Monday, November 13, 2017

They pay more but self-employed must still comply, writes Brian Keegan

It’s income tax return filing season and this week is the critical week. The returns of income which Revenue expect to receive between now and November 16 are largely made by the self-employed. The tax affairs of employees are mostly handled through PAYE. But tax is full of rules to catch out the unwary.

Opening a foreign bank account means a person must send in a return of income, even if they’re not self-employed. So, too, must someone who received a benefit from their employer in the form of shares during the year. Proprietary directors — those with more than a 15% shareholding — even if all their income is taxed under PAYE, must file a return. Such exceptions aside, PAYE workers don’t usually have to complete income tax returns. But it’s a must for anyone self-employed – whether you’re trading, like wholesalers and retailers, or providing services; like doctors, engineers, solicitors or accountants.

Anyone who’s not familiar with the tax system and the way it mangles otherwise ordinary and harmless words could understandably be puzzled by some of the questions asked and details demanded on the tax return. That’s because, first and foremost, a tax return is a legal document. It is designed to leave Revenue in a position to take legal action against you if you get it wrong, just as much as it is designed for them to collect the information they need to work out your tax bill.

The tax take from the self-employed is critically important to the national finances. While most income tax comes from employees through the PAYE system, or from withholding systems like the DIRT tax levied on the interest earned on savings, the self-employed pay significant amounts in taxes each year. Every month about €1.5bn of income tax flows into the national coffers. This month that amount should double due to the contribution of the self-employed.

While it may be an advantage not having to suffer PAYE throughout the year and make a tax payment in one lump sum, the tax system is harsher on the self-employed, in comparison with how employees are treated. The self-employed tend to pay more tax than employees on similar earnings, because the PAYE tax credit of €1,650 is higher than the earned income credit for 2017 of €950.

High earning self-employed people pay USC at a rate of 11% on income over €100,000 – the employee rate stays at 8%. On the other end of the scale, a minimum PRSI contribution of €500 means that the effective PRSI rate on low incomes is far higher than the 4% paid almost universally by employees. It’s unjust to tax people by reference to how they earn their money, rather than by reference to how much they earn.

The key thing, however, for self-employed people this week is to manage the exposure to tax penalties, interest and surcharges by making sure the income return is filed on time. A late return will add 5% or even 10% to the tax bill as a surcharