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Starting your own business but can't see the forest for the taxes.

Are you tired of your manager constantly looking over your shoulder? Are you tired of the idle chatter at the coffee machine? Are you Willie Root who invents a brilliant product or Guus Happiness who stumbles upon a brilliant idea by chance? Then it's high time for a career switch: goodbye employee, hello entrepreneur.

Still not convinced about being an entrepreneur because you can't see the wood for the trees because of the taxes? Don't panic! After reading this column, you will make short work of the tax problem.

Business form

Which taxes apply to your business depends on your chosen business form. The most obvious business forms are the sole proprietorship and the limited liability company (better known as: the BV). It is a misconception to think that the owner of a sole proprietorship must single-handedly bring in money. Even if you have a sole proprietorship, you can hire staff. Both the sole proprietorship and the limited liability company are involved in a tax on profits. For the sole proprietorship, this is income tax. The BV is liable for corporate income tax.

From wage slave to sole proprietorship

As an employee, you pay income tax on your wages. Employees usually claim the general tax credit and the work tax credit. Despite these tax credits, with a modal income of €36,500, you will have to add more than eight thousand kroner to the tax authorities' bank account. Big chance that this amount will give you a heartache. Small chance that you will actually see this amount on your bank statements. Your employer deducts the tax from your paycheck and makes sure it gets to the IRS.

As a sole proprietor, you get more pay for work. If you own a sole proprietorship, you pay income tax on your business profits. Like employees, entrepreneurs are in principle entitled to the general tax credit and the employment tax credit. Entrepreneurs are also eligible for the entrepreneur deduction and the SME profit exemption.

The entrepreneur deduction is a collective name for several deductions, including the self-employed deduction and the start-up deduction. The self-employed deduction includes a fixed amount of €7,030 (in 2020). You are only eligible for the self-employment deduction if you meet the hour criterion. To meet the hour criterion, you must perform at least 1225 hours of work for one or more companies in a calendar year. Starting entrepreneurs are entitled to an increase in the self-employment deduction during the first few years. If you were not an entrepreneur in one or more of the previous five calendar years and have not applied the self-employed deduction more than twice in that period, the self-employed deduction is increased by €2,123 (in 2020). This increase in the self-employed deduction is called the starter deduction.

The SME profit exemption exempts a percentage of profits after profits are reduced by the entrepreneurial deduction. It is a fixed percentage of 14% (in 2020). Whether or not you meet the hour criterion is not important for the SME profit exemption. As an entrepreneur, you get this little extra whether you want it or not. After all, you can't look a gift horse in the mouth.

Thanks to the entrepreneurial deduction and the SME profit exemption, the math suddenly looks very different. Entrepreneurship is good for your wallet.

From sole proprietorship to BV

Once entrepreneurship begins to take serious shape, most entrepreneurs choose to incorporate their business into a limited liability company (BV). Of course, as a starting entrepreneur, you can also opt for a BV immediately.

As sole founder of a BV, you are automatically director and major shareholder of the BV. As dga, you are obliged to pay yourself a salary. This must be a customary wage. The customary wage is at least € 46,000 (in 2020). As dga of a startup, you may take the legal minimum wage as your customary wage (approximately € 20,000 in 2020). You owe income tax on the customary wage.

In addition to income tax, as the owner of a limited liability company (BV), you will have to deal with corporate income tax. You pay 16.5% (in 2020) corporate income tax on profits up to and including €200,000. Did you make more profit? As of €200,000, you pay 25% (in 2020) corporate income tax.

In total, you're out over €5,000 in taxes. Want to transfer the remaining profit to your personal savings account? Then you have to make a profit distribution. You'll owe another 26.25% (in 2020) income tax on the profit distribution.

When you think you've had it all ...... sales tax comes around the corner

If you sell products or provide services, you'll have to deal with sales tax in addition to income tax and/or corporate income tax. For this, it doesn't matter whether you have a sole proprietorship or a limited liability company. In both cases, you generally have to pay 21% VAT on your turnover. Say you sell a product for a fee of €100, then you charge your customer €121 and pay €21 VAT to the tax authorities. As a rule, you can deduct the VAT that suppliers charge you from the VAT you have to pay on your turnover.

Does your turnover amount to less than €20,000 on an annual basis? If so, under certain conditions you are eligible for the so-called small business allowance (KOR). If you meet the conditions and choose to apply the KOR, you no longer have to charge VAT to your customers and pay it to the tax authorities. On the other hand, you can no longer deduct the VAT paid on your purchases. The advantage of the KOR is that you no longer have to submit quarterly VAT returns and can suffice with simplified administration.

Conclusion

In this column I have made a comparison between the employee, the owner of a sole proprietorship and the director and major shareholder of a private limited company. With an average income or profit of € 36,500, the sole proprietorship is the winner from a tax perspective.

An important side note to this column is that you should not let tax motives alone determine your choice of entrepreneurship. As an employee, you are automatically insured against loss of income due to illness, disability and unemployment. As an entrepreneur, you decide whether to take out such insurance. Other factors also come into play when choosing either a sole proprietorship or a limited liability company. For example, the owner of a sole proprietorship is liable in private, while the shareholder/owner of a limited liability company is not personally liable for the debts of the company. As befits a good lawyer, I therefore conclude this column with the famous statement that the best choice always depends on all the circumstances of the case.