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An unpleasant surprise awaits young people who expected a complete tax exemption. The Ministry of Finance has confirmed that the provision requiring flat-rate taxation of income from service contracts worth up to PLN 200 still applies. It also applies to people under 26.
This is not very logical. Many young people take small, occasional jobs, such as students handing out leaflets in the summer. The new exemption seemed to be intended primarily for them.
Recall that zero PIT for young people has applied since 1 August. It is available to people under 26 employed under an employment contract or a service contract. The annual limit for tax-exempt income is PLN 85,528. This year, the relief applies to those whose income from August to December does not exceed PLN 35,636.67.
The new exemption is in Article 21(1)(148) of the PIT Act. At the same time, Article 30(10) states that the relief does not apply to income subject to flat-rate taxation. This includes service contracts worth up to PLN 200, concluded with a person who is not an employee of the payer, who must withhold tax.
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Does this mean that a young person’s income from such a contract is still taxed?
According to the Ministry of Finance, the exemption for young people does not apply to income subject to flat-rate tax. Unfortunately, the 18% tax paid cannot be recovered in the annual settlement. Income taxed at a flat rate is not reported in the annual return.
How much can a young person lose because of this exception?
Suppose a 22-year-old student agreed to receive PLN 200 for helping unload goods. Having heard about the PIT exemption for young people, the student is convinced they will receive the full amount. The principal must, however, withhold 18% flat-rate tax, so the student will receive only PLN 164.
Can the tax be avoided?
There are three ways. The first, and simplest, is to pay PLN 201 instead of PLN 200. The second is to combine contracts, for example by signing one instead of two so that the amount due exceeds the limit. The third is to use an hourly rate for settlement; then tax is not paid even if the payment does not exceed PLN 200.
Taxation of small service contracts is not the only bad news for young people interested in the relief. They cannot use it if they earn under a contract for specific work or in their own business. In the Ministry of Finance’s view, employment contracts and service contracts are the most common forms of professional activity, so the preference is provided only for those forms.
To benefit from the exemption, therefore, the rules of engagement must change. For example, a young businessperson can shift some income to a service contract. This is lawful. The regulations do not prohibit conducting a business and performing service contracts outside it, even for work identical to that carried out by the business. The tax authority also agrees with this in its interpretations.
Young people who have until now been employed under contracts for specific work also have room to manoeuvre. Such a contract can generally be replaced by a tax-exempt service contract.
People who want to use the relief this year must inform the payer, whether employer or principal. Otherwise, the payer will continue withholding tax advances, which they will recover only after filing their return, that is, next year. The payer is not required to apply the exemption automatically.
Next year, settlement is to look different. The payer will not withhold PIT advances on their own initiative, and no statement from the employee or contractor will be needed. The employee or contractor may, however, request that the exemption not be applied. This is worth doing when earning in several places if none of the payers withholding advances would lead to a substantial tax payment on the annual return.
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Summary
Everything indicates that, when introducing the PIT exemption for young people, the legislature deliberately kept the flat-rate taxation of service contracts up to PLN 200 in the regulations. It is hard to understand why. Many young people earn precisely through such small contracts and will pay tax, because the flat rate is mandatory. This may be a considerable disappointment for those who expected full relief, especially since people earning more under a service contract are exempt. This would also be a good occasion to consider whether the flat-rate tax on income up to PLN 200 makes sense at all. It creates inequalities in taxation and forces the parties to modify the terms of their cooperation in order to avoid the tax.
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