Deduction of social security contributions when settling tax

If you run a business, you are subject to compulsory social and health insurance and you have an obligation (with the exception of the so-called "overlapping titles for insurance") to pay contributions to these insurance policies. Additionally, if you are a full ZUS employee you will pay contributions to the Labour Fund.

If you hire employees, you will also have to pay part of their insurance contributions (social, health, Labour Fund and Guaranteed Employee Benefits Fund).

What social security contributions can be deducted when settling income tax?

The right of deduction covers:

• social security contributions (old-age, disability, sickness and accident insurance)
• health insurance contributions
• contributions to the Labour Fund

The way you settle your social security contributions and health insurance contributions when you settle taxes depends, among other things, on the type of insurance and the form of taxation.

Important! There are also differences as to whether you can include contributions in your costs, deduct them from your tax base or from tax. The table below clearly explains the accounting rules.

Rules of settlement of contributions for own insurance by entrepreneurs

*Tax deduction in the amount not exceeding 7.75% of the contribution assessment basis

Insurance contributions for employees

Social security contributions and non-insurance funds (Labour Fund, FGSP), which you are obliged to pay from your own funds on account of salaries paid to employees, are tax deductible costs, of course if they are costs incurred in order to generate income or to maintain or secure a source of income.

How to account for entrepreneurs' social security contributions in taxes?

When calculating the tax you have the right to take into account the paid social security contributions (old age, disability, sickness, accident) paid to the Social Insurance Institution (ZUS). The method of accounting for these contributions depends on the type of insurance and the form of taxation you choose (general rules, flat rate tax, lump sum tax, tax card).

Settlement on general principles (tax scale or so called flat rate tax)

If you settle according to the general rules, you have two options to settle your social security contributions:

• you can deduct your own social security contributions (old age, disability, sickness and accident) paid in a given year from your income (i.e. from your tax base) in the given year
• or to classify the contributions paid as tax deductible costs

Remember, contributions can only be deducted from your income if they are not deductible for tax purposes (or if you have not been reimbursed for them in any form whatsoever). The second important principle when deducting social security contributions is that they can only be deducted from income (or included in costs - depending on the accounting method chosen) once they have been paid!

The right to deduct from taxable income the social contributions paid shall not apply where:

• the basis for their assessment is income (revenue) free of tax under the Personal Income Tax Act or subject, under the provisions of the Tax Ordinance, to the abandonment of tax collection, or
• such contributions were recognized as tax deductible expenses or deducted from income pursuant to the Lump-sum Income Tax Act or refunded to the taxpayer in any form.

What should I do if my income is lower than my contribution?

• In the case of deduction of contributions from income

If you deduct your social security contributions from your income but this is less than the amount of your deductible contributions, you can only deduct them up to the amount of your income for the tax year. In practice, this means that if your income is less than the amount of your contribution, you will only deduct part of your contribution because you will not "cover" the rest of it with your income. You will no longer be able to deduct the rest of your outstanding contributions from your next year's income. This is because the difference between your income and your social security contributions is not a loss you could settle. A loss arises only when the cost of acquisition exceeds the total revenue.

• Where contributions are recognised as costs

If you use the method of allocating social security contributions to costs and the contributions paid are higher than your income, you can deduct the loss from your income over the next five tax years.

Both deduction of contributions from income and their inclusion in tax deductible costs are possible only at the moment of payment of contributions to the Social Insurance Institution (ZUS). This means that you can, for example, deduct from your income for a given year the social security contributions for the previous year (outstanding) paid in that year.

Deduction of overdue contributions when calculating tax advances

During the tax year you are entitled to deduct your social security contributions from your income when calculating your monthly tax advances  When calculating tax advances, you can deduct from your income contributions paid in the previous months of the year, but not yet deducted due to insufficient income.

Settlement on the basis of a lump sum on registered income

Revenue is the basis for taxation with a lump sum on registered income, but it is not reduced by tax deductible costs. If you settle with a lump sum, you can only deduct your social security contributions from your income, thus reducing your tax base.

What should I do if my revenue is lower than my contributions?

Importantly, during the year, you can deduct from your income not only the contributions paid in a given month, but also the contributions paid in the previous months of the year, if you have not been able to deduct them because your revenue is too low.

If during the whole year the amount of contributions paid exceeds the revenue earned, the excess is forfeited and it will not be possible to reduce the revenue in the following tax year.

