How does taxation work for a light entrepreneur with a business ID?

How does taxation work for a light entrepreneur with a business ID?

When you work as a light entrepreneur with your own business ID, you operate as a private trader and pay income tax on the profit from your business activities. If your business activities are subject to value added tax, you also need to account for value added tax, or VAT, in your invoicing.

Income tax and VAT are different things. In this article, we explain how they work in the UKKO Light Entrepreneur with a Business ID service.

How is a private trader’s income tax calculated?

Income tax is based on the profit from your business activities, not directly on the total amount you invoice.

Your business profit is calculated by subtracting deductible business expenses from your income.

For example, if you earn 10,000 € in income during the year and have 2,000 € in deductible expenses, your business profit in this simplified example is 8,000 €. The amounts do not include VAT.

How is income tax paid in advance?

As a private trader, you generally pay income tax in advance as prepayments. The amount of prepayments is based on an estimate of your business profit for the year.

Here is how it works:

1. You estimate your business income and expenses.
2. The amount of your tax prepayments is based on your estimated profit. Your other income, such as salary, also affects the amount.
3. After the year ends, the Finnish Tax Administration takes your actual income and expenses into account in your taxation.
4. Any tax you have already paid as prepayments is also taken into account in your final taxation.

For example, at the beginning of the year, you might estimate that your business profit will be 8,000 €. By the end of the year, your actual profit may be higher or lower. Your final taxation is based on the actual figures, and the tax you have paid in advance is taken into account.

If you have paid too little tax, you may have to pay more. This is called back tax. If you have paid too much tax, you may receive a tax refund.

If you notice during the year that your profit differs from your estimate, you can apply to change your tax prepayments in MyTax.

Your business profit is taxed as part of your personal taxation. Business income is generally earned income, but part of it may be capital income. Your final tax amount is also affected by your other income and deductions.

How are tax prepayments paid in the UKKO Light Entrepreneur with a Business ID service?

In the service, money can be set aside from your invoices for tax based on the tax percentage you enter in the service. When the conditions are met, we apply for and pay the amount collected on your behalf as an additional prepayment.

Learn more about choosing a suitable tax percentage: How do I calculate the correct tax percentage?

What is an additional prepayment?

An additional prepayment is tax paid afterwards on income from the previous year.

Think of it like this:

1. You work and invoice your customers during the year.
2. The service sets aside money from your invoices for tax.
3. After the year ends, the amount collected can be paid to the Finnish Tax Administration as an additional prepayment.
4. The Finnish Tax Administration takes the payment into account in your final taxation.

An additional prepayment is not a new or extra tax. It is one way to pay income tax before your final taxation is completed.

If you already have a tax prepayment decision for the same year, the process is different: we return the amount collected to you, and you are responsible for paying the tax prepayments yourself.

Learn more about additional prepayments and their conditions: What does an additional prepayment mean?

When can’t UKKO.fi pay an additional tax prepayment on my behalf?

We cannot apply for and pay an additional tax prepayment on your behalf in the following situations:

• Less than 170 € in tax has been collected from your invoices during the year.
• The Finnish Tax Administration has already imposed tax prepayments on you for your business activities for the current year.

In these situations, we will refund the amount collected from your invoices for the additional tax prepayment to your bank account. You must pay it to the Finnish Tax Administration yourself, if necessary.

Check MyTax to see whether the Finnish Tax Administration has issued you a prepayment decision requiring you to pay tax prepayments for the current year, and whether the amount refunded to you is sufficient. If necessary, you can also apply for an additional tax prepayment yourself in MyTax, provided that the conditions for applying are met.

Please note that the amount we refund to you may not be the same as the amount of tax you need to pay.

For example, even if we refund you 100 €, whether you need to pay an additional tax prepayment depends on your total income and the taxes you have already paid.

Please note that a prepayment decision for next year does not prevent us from applying for an additional tax prepayment for the current year. Only a prepayment decision for the current year means that you need to pay the taxes yourself.

How does VAT work?

If your business is registered for VAT, you add the applicable VAT to the prices of products and services that are subject to VAT.

In the UKKO Light Entrepreneur with a Business ID service, we withhold VAT from your invoices and report and pay it to the Finnish Tax Administration according to your tax period. The VAT on deductible business purchases may reduce the amount payable.

Learn more about how VAT is handled in the service: How is VAT handled in the UKKO Light Entrepreneur with a Business ID service?

Can I pay myself a salary?

As a private trader, you cannot pay yourself a salary. When you take money from your business for your personal use, this is called a private withdrawal.

A private withdrawal is not a business expense. It therefore does not reduce your business profit or the tax payable based on that profit.

For example, if your business profit is 8,000 € and you take 2,000 € for your personal use, your business profit does not decrease to 6,000 €. The profit remains 8,000 €.

You therefore do not pay tax based on how much money you take for your personal use, but on the profit from your business activities.