Self-employed people often find themselves in this situation. Their income is frequently taxed as business profits. But then a job comes along where the client insists on paying them a salary.
Business profit
The tax burden on business profits is considerably lower than that on wages from employment. The SME profit allowance (14%) is deducted from the profits. Furthermore, entrepreneurs who can demonstrate that they have spent 1,225 hours or more on their business in a calendar year (the ‘hours criterion’) are entitled to the self-employed person’s allowance (€7,280; for those receiving the state pension: €3,640). For start-ups, this amount is increased by the start-up allowance (€2,123). Finally, the costs incurred by the entrepreneur in the course of the business are deductible from the profit.
Where a self-employed person carries out a job as part of an employment relationship, they are not entitled to the SME profit exemption in respect of that income. Furthermore, the hours spent on that job do not count towards the hours criterion, which means that the self-employed person’s tax allowance may not be claimed. Deductions for acquisition costs are not permitted in the case of wages from employment; these must be provided or reimbursed by the employer.
Absorption
The self-employed person’s logical argument is therefore that the work carried out under an employment contract forms part of their business. The wages are then classified as business profits, and the hours worked count towards the hours criterion. This is also referred to as ‘absorption’.
Deduction is permitted provided that two conditions are met. The work carried out in the course of employment:
- are closely linked to those within the company and;
- play a minor role within the company’s overall activities.
Actress
At the North Holland District Court The question has recently been raised as to whether the salary received by an actress is absorbed by her business profits. However, her salary income is not ancillary to her business activities as a whole. She receives 62,32% of her income as salary.
The actress is also claiming the self-employed person’s tax allowance. However, she has not provided evidence that she meets the hours criterion. The court has placed the full burden of proof on her in this regard.
Furthermore, the actress has not provided any evidence to support her claim for a tax deduction of €17,033. She justifies the deduction by arguing that she is an actress 24/7. The court considers this insufficient grounds for deducting expenses, which are, for the most part, of a primarily consumer nature. Here too, the court places the full burden of proof on the actress.
In the same court A ruling has also been handed down in the case of a saxophonist. Half of his income is in the form of wages (as a teacher) and the other half as business profits (from giving saxophone lessons as a self-employed professional). Even in this ratio, there is no situation in which the salary income is incidental to the business profits.