Settlement of tax on the basis of a tax card

If you settle on the basis of a tax card, you pay tax regardless of your revenue. Social security contributions are therefore not accounted for in this form of taxation at all. Unless you combine your business with another source of income.

Several sources of income - possibility of settling social security contributions

If you do business and, for example, work as an employee, you should be aware that the law allows social security contributions you have paid in connection with your business to be deducted from income (revenue) from sources other than your business, such as income from employment. How to settle in this situation? When settling the tax on income earned from employment in the PIT-36 annual tax return, you may reduce the income by the social security contributions paid on account of running a business. Remember, however, that you cannot double-count your contributions.

How to account for the entrepreneur's health contribution in taxes?

Health insurance is compulsory when you are running a business. Remember that you can include health insurance contributions in your tax settlement. Unlike social security contributions (depending on the form of taxation you can include them in the calculation of the tax base or classify them as costs), you can only deduct your health insurance contributions from your income tax for a given year. You have the right to deduct both when you settle according to the tax scale, flat-rate tax, lump-sum tax on registered income or a tax card.

However, the amount of the health insurance contribution by which the tax is reduced may not exceed 7.75% of the basis for assessment of the contribution!

Settlement of a part of contributions in the following months

If, for example, you incur a loss and were not able to fully deduct your health insurance contributions in a given month (remember, you can only deduct them up to the amount of tax), you can do so in the following months of the calendar year. This means that the unused part of the contribution is 'transferred'. However, if you do not use all your health insurance contributions to deduct, the tax rules will give you another option. If you have other sources of income, e.g. employment, paid but not settled health insurance contributions, you can deduct them when calculating income tax from other sources (e.g. employment). Otherwise, the contributions will be forfeited because they cannot be settled in future years.

Examples of deducting health insurance contribution

• From 1 January 2018 to 31 May 2018, Jan Kowalski ran his own business. This activity is a compulsory title to health insurance. During 2018 on this account, Jan Kowalski paid monthly health insurance contributions from the minimum base required by law (PLN 3554.93) in the amount of PLN 319.94 per month. In total, in 2018 he paid 1599.70 PLN, including 1377.55 PLN deductible from income tax. He incurred a loss on account of his business activity, so he is not obliged to pay income tax and he cannot settle in any way the health insurance contributions paid in tax (in the activity settlement).
• At the same time, in the period from January 1, 2018 to June 30, 2018 Jan Kowalski was employed on the basis of the contract of employment in Company "A" with the basic remuneration of 3000 PLN/month. He did not earn any other income in 2018. On account of employment, the employer as a payer deducted from Jan Kowalski's salary and transferred to the Social Insurance Institution during his employment health insurance contributions in the total amount of PLN 1,397.88 (PLN 232.98 per month), including those deductible from income tax PLN 1,203.72. The due income tax for 2018 from the income obtained from the contract of employment in company "A", before deduction of health contribution, amounted to 2397,18 PLN. In total, the health insurance contribution deductible from tax for 2018, paid by Jan Kowalski in 2018 for running a business and working as an employee in another company amounted to PLN 2,581.27 (PLN 1377.55 + PLN 1,203.72). 

As indicated above, the due income tax on account of income obtained in 2018 amounted to 2,397.18 PLN before deduction of health insurance contribution. It is possible to deduct from the tax deductible amounts of health insurance contributions paid in 2016 in the total amount of PLN 2,696.64. However, that value exceeds the amount of tax due. Thus, the amount of health insurance contribution in the amount of PLN 2,397.18 (up to the amount of income tax due) can be deducted from the income tax. However, the amount of paid health insurance contributions in the amount of 184.09 PLN is not deducted from the tax, which will exceed the amount of due tax in 2018. Unfortunately, it will not be deducted, as there is no legal possibility of deducting it from the income tax in the following years.

When do I not have to pay health insurance contribution?

If you have set up a company and register with ZUS, you should know that the health insurance contribution is payable by persons running a business or cooperating with them (except for suspension of business activity). The basis for the assessment of health insurance contributions for such persons is the declared, but not lower than 75% of the average monthly remuneration in the enterprise sector in the fourth quarter of the previous year, including payments from profit.

Not all entrepreneurs have to pay health insurance contributions or the full amount. These preferences are available to:

• certain pensioners
• entrepreneurs receiving low maternity benefit
• persons with moderate or severe disability.

An entrepreneur exempt from the obligation to pay the health insurance contribution is the one who:

is a pensioner whose old-age or disability pension does not exceed the minimum salary, provided that his income from business activity does not exceed 50% of the amount of the lowest pension per month, or he settles income tax in the form of a tax card
is a person with a moderate or significant degree of disability, provided that his/her income from business activity does not exceed 50% of the amount of the lowest pension per month, orhe settles income tax in the form of a tax card
is on maternity leave if the maternity allowance does not exceed the amount of parental benefit per month (PLN 1000 net). The exemption from paying the health insurance contribution is granted regardless of the reason for acquiring the right to maternity benefit. For example, women who run a business but have acquired the right to a benefit on another account (e.g. from a full-time job) are also entitled to exemption from the payment of health insurance contribution in respect of their business activity.
What is important, the beneficiary of the exemption from paying the health insurance contribution is at the same time subject to health insurance and keeps the right to health benefits. The right to exemption from paying health insurance contribution is granted in the month in which the conditions for exemption described above are fulfilled.

Example

• Jan Kowalski is a pensioner with a monthly pension of PLN 1700. At the same time, since February 2018, he has been running business activity, which he settles for tax purposes according to general rules. In February 2018 he obtained revenues from business activity in the amount of PLN 350, in March 2018 in the amount of PLN 400, in April 2018 in the amount of PLN 600 PLN, in May 2018 in the amount of PLN 380.

Jan Kowalski meets the first of the conditions for exemption from paying health insurance contributions, as his pension of PLN 1700 is lower than the minimum wage. The second condition is met if the operating income does not exceed 50% of the amount of the lowest pension. This condition was fulfilled in February, March and May 2018. In those months, Jan Kowalski was exempted from paying a contribution for health insurance related to his business activity. In April, on the other hand, the amount of income (PLN 600) was higher than half of the lowest pension (the lowest pension since March 2018 was PLN 1029.80) and therefore, in April 2018, J. Kowalski was not entitled to an exemption from health insurance contribution.

Jan Kowalski would be entitled to exemption from paying the health insurance contribution regardless of the income earned from his activity in each of the above months, if Jan Kowalski settled the income tax on his business activities in the form of a tax card.

If you have a moderate or severe disability certificate you can pay lower health insurance contributions, i.e. up to the amount of income tax you are due. Provided that your non-agricultural business activity is your only source of income. This relief is not applied in the case of entrepreneurs settling income tax on their business activities in the form of a lump sum on registered income or in the form of a tax card. Therefore, the relief is available to disabled entrepreneurs who settle income tax on their activity according to general rules.

Shareholders of limited liability companies and joint-stock company

The problem of paying health insurance contribution does not concern the partners of limited liability companies or joint-stock companies. However, this applies to multi-person companies. A person who is the sole shareholder (holding 100% of shares) is treated in the same way as a person running a business and is therefore subject to compulsory health insurance. Remember that the consequence of not paying health insurance contributions by a partner in a multi-person company is the lack of the right to public (free) health care services.

How to settle the entrepreneur's own contributions to the Labour Fund in taxes?

Contribution to the Labour Fund is obligatory for entrepreneurs conducting business activity, if in respect of this activity they are obligatorily subject to old-age and disability pension insurance, and the basis of assessment for these insurance - calculated for a period of one month - is at least equal to or exceeds the amount of the minimum wage. If you do not use the so-called small ZUS, the amount of the contribution assessment basis is 60% of the average projected monthly salary and is higher than the minimum salary. You should therefore pay contributions to the Labour Fund in the amount of 2.45% of the basis of assessment of the rate.

However, if you use a small ZUS, where the contribution assessment basis is 30% of the minimum wage, you do not have to pay a contribution to the Labour Fund because the contribution basis is lower than the minimum wage.

You will also not pay contribution to the Labour Fund if you conduct activity and work full-time at the same time, for example, and your earnings are at least equal to the minimum wage.

If you are over 60 (for men) or 55 (for women), you are also exempt from paying contributions to the Labour Fund.

Settlement of the Labour Fund contribution in taxes

The tax regulations for natural persons do not provide for the possibility of deducting contributions to the Labour Fund from income or tax. You can only classify this contribution as a tax deductible expense. So you cannot settle it if you settle it with a lump sum or with a tax card, because these taxes do not include tax deductible costs. 

The contribution to the Labour Fund is a tax cost provided that it is paid to the Social Insurance Institution (ZUS).