How should legal entities work with self-employed?
Self-employed individuals who work in any of the constituent entities of the Russian Federation are entitled to operate under a special tax treatment and apply professional income tax. The main advantages of this special tax treatment are as follows:
- Taxpayers are exempt from personal income tax, VAT, and other taxes;
- This special tax treatment will stay in place until December 31, 2028 inclusive, and the conditions to operate under it will not change until that date: tax rates will not be increased, and the income limit for tax calculation will not be reduced;
- Individual entrepreneurs declared bankrupt whose assets are being sold may also apply this special tax treatment and be subject to professional income tax;
- Professional income tax rate: 4% for income generated by individuals and 6% for income generated by legal entities and individual entrepreneurs;
- Income should not exceed RUB 2.4 million per year;
- If the above threshold is exceeded, the special tax treatment will no longer apply, and income will be subject to personal income tax. Individual entrepreneurs may switch to another special tax treatment (e.g. simplified taxation system) by notifying tax authorities;
- When selling goods and providing services to foreign customers, the same rates apply, i.e. 4% for individuals and 6% for legal entities ;
- If there is no income, no mandatory or fixed payments are required;
- Participation in compulsory health insurance system;
- Self-employed people (except for individual entrepreneurs) may not voluntarily pay for themselves social insurance contributions for inability to work and maternity (Social Insurance Fund Letter N 02-09-11/06-04-4346 dated February 28, 2020);
- Taxpayers can use the application My Tax (Moy nalog) to liaise with tax authorities.
Advantages for individuals:
- Easy registration – the status of self-employed can be obtained online through a mobile application, the Federal Tax Service website, a bank, or state services;
- No need to submit reports and tax returns to tax authorities: accounting is done using the Federal Tax Service mobile application;
- It is possible to work without the status of individual entrepreneur. Income can be confirmed with a statement from the mobile application;
- Individuals are entitled to pay voluntarily social contributions to compulsory pension insurance;
- Taxes are calculated automatically. Self-employed are notified on the 12th of the month following the tax period that has ended. The payment is to be made by the 25th of the month;
- No need to purchase cash-register equipment as bills are generated in the mobile application;
- It is possible to work both as a self-employed and as an employee under an employment contract. Salaries are not taken into account when calculating self-employed tax, and income generate from self-employed work is not subject to personal income tax;
- People who register as self-employed in 2020 will not be required to pay tax until the end of the year if the amount of payable tax does not exceed RUB 22,130. They will be entitled to deduct RUB 10,000 until 2021 and an extra RUB 12,130 due to the pandemic and only deductible from tax liabilities that arose in 2020.
- Due to the COVID-19 pandemic, a subsidy in the amount of the professional income tax paid in 2019 will be provided to self-employed people.
Individual entrepreneurs may become self-employed. When switching from the simplified taxation system, single agricultural tax, and single tax on imputed income to self-employed status, it is necessary to send to tax authorities a notice of termination of the abovementioned types of taxation within a month of registering as a self-employed. Individual entrepreneurs operating under the patent taxation system may become self-employed only after notifying tax authorities of the termination of activities under the patent system or upon expiration of the term of this taxation treatment.
Foreign nationals from countries of the Eurasian Economic Union, Belarus, Armenia, Kazakhstan, and Kyrgyzstan may be self-employed. They can register as such through the appropriate mobile application or their online taxpayer account using their taxpayer identification number (INN).
Professional income taxpayers may withdraw from the special professional income tax treatment by submitting an application to tax authorities via My Tax (moy nalog) mobile application. The date on which such application is sent will be deemed the date of deregistration. If the registration as self-employed was made through a bank, then it will be necessary to notify the bank of the deregistration. It is possible to register again as self-employed at any time provided there are no arrears in tax, fines, and penalties.
Restrictions on the application of professional income tax treatment
Switching to professional income tax is not possible in case of (Article 4(2) Federal Law N 422-FZ dated November 27, 2018):
- Resale of property rights, goods (except personal belongings);
- Sale of excisable goods and goods subject to mandatory marking;
- Extraction and/or sale of natural resources;
- Employment of staff under employment contracts although engaging people to work, for example, under a contractor agreement is not prohibited;
- Intermediary activities;
- Provision of services for delivery of goods with acceptance of payments for other entities (except for delivery with cash register equipment registered by the seller of goods);
- Individual entrepreneurs are not allowed to combine professional income tax with other special tax treatments or with the general taxation system (i.e. payment of personal income tax);
- Application of another special tax treatment or business activities generating revenues subject to personal income tax except for cases provided in Article 15(4) of Federal Law No. 422-FZ dated November 27, 2018.
How does work with self-employed look like for legal entities?
Before working with self-employed, legal entities should make sure that:
- The self-employed has not been an employee of the company for at least 2 years before the planned conclusion of contract as it is prohibited to work with self-employed people who used to work for the company under employment contracts for the previous two years prior to the contract conclusion with them (Federal Law No. 422-FZ dated November 27, 2018).
- The individual is indeed self-employed (taxpayer identification number (INN) can be checked through the Federal Tax Service). We recommend checking the self-employed status before each payment transfer to a self-employed as individuals may lose the status of self-employed, for example, if their income exceeds the threshold set by law. It is possible for a self-employed to be registered as such with the Federal Tax Service, and for this self-employed to have already exceeded the income limit. The only way to exclude this risk at the moment is for legal entities to request self-employed people to submit a statement of income from the Federal Tax Service mobile application.
- We recommend including the following in contracts with self-employed: “The contractor is a professional income taxpayer”.
- No signs of employment contract should be in the civil law contract with a self-employed. If such contract shows signs of employment contract, then payments made under such contract should be subject to personal income tax and social insurance contributions. Doing so will allow avoiding adverse consequences, i.e. additional charges and payment of penalties and fines (Moscow Region Federal Tax Service Letter N 10-17/051757@ dated July 27, 2020).
- A receipt from My Tax (moy nalog) application should be available for each payment made to self-employed. The date, time, payment amount, self-employed full name and identification number should be specified in this receipt.
- A receipt should be generated immediately when payment is made in cash. In other cases, it should be issued by the 9th of the month following the month in which payment was made.
- An exception to this rule is when a civil law contract provides that personal injury contributions are to be paid to a self-employed.
- If a self-employed is no longer entitled to apply the special tax treatment provided for self-employed, the obligation for the company to accrue and pay personal income tax and social insurance contributions for that person arises from the date of loss of eligibility for the special tax treatment (Federal Tax Service Letter N СД-4-3/2899@ dated February 20, 2019).
- Self-employed people may not hire other people to work under employment contracts.
When planning work with self-employed, it should be borne in mind that most banks will charge a commission for transfers to individuals’ bank accounts.