When work is done by someone who is on the prepayment register, the payor does not need to withhold tax on the pay (including royalties or other nonwage compensation). However, if the pay is wages, the payor must always withhold tax on it even though the beneficiary is on the register.
The guidance on the Prepayment register pages are for private individuals as well as businesses including the self-employed and all types of corporate entities.
Who can be registered?
Prepayment register is one of the registers of the Tax Administration. If you are a self-employed individual, a company or a corporate entity and you operate a trade, business, farm or other activity that generates income, the Tax Administration can enter you in the register.
It is not necessary for you to have started the operation when you ask for registration. It is enough if you are going to start it as you have planned. However, if your operation clearly has the characteristics of a hobby activity, the requirements for prepayment registration cannot be fulfilled and you will not be registered.
There is no mandatory rule that would require a business to have a prepayment registration. In fact, in some circumstances, the party who works may find it useful that the payor withholds taxes on the pay.
You can get a prepayment registration also if your only activity is that you receive royalties or operate a simple trading business with goods.
However, not all requests for registration can be granted. For example, requests made by taxpayers who have not filed their taxes or have not kept their books properly in the past.
What is the purpose of the prepayment register?
Belonging to the prepayment register affects the advance collection of taxes during the income year. The purpose of being on the register is to make it clear that the payor does not have to arrange for tax withholding; instead, the recipient, being prepayment-registered, will pay whatever advance payments are required.
If the payment is treated as being wages
In the case of wage payments (and sportsmen’s fees), payors must always withhold tax as instructed by the withholding rate printed on the recipient’s tax card. Wage payments are also subject to the employer’s health insurance contributions.
Whether or not you are on the prepayment register does not affect the treatment of any paid compensation as wages. Instead, the question whether a payment should fall in the category of wages is always decided in accordance with the Prepayment Act.
Payments treated as nonwage compensation or royalties
If your payor is paying nonwage compensation or royalties to you and you are on the prepayment register, your payor does not have to withhold tax. Because you are registered, you are expected to assume responsibility for your taxes and pay them to the Tax Administration independently. The amounts are calculated by the Tax Administration; i.e. the prepayments are imposed in advance.
If the recipient is not on the prepayment register, payors are required to withhold tax also when paying out nonwage compensation and royalties. However, payors do not have to pay employer’s health insurance contributions.
The withholding obligation is not affected by who the recipient is: it may be a limited-liability company or it might as well be a natural person.
- When the work had been performed by a limited-liability company, another business, or an organisation (e.g. corporate entities including cooperatives; or by a general partnership or partnership), the withholding rate is 13%.
- If it was performed by a natural person and compensation is paid to him or her, the withholding must be carried out as instructed by their tax card.
- If he or she fails to present the card, the payor must withhold 60%.
Before the payor calculates the amount to withhold, the VAT must be subtracted from the final sum of the invoice.
Nonwage compensation i.e. trade income is the compensation paid for the performance of work, a one-off assignment, or for the rendering of a service.
A payment of royalties is a compensation for use: a copyright or a similar intangible right has been used or transferred.
A service provider’s registration for prepayment may also affect a household’s eligibility for the tax credit for domestic expenses. The household that buys services can only be given the credit when the provider of services is on the register.
If goods are being traded or if rental property is offered for rent
The requirement to withhold tax on payments does not apply to purchases of goods or to rental operations. If a payor is settling an invoice that contains both nonwage compensation and payment for delivered goods, they must check whether registration is valid: if it turns out that the supplier of the invoice is not prepayment-registered, tax must be withheld on the nonwage compensation part. If goods had been sold and a small amount of work is included in the invoice, it should not be regarded as an invoice for work – instead, it is an invoice for goods. Under the circumstances, there is no need to withhold tax.