Risks of transferring employees to individual entrepreneurs and self-employed
We talk about the main risks for an employer company that transfers its employees to self-employed and self-employed, and explain how to protect yourself from possible penalties from the tax authorities
Interaction with an individual entrepreneur on the basis of a civil law nature from a tax point of view for an employer can be significantly more profitable than hiring an employee under an employment contract. The customer does not pay social contributions, does not withhold personal income tax, and puts the costs of the contract with the individual entrepreneur into expenses, reducing the tax base for income tax.
However, one should keep in mind the concept of unjustified tax benefit in accordance with Article 54.1 of the Tax Code. If the interaction with the IP was deliberately organized in order not to pay or reduce taxes, then this particular factor will be decisive in recognizing the scheme of interaction with the IP as illegal from the point of view of tax optimization. In this regard, the tax authority will consider primarily the essence of the legal relationship.
What can indicate dishonesty of the employer?
Previously employed employees perform the same functions as individual entrepreneurs under civil law contracts. This is especially true when transferring the CEO to the status of IP manager.
Under the contract, the individual entrepreneur performs the same work as the full-time employee.
The employer is the sole customer of the individual entrepreneur, and the individual entrepreneur has not attempted to conclude new contracts.
A civil law contract contains labor elements: there are provisions on the work schedule, bonuses, there is a description of labor functions without a clear assignment and description of the ultimate goal and result of work under the contract.
The contract with the IP is regular, and not one-time.
The contract is concluded with an individual entrepreneur who, due to the lack of education or special skills, could not perform these works / provide services.
The employer and the individual entrepreneur have an account in one bank, and the individual entrepreneurs are served by the accounting or legal services of the employer.
The employer did not check the trustworthiness of the counterparty and did not compare the quality / cost of its work with other offers on the market.
The cost of IP is significantly higher than the market and does not depend on the result of the work performed.
An individual entrepreneur has a workplace in the employer’s office, but the individual does not pay rent.
Contracts are not concluded with newly registered individual entrepreneurs in droves.
All these signs in various combinations are detected during a desk or field inspection. As for the presence of an illegal optimization scheme, it will be signaled by a decrease in personal income tax and social deductions while maintaining sales volumes. Further, the inspector may begin to ask questions that are designed to identify the above risk characteristics.
What will help avoid tax problems?
Hiring an employee should have an economically reasonable goal. For example, it may be a one-time project that is not of a regular nature, when hiring a staff member seems inappropriate. The presence of an IP contractor should also be justified: for example, full-time employees could not perform this function, since they did not have the necessary competence and education.
It is necessary to check the counterparty and monitor similar offers on the market in order to establish that this individual entrepreneur has significant experience, confirmed qualifications and (or) requests a more competitive amount of remuneration for his work / service than competitors.
It is necessary to confirm the costs of the IP itself (for example, for paying rent, equipment repair, fuel and lubricants).
The cost of IP services should be consistent with market value. Too high fees will raise questions and replenish the inspector’s coin box of cooperation with the sole proprietor solely for the purpose of deriving tax benefits.
The contract should be strictly civil law and should not contain signs of labor. In it, the task and the result of the services (work) must be clearly formulated. At the same time, there should be no indication of the mandatory daily work schedule for the individual entrepreneur, or provisions on disciplinary sanctions. The presence of bonuses and bonuses is permissible only in certain areas where such a system is the norm rather than the exception (the implementation plan is overfulfilled, the remuneration is tied to the success fee, for example, in defense in court). At the same time, the dependence of remuneration solely on the achievement of specific indicators can create a favorable image when justifying the transfer of the current general director to the status of manager. For example, if at the end of the year the activities of the manager (former CEO) led to an increase in profits, sales, and a reduction in accounts payable, then even with a significant increase in the manager’s remuneration, such relationships will look reasonable and understandable from the point of view of economic feasibility.