Do I work as an employee or self-employed?

Several factors have an impact on defining where the line between employee and self-employed should be drawn. The society is different from what it used to be and the ways of working have become more versatile. At the same time, being self-employed has become more common in many fields. Distinction between employment and business activities is important because of the obligations of both the payer and the payee of a compensation.

Distinction between employees and self-employed people is important

Compensation for the performance of labour takes the form of wages or nonwage compensation for work (Finnish: työkorvaus, Swedish: arbetsersättning). As it has been pointed out, to define the tax obligations of each concerned party, it is very important to know the difference between these two. If an employer/employee relationship exists, the compensation is considered wages. In some situations, payments of certain fees will be considered wages even if no employer/employee relationship exists. However, if work is done as an assignment, the payment is a nonwage compensation for work.

To know the distinction between an employee and  a self-employed individual is important not only for tax purposes, but also for other reasons. If an employer/employee relationship exists, the employer takes care of the social security contributions, statutory pension and other insurance contributions. Furthermore, the employer usually has to pay wages during sick days, vacations and holidays.  The employer has to follow the Working Hours Act. Payments made to self-employed only cover the work that was done according to an invoice presented by the self-employed. The billing may be based on a total service fee. As an alternative, the billing may be based on the quantity of hours worked. The charge per hour of a self employed individual is usually higher, because he/she pays his/her own social security contributions.

In determining whether a person is an employee or a self-employed individual, all information must be considered

Tax authorities examine a wide range of factors to determine whether a person is an employee or a self-employed individual.  Each case is based on an appraisal of the entire situation, because there are usually some factors that support the employee conclusion - and simultaneously, there are other factors that seem to justify the opposite conclusion that the person is self-employed. For more information on evaluating the nature of an employee, a self-employed individual and the compensation paid, see the official instruction in Finnish Palkkaa vai työkorvausta (Ohje Dnro 2118/31/2004, 21.6.2005).

It should be noted that the conclusion may be different in situations that may seem very similar. For example, some laws include their own regulation on the distinction. Even if e.g. the applicable pension rules define that the person who works is self-employed, the compensation paid may be considered wages for tax purposes.

If there is any doubt as to, whether someone is an employee or self-employed, it might be beneficial to clear up the situation in advance. The payer or payee of compensation may request an advance ruling in casu against a fee from the Tax Administration. For more information on requesting an advance ruling in Finnish, go to Ennakkotieto-, ennakkoratkaisu- ja poikkeuslupahakemus.