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Tax burden IB entrepreneur, employee and dga

Closing the tax burden gap

The government has had calculations made of the differences in tax burden between employees, IB entrepreneurs and dgas. Of course, quite a few assumptions have been made, but the study does give you a clear picture of the differences, which are vast. The employee is the underdog here.

The government has long wished to close the tax burden gap between employees, entrepreneurs subject to personal income tax (IB entrepreneur) and directors and major shareholders (dga). In particular, the difference between employees and IB entrepreneurs is a thorn in the government’s side. The growing number of self-employed workers has made this discussion even more pressing. The self-employed pay far less tax than employees.
To support this statement, the State Secretary of Finance has commissioned a study on the tax burden of the various groups. Of course, he had to work with a number of assumptions. Comparing the average tax burden for employees, IB entrepreneurs and dgas, the following assumptions were made:

  • The taxpayer is single and has no children.
  • He is not entitled to mortgage interest relief or other deductions.
  • The IB entrepreneur is entitled to the self-employed deduction and the SME profit exemption.
  • The taxpayer is not entitled to rent allowance. The health care benefit is included in the calculations. In the case of the dga, part or all of the company’s profit is distributed as normative wage and taxed in box 1. The pension contributions and disability insurance premiums reduce this box 1 income. When profits rise, the normative wage increases and part of the increased profit is also considered as profit of the company. Having paid corporation tax, that part is distributed in full as a dividend and taxed in box 2.

Deduction

The employee’s taxable income is equal to his gross income after deduction of the employee’s share of the pension contribution. For the IB entrepreneur, the taxable income is equal to the profit after deduction of the self-employed deduction, the SME profit exemption, the reservation/contribution for an old-age provision (old-age reserve/annuity) and the disability insurance premium.

Context

Self-employed deduction reduced as of this year

As of January 1, 2021 the self-employed deduction has been reduced. Starting this year until 2027, the self-employed deduction will be reduced by € 360 annually, by € 390 in 2028 and by € 110 in the years thereafter until it reaches € 3,240 in 2036.  So this is a first step towards a more equal tax burden. Of course, the IB entrepreneur’s tax burden will change as a result of this gradual phasing out. The gap between them and employees will already close somewhat. Especially for gross incomes of employees between € 30,000 and € 75,000 the difference decreases by a quarter to a third, nearly.

Contribution

In addition, it is assumed that the IB entrepreneur and the dga pay the health insurance contribution for the self-employed (5.75% in 2021) out of their net income. They also use this income to make reservations for unemployment or illness. For this, an amount of 50% was calculated of the total contribution an employer pays for an employee. But no account has been taken of any tax due in box 3 on the reserves. It was also assumed that the IB entrepreneur or dga saves an amount or pays a contribution for his old-age provision equal to the aggregate sum of the employer’s and employee’s shares for employees. For the disability insurance, the amount for the IB-entrepreneur or dga is equal to the contribution the employer pays for the employee. The calculation shows that for a gross income of around € 10,000, the average tax burden for employees is 12.8%. For IB-entrepreneurs and dgas, the burden is 3.6% and 8.6% respectively.

The highest income for which the tax burden was calculated is € 200,000. For employees, the average tax burden on this income is 53.8%. A gross income for employees of €  200,000 corresponds to employer’s contributions or profit of € 229,056. This comes with an average tax burden for IB-entrepreneurs and dgas of 47.8% and 48.0% respectively.

Turning point

On the basis of these calculations, it is also possible to determine the turning point when it is more advantageous for an IB entrepreneur, from a tax perspective, to set up a bv. The State Secretary said that from a profit of approximately € 243,000 it is more advantageous taxwise to set up a bv and thus become a dga. With less than this profit, it is more favorable to continue as an IB entrepreneur.

Practice

The State Secretary admits that in practice the distinguishing features and circumstances (the assumptions) will be different for almost every working person. For example, IB entrepreneurs and dgas are often not so well insured against occupational disability. They also accumulate less in the way of old-age provisions. On the other hand, IB entrepreneurs and dgas often accumulate assets in their companies that they can convert into cash when they retire. These differences lead to differences in the outcome. However, the State Secretary does not want to calculate the outcome for all cases. He argues that in that case, different outcomes are also partly due to different circumstances. This, he says, makes the comparison less appropriate.

Context

Social and Economic Council wants fewer tax benefits for fake zzpers

The SER (Social and Economic Council of the Netherlands) stated in a draft opinion that although the Netherlands is a prosperous and happy country on average, at the same time inequality and social discontent are growing.

Considerably

The opinion shows that the Council wants to discourage people from becoming zzp’er for financial reasons. Think, for example, of the nurse or the IT professional who resign and then have themselves hired by the hospital/IT company.

Lately, this group of zzp’ers has increased considerably and is also eligible for the tax benefits of being self-employed, while actually they are really some kind of employees still. The group hardly runs any financial risk, unlike the butcher or the baker on the corner, who are equally self-employed.

To tackle this, the self-employed deduction must be phased out (which has already begun) in conjunction with the other measures improving the self-employeds’ protection. The deduction must then be replaced by tax facilities for self-employed individuals running a real risk because of their investments.

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