, legal and IT services;
- Software licences;
- Rent, internet and telephone;
- Business travel;
- Training to improve qualifications;
- Social insurance contributions for the entrepreneur and employees, within the scope specified by law.
Revenue and tax-deductible costs — how does this work in practice?
The amount reaching an entrepreneur’s account in exchange for a service performed or goods delivered is revenue. However, it is rarely also the final profit, because the entrepreneur incurs costs in fulfilling the order. They can subtract these costs from revenue to determine the amount of income.
What is recorded revenue?
Recorded revenue is revenue forming the tax base for lump-sum tax on recorded revenue. It includes, among other things, receipts from sales of goods and services, rental or property rights, in accordance with the rules specified by law.
When determining the lump-sum tax base, revenue is generally not reduced by tax-deductible costs. This means that tax is calculated on revenue earned rather than on income representing the difference between revenue and costs.
What is employee income?
An employment contract specifies gross remuneration, which forms the basis for calculating contributions and tax due. Employee income for tax purposes is determined by reducing employment revenue by, among other things, tax-deductible costs and social insurance contributions deductible under the law. The amount ultimately reaching the employee’s account after contributions and income tax advance payments are deducted is net remuneration.
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