The Supreme Administrative Court’s decision changes the tax treatment of light entrepreneurs
On 12 May 2023, the Supreme Administrative Court issued its decision KHO 2023:42 on invoicing service companies and self-employed light entrepreneurs. The decision changes the previous tax policy.
What are taxable wages?
According to the Supreme Administrative Court’s decision, the taxable wages of a light entrepreneur who uses invoicing services include compensation paid for work, from which the fee charged by the invoicing service company and the employer’s health insurance contribution have been deducted.
Because the fee paid to the invoicing service company and the employer’s health insurance contribution have been deducted from the amount of the light entrepreneur’s taxable wages, the light entrepreneur can no longer deduct them in their own taxation.
What are the grounds for wages subject to withholding and the employer’s health insurance contribution?
An invoicing service company must pay the employer’s health insurance contribution if the light entrepreneur is obligated to take out YEL insurance. The invoicing service company pays the employer’s health insurance contribution based on wages subject to withholding.
Based on the Supreme Administrative Court’s decision, the employer’s health insurance contribution is calculated from the amount of wages from which the invoicing service company’s fee and the employer’s health insurance contribution have first been deducted. No value added tax is calculated on the amount of wages.
Example: A light entrepreneur and their customer has agreed that €1,000 + VAT be paid as compensation for work. The customer pays €1,000 + VAT 24% to an invoicing service company.
The amount of wages subject to withholding, on which the employer’s health insurance contribution is based, is €1,000 less the invoicing service company’s fee of 5% (€1,000 × 5% = €50) and the employer’s health insurance contribution (1.53% in 2023).
Grounds for wages subject to withholding and the employer’s health insurance contribution:
(€1,000 - €50) ÷ 1.0153 = €935.68
Employer’s health insurance contribution: €935.68 × 1.53% = €14.32
The decision also applies to non-wage compensation for work
In the Finnish Tax Administration’s view, the Supreme Administrative Court’s decision can also be applied to light entrepreneurs who receive non-wage compensation for work from an invoicing service company. In this case, taxable non-wage compensation for work includes compensation from which the invoicing service company’s fee has been deducted.
The Supreme Administrative Court’s decision does not apply to self-employed individuals who have a business ID. For them, taxable business income includes the entire compensation received for work. Correspondingly, an entrepreneur can deduct any expenses arising from work.
Claims for adjustment applied to the taxation of light entrepreneurs
At the request of the light entrepreneur, i.e. the taxpayer, the Supreme Administrative Court’s decision can also be applied retroactively within the scope of the time limits and provisions concerning the claims for adjustment applied to taxation (for more information, see Claim for adjustment of income tax). A claim for adjustment can be issued for 2021 and 2022.
If a light entrepreneur requests their taxation to be adjusted based on the Supreme Administrative Court’s decision KHO 2023:42, they must attach a reliable clarification of the amounts of wages, the invoicing service company’s fee and the employer’s health insurance contribution with their claim for adjustment.
If a light entrepreneur has previously requested the fees paid to an invoicing service company and the employer’s health insurance contribution to be deducted as expenses for the production of income, they must request these deductions to be eliminated while requesting their taxable wage income to be reduced. Otherwise, a punitive tax increase may be imposed due to an unfounded deduction request.
The impact of a claim for adjustment on taxation can be low
When the amount of both wages and expenses for the production of income decreases by the amount of the invoicing service company’s fee and the employer’s health insurance contribution, the change may not have any impact on the light entrepreneur’s taxation or the impact may be very insignificant. However, this depends on the taxpayer’s other income and deductions.
There will probably be no impact on taxes if the light entrepreneur has more than €750 of other expenses for the production of income in addition to the invoicing service company’s fee and the employer’s health insurance contribution.
Example: In 2021, a light entrepreneur received €20,000 in wages through an invoicing service company. The light entrepreneur deducted the invoicing service company’s fee (5%) of €1,000, the employer’s health insurance contribution (1.53%) of €306 and the home-office deduction of €920 in their taxation as expenses for the production of income.
Based on the Supreme Administrative Court’s decision, the light entrepreneur’s wages were €18,694 (20,000 – 1,000 – 306). In addition, the invoicing service company’s fee and the employer’s health insurance contribution should be eliminated from the light entrepreneur’s expenses for the production of income so that only the home-office deduction of €920 should be deducted.
As these changes have no impact on the light entrepreneur’s taxation, the light entrepreneur has no reason to request their taxation to be adjusted based on the Supreme Administrative Court’s decision.
Before the Supreme Administrative Court’s decision, the employer’s health insurance contribution was calculated based on the compensation the customer had paid for work. Even though the grounds for calculating the employer’s health insurance contribution changed as a result of the decision, the light entrepreneur can request their taxable wages to be decreased by the amounts of the fee and the employer’s health insurance contribution that they have actually paid to the invoicing service company.
Example: In 2021, a light entrepreneur and their customer agreed that €1,000 + VAT be paid as compensation for work. The customer paid €1,000 + VAT 24% to an invoicing service company. The invoicing service company charged a fee of 5%, or €50, from the light entrepreneur. The employer’s health insurance contribution (1.53%) was calculated from €1,000 and was €15.30.
In their claim for adjustment, the light entrepreneur can propose €1,000 as the amount of their taxable wages, less the fee of €50 and the employer’s health insurance contribution of €15.30. In addition, the light entrepreneur must remember to request the invoicing service company’s fee and the employer’s health insurance contribution to be eliminated from deductions for the production of income.
Invoicing service companies do not need to correct earnings payment reports in the Incomes Register
Based on the Supreme Administrative Court’s decision, invoicing service companies do not need to correct earnings payment reports regarding 2021–2022 in the Incomes Register.
If an invoicing service company corrects the employer’s separate reports submitted for 2021–2022 based on the Supreme Administrative Court’s decision to have the employer’s health insurance contribution refunded, it does not exceptionally have to correct earnings payment reports correspondingly, however. If an invoicing service company is refunded part of the employer’s health insurance contribution it has paid before, it must correspondingly request its income tax to be adjusted.
To ensure that light entrepreneurs’ income data for 2023 is entered correctly in pre-completed tax returns in spring 2024, we recommend that invoicing service companies correct reports submitted to the Incomes Register (earnings payment reports and employer’s separate reports) from the beginning of 2023. However, invoicing service companies are not under obligation to correct reports retroactively from a period preceding the Supreme Administrative Court’s decision.
Additional information
Tax questions related to invoicing service companies and their users (available in Finnish and Swedish)