Offering work and giving job assignments to individuals over an “app”
Work can be offered to people – and workers can accept the offers – using a mobile app. When a relationship between an employer and a worker is established over a mobile connection, both the owner of the application and the customer (employer) have a set of obligations to fulfil.
Employer: are you about to hire an employee or an independent contractor?
If you agree with someone that he or she will do some work for you, it is important that you determine whether the contract is for employment (employee) or for an assignment (independent contractor). For tax purposes, compensation paid to an employee is treated as wages. Payments to independent contractors are treated as “trade income” (=nonwage compensation). The distinction between the two kinds of compensation is important both for you who are the payer, and for the recipient, as well.
You can sign an employment contract or agree on an assignment between yourself and the person who works for you. In principle, you and that person can decide on the type of the contract freely. However, don't forget that some types of work may require that the other party has the machinery and equipment necessary for the work. If the person who will do the work does not have them, the contract must be an employment contract.
What is typical for the two contracts?
The contract to be made between the two parties must reflect actual circumstances. We recommend that you familiarise yourself with the typical characteristics of the two types of contract. Do this before you draw up the contract. This way, you can ensure that the type of contract, its content, and the true activity are aligned with both parties’ original purposes.
The characteristics used for the differentiation between contract types can be seen as representing either form or substance. The formal characteristics relate to how various obligations are fulfilled when starting up business and maintaining an economic operation. The substantial characteristics are about the actual meaning of the contractual obligations. “Substance” also has to do with the actual circumstances and conditions of work. The characteristics may either point towards an employment contract or towards an assignment (=with an independent contractor).
Examples of “form” characteristics:
- carrying out trade or business as a registered, self-employed or incorporated operator
- arrangements that cover the required social insurance
- whether or not the worker/operator is on the Prepayment Register
- whether or not the worker/operator is on other registers
- submittal of reports required by law
- contents of the contract
- worker's/operator's degree of personal autonomy and independence
- working for someone else or working for oneself
- rights of direction and supervision
- tools, materials and supplies
- the time when work is performed
- principles of compensation
- how direct expenses are reimbursed to the worker/operator
- responsibilities, warranty agreements and insurances
- conditions of termination
- restrictions on taking on other assignments, on non-competition by the worker, and rules of confidentiality
An overall evaluation of the characteristics determines whether the people who work are considered an employee or an independent contractor. However, the evaluation is only carried out in contradictory situations i.e. if the matters agreed upon in the contract are in contradiction with what the contracting parties actually do.
The overall evaluation means that the Tax Administration looks into the arrangement as a whole, including both the typical characteristics of the business sector and the circumstances. In order to determine whether a contract is signed with an employee or with an independent contractor, the evaluation is based on the typical terms and conditions of contracts in the business sector in question. In different sectors, the relative importance of the above characteristics may vary.
The obligations of the employer (the customer)
If the arrangement gives rise to an employer-employee relationship and if the payment is considered wages, the employer must withhold tax on the pay, take care of the employer's health insurance payments and other contributions including the mandatory pension insurance. From the wage earner's point of view, the pay is taxable earned income.
If the relationship is with an independent contractor, the pay is considered trade income, not wages. Payments to a beneficiary who is prepayment-registered are not subject to withholding. The beneficiary pays for their own pension insurance independently. In the beneficiary's hands, the compensation they receive may be taxed as business income, as other earned income or as corporate income if they own the company. If the selling of services has generated a turnover that exceeds the VAT threshold of small-scale business, the beneficiary who works for you must additionally obtain a VAT registration.
The obligations of the owner of the app
Even though you are just an intermediary, you may have responsibility for a number of employer obligations. If an employer-employee relationship is deemed to exist between the contracting parties using the mobile app – your customer and the worker carrying out the contract – you must pay the withholding and the health insurance contribution to the Tax Administration. You also have the other usual obligations of an employer, such as arranging for your employees' pension insurance. However, the pay is not subject to withholding if the relationship between the contracting parties is merely based on a work assignment, and the pay is received by a prepayment-registered person.
Example 1. Minna has signed in as a jobseeker through a mobile app. A customer turns up, giving Minna a home-cleaning job. Minna signs an employment contract with this customer via the mobile app. The owner of the app takes care of the payment of wages to Minna, the payment of employer contributions, and the payment of insurance. The owner must also withhold tax on the wages in accordance with the rate printed on Sini’s tax card. In this example, the app is only an intermediary although the transfer of money is effected over the app.
Example 2. Matti is a mobile app user and a construction worker, accepting offers for various renovation contracts over multiple apps. He uses his own tools when he works. He pays his own social insurance. Matti agrees to perform a paint job after seeing it advertised on one of the apps he uses. The customer has signed a separate contract with the owner of the app. In these circumstances, the owner of the app is treated as the party that engages Matti's services and pays his fee. The contractual relationship is with an independent contractor (it is not an employer-employee relationship). Because Matti is on the Prepayment register, no withholding is necessary on the trade income paid to him. He pays his prepayments on his initiative.
Example 3. Heikki works as a food delivery messenger from time to time. He receives the delivery assignments through various mobile apps. When the app has given him the instructions he needs, Heikki’s job is to transport the food to the customer’s home by car. The customer has signed a separate contract with the company that owns the app. In this case, the owner of the app is the party that engages Heikki's services and pays his fee. Heikki receives his remuneration in the form of trade income. This kind of income is treated as earned income subject to tax. Because Heikki is on the Prepayment Register, the payor does not have to withhold taxes on the income paid to him. Heikki makes prepayments on his own initiative.
His delivery assignments give rise to some telephone expenses, and fuel and other car expenses including an occasional car wash. Heikki is entitled to deductions for the expenses insofar as they are connected to his activities for the production of income. However, no private phone and car expenses can be deducted – he can only deduct the work-related part.
He keeps a driver’s log that indicates the distribution between work-related and private kilometres in the course of the year. Of all Heikki’s car expenses, 15% is related to production of income, and the remaining 85% is related to private purposes. Correspondingly, 10% of his telephone expenses is related to production of income, and the remaining 90% to private purposes. Consequently, Heikki can claim deductions in his income taxation for 15% of the car expenses and 10% of the telephone expenses. When completing his tax return, he fills in the euro amounts of the deductible expenses under “earned income, expenses for the production of income”.
Example 4. Sini has signed in as a user of a mobile app to seek assignments and jobs for herself. A customer who uses the same app gives Sini a food delivery assignment: she should transport a serving of food from a restaurant to the customer’s home. The owner of the app pays wages to Sini, and deals with the payments of employer’s contributions and insurance premiums. The app company must also withhold tax on the wages in accordance with the rate printed on Sini’s tax card. In this example, the app is only an intermediary although it administers all the transactions involving the transfer of money. For the entire year, Sini gets paid €2,700 in wages.
Her assignments and jobs give rise to some telephone expenses, and fuel and other car expenses including an occasional car wash. Sini is entitled to deductions insofar as the expenses are connected to her activities for the production of income. However, no private phone and car expenses can be deducted. For the assignment described above, Sini had to pay a total of €50 in expenses for the production of income. For all her assignments and jobs during the entire year, Sini’s expenses total €500.
The Tax Administration automatically gives a deduction of €750 a year for the production of income to all recipients of wage income. This is a standard deduction for work-related costs that does not require that the taxpayer make a special claim for it. If the taxpayer’s total wage income is less than €750, the Tax Administration will maximally give a deduction that is equal to the actual wage income of the taxpayer. In other words, it is not necessary for Sini to inform the Tax Administration of her expenses unless they exceed €750 a year. In this example, her expenses (€500) do not exceed the amount of the standard deduction. Accordingly, it is not necessary for Sini to claim them on her tax return at all. Instead, the Tax Administration will automatically grant the €750 deduction to her because of her wage income (€2,700). However, if Sini’s actual wage income for the year were below €750, she would be given a deduction that equals the income.