The second tax threshold for sole proprietors (JDG) - when does the current model stop paying off?
A sole proprietorship (JDG) is the simplest and most popular way of running a business in Poland. For many entrepreneurs it is an ideal starting point - low running costs, simple bookkeeping and full control over the business. The problem arises, however, when income starts to grow rapidly.
In 2024 the second tax threshold on the tax scale applies once you exceed PLN 120,000 of annual income. This means that the amount above this figure is taxed at 32% instead of the previous 12%. For an entrepreneur earning, for example, PLN 250,000 of income a year, the difference in the tax paid becomes very noticeable.
It is also worth remembering that, in addition to income tax, a sole proprietor pays mandatory contributions to the Social Insurance Institution (ZUS), including a health insurance contribution, the amount of which depends on the chosen form of taxation. In extreme cases the total tax burden can even exceed 40% of income. This is the moment to ask yourself: is my current structure still optimal?
JDG, flat tax or limited liability company (sp. z o.o.) - comparing the options
An entrepreneur who crosses the second tax threshold has several alternatives available. Each has different tax, legal and organisational consequences. The key is to match the model to your individual financial situation and the company's growth plans.
Flat tax for a JDG
The first option considered by entrepreneurs moving into the second threshold is switching to the flat tax at a rate of 19%. This eliminates the problem of progressive taxation - the rate stays the same regardless of the level of income. However, bear in mind that under the flat tax you cannot use the tax-free allowance or most tax reliefs, including joint filing with a spouse.
Limited liability company
More and more entrepreneurs are choosing to run their business as a limited liability company (sp. z o.o.). The company pays corporate income tax (CIT), which for small taxpayers is only 9% (with revenue of up to EUR 2 million). In addition, a company offers many legal tools for managing profit distributions effectively and optimising the tax burden.
Here are the main differences between the various forms:
- JDG on the tax scale - rates of 12% and 32%, tax-free allowance, full liability with personal assets
- JDG on the flat tax - fixed rate of 19%, no tax-free allowance, full personal liability
- Limited liability company (sp. z o.o.) - CIT of 9% or 19%, limited liability of shareholders, greater optimisation opportunities
- Estonian CIT - tax paid only when profits are distributed, favourable effective tax rates
- Lump-sum tax on recorded revenue - simplified accounting, but no option to deduct business expenses
Sp. z o.o. and Estonian CIT - why are they gaining popularity?
In recent years there has been particular interest in running a business through a sp. z o.o. taxed under Estonian CIT. This is a form of lump-sum tax on company income in which tax is not charged currently on the income earned, but only when profits are distributed to shareholders.
In practice, this means that as long as profit stays in the company and is reinvested in the business, the entrepreneur pays no income tax. This is a huge advantage for fast-growing companies that need capital for investment, hiring or market expansion.
The effective tax rate under Estonian CIT for a small taxpayer can be only around 20% in total (CIT plus tax on dividends), which gives significant savings compared with 32% in the second threshold of the tax scale. What is more, a sp. z o.o. provides limited liability - a shareholder is not liable with their personal assets for the company's obligations, which is a further argument for changing your business structure.
It should be stressed, however, that Estonian CIT comes with certain conditions that the company must meet. These include, among others, employing staff, and the ownership structure must consist exclusively of individuals. Every case therefore requires an individual legal and tax analysis.
When is it worth considering a change of business structure?
Not every entrepreneur who crosses the second tax threshold should immediately set up a sp. z o.o. The decision to change legal form should be preceded by a careful analysis of many factors. It is worth considering the change above all when the following conditions are met.
First, your annual income regularly exceeds PLN 120,000 and the upward trend continues. Second, your business has relatively low deductible costs, which makes the tax base high. Third, you plan to reinvest profits in the growth of the business rather than withdraw all income as it arises.
The question of liability with your assets is also important. As a sole proprietor, you are liable for the business's obligations with all your personal assets - including property, savings or your car. A sp. z o.o. effectively separates business assets from private ones, which becomes crucial as the scale of the business grows.
Remember, however, that converting your business involves organisational and administrative costs - the need to keep full accounts, prepare financial statements and bear the costs of legal and accounting support. The profitability of the change should therefore be assessed comprehensively.
Don't overpay your taxes - discuss your situation with an expert
Tax optimisation is not tax avoidance - it is the legal and conscious management of your business structure so that the tax burden matches the entrepreneur's real needs and capabilities. Polish law offers a range of tools for effective tax planning, but using them successfully requires specialist knowledge.
Every situation is different - costs, revenue, growth plans and priorities all vary. That is why there is no single universal solution that works in every case. What is optimal for an IT services company may be completely unsuitable for an entrepreneur running a trading business.
Before you next pay tax at the 32% rate, contact our firm. We will carry out a detailed analysis of your tax situation, compare the available business structures and propose a solution that lets you legally optimise your tax burden. The first consultation is an investment that can bring tangible savings over the coming years of running your business. Book a meeting today.
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