Am I an employee or an entrepreneur?

A number of factors affect the way the tax authority differentiates between independent contractors, on the one hand, and workers who receive wages from their employer, on the other hand.

In recent years, new forms of work have emerged that were unknown in the past. New ways to be an entrepreneur – owner of a small business – have become more commonplace.  Distinction between employment and an entrepreneur’s operation is important. For both the payer (the customer) and the worker (or the entrepreneur), the tax obligations differ greatly depending on where the line is drawn.

In order to get a job done, the parties may make an employment contract or a specific one-off contract with each other. Only in circumstances where the distinction is very unclear between employee vs. entrepreneur, the tax authorities start evaluating the overall situation and its characteristics to make a conclusion.

An important difference

Compensation for work can be either wages or “trade income” (työkorvaus; arbetsersättning). The tax obligations of the payer and the person who works depend on whether the compensation is considered wages or trade income.

If the person is treated as being employed by the payer, the compensation is considered wages. In this case, an employer–employee relationship has been formed. In taxation, various fees paid to a person (e.g. for attending meetings) are automatically seen as wages. This is unrelated to whether an employer-employee relationship exists.  If you work for another party and your status is an entrepreneur, the money you receive as your compensation is trade income.

When you determine your status – whether you are an employee or an entrepreneur – it is not only important from a tax point of view, but it affects other matters as well. If your work gives rise to an employer–employee relationship, your employer company is responsible for several arrangements having to do with your social security, pension insurance, and other insurance as required by law.

In addition, the employer company must pay you wages when you take days off, either as your vacation or because you have fallen ill. Besides, the legal requirements of the Working Hours Act must be complied with. But when work is done by an entrepreneur, the only pay is the payment on invoice. The customer and the entrepreneur can have agreed on a fixed price in advance, or that the invoice to be prepared by the entrepreneur will be based on the number of hours worked. In general, the compensation paid by the hour to entrepreneurs is expected to be higher because entrepreneurs must pay their personal social security expenses themselves.

The overall situation determines whether your income is wages or trade income

The tax authorities look into many different factors in order to establish whether you work as an employee or as an independent contractor, i.e. an entrepreneur. The authorities look into the overall situation in order to reach a conclusion of the matter.  This is because part of the factors will usually point towards taxation of your income as wages from employment – while other factors would justify treatment of your income as trade income from entrepreneurship.  Further information on the difference between working for an employer and handling a work assignment as an independent contractor.

Please note that the conclusion is not always drawn in the same way because prevailing circumstances will vary. For example, some Finnish legal acts contain specific provisions on the matter: under the Self-Employed Persons’ Pensions Act, someone may be an entrepreneur, but at the same time, the Tax Administration treats the money he or she receives as wages.

If the party that pays you does not have a clear understanding of whether your activity should be seen as work as an employee or as a business operation of an entrepreneur, we recommend that the question be settled in advance, before any problems can arise.  You or the party that pays you can submit a request to the Tax Administration for a preliminary ruling. Such rulings are prepared against a charge. For more information on requests for a preliminary ruling, see the guidance on tax.fi (Ennakkoratkaisu- ja poikkeuslupahakemus, available in Finnish and Swedish).