Choosing the form of taxation for a business is one of the more important decisions an entrepreneur makes. One of the available options is the flat tax, which may be very beneficial in some situations and completely unprofitable in others. The key is understanding when it actually works well and how it compares with other tax methods.
As a rule, individuals running a business can choose between the progressive tax scale, the flat tax, and the lump-sum tax on recorded revenue. The tax card still exists, but only for taxpayers who used this method before 2022. Each form operates differently, has its own limitations, and suits different business models. The progressive tax scale is the most universal and available to everyone, but higher income may result in entering the 32% tax bracket. Lump-sum taxation, on the other hand, is based solely on revenue and does not take costs into account, which can be either an advantage or a disadvantage depending on the situation.
The flat tax applies a fixed 19% rate to income. Unlike the progressive scale, it does not include a tax-free allowance or most tax reliefs, but it also eliminates the risk of moving into a higher tax bracket. This option is often chosen by entrepreneurs who generate higher income or incur significant business expenses.
To illustrate the difference, consider a simple example.
Mr. Marek started his business and in the first month generated income of PLN 18,000. Under the progressive tax scale, he would not yet pay income tax due to the tax-free allowance. With the flat tax, however, he would have to pay 19% on the entire amount, which equals PLN 3,420. In this case, the flat tax clearly loses.
It is also important to remember that choosing the flat tax applies to all business activities. If someone runs a sole proprietorship and at the same time is a partner in a general partnership and a civil partnership, once this method is chosen, all such income will be taxed at the flat rate.
For example, Ms. Katarzyna runs her own marketing business and also holds shares in two partnerships. By choosing the flat tax, all her business income is covered by this form of taxation.
However, not everyone can use this option in every situation. An important limitation concerns relationships with an employer. If an entrepreneur provides services to a current or former employer that are the same as those performed previously under an employment contract in the same tax year, the right to apply the flat tax is lost.
For instance, Mr. Tomasz terminated his employment contract in February and started a business in March, providing identical services to his former employer. In such a case, he cannot use the flat tax until the end of the year. If, however, the cooperation had ended in December of the previous year, he could choose the flat tax from the beginning of the following year.
The flat tax is often considered a tool for tax optimization, but its profitability mainly depends on the relationship between revenue and costs. Compared with lump-sum taxation, the key advantage is the ability to deduct expenses. If costs are high, the tax calculated on income may be lower than the lump-sum tax calculated on revenue.
Assume that Mr. Adam earns PLN 12,000 in monthly revenue and his activity is subject to an 8.5% lump-sum rate. In this case, the tax would amount to PLN 1,020. Under the flat tax, the result depends on costs. With no costs, the tax would be PLN 2,280. With costs of PLN 3,000, it would drop to PLN 1,710. With costs of PLN 6,000, the tax would amount to PLN 1,140, and with costs of PLN 7,500 it would fall to only PLN 855. This clearly shows that only at higher cost levels does the flat tax start to outperform the lump-sum method.
The comparison with the progressive tax scale looks slightly different. At lower income levels, the progressive scale is usually more advantageous due to the tax-free allowance and lower initial rate. Only when income becomes higher and the 32% rate applies does the flat tax begin to show a clear advantage.
For example, Ms. Joanna achieved annual income of PLN 90,000. In this situation, the progressive tax scale would be more beneficial. However, if her income increased to PLN 240,000, the flat tax would become clearly more profitable.
The situation changes further when the entrepreneur earns other income taxed under the progressive scale.
Mr. Łukasz works full-time and earns PLN 140,000 per year, while also running a business. His employment income alone places him in the second tax bracket, meaning every additional złoty from business activity would be taxed at 32%. In this case, the flat tax for business income becomes beneficial almost immediately.
It is also important to consider the impact of joint taxation with a spouse and available tax reliefs.
Mr. Krzysztof generated PLN 210,000 of business income, which might suggest that the flat tax is the obvious choice. However, his spouse does not work and has no income. Thanks to joint taxation under the progressive scale, their total tax may be lower than under the flat tax. A similar situation applies to the child tax relief. With two children, the tax can be reduced by more than PLN 2,200, which is not available under the flat tax.
When choosing a taxation method, health insurance contributions must also be taken into account. Under the flat tax, the contribution amounts to 4.9% of income, while under the progressive scale it is 9%.
The lump-sum method works differently again. The health contribution is fixed and depends on the level of revenue. In practice, this means that at higher income levels, the flat tax may also be more advantageous due to a relatively lower health insurance burden.
A good example is two businesses operating in the same industry.
Ms. Natalia works as a freelancer and incurs almost no costs. In her case, the lump-sum tax may be the simplest and most cost-effective solution. Mr. Michał, on the other hand, runs a design office, employs several people, rents premises and uses equipment leasing. His costs represent a significant portion of revenue, so the flat tax will be much more advantageous for him.
In summary, the flat tax works best at higher income levels and where business expenses are significant, especially when the entrepreneur does not use tax reliefs and does not file jointly with a spouse. However, it is not a universal solution. In practice, the most reasonable approach is to calculate several scenarios using real figures before making a decision. In many cases, a simple comparison can lead to meaningful savings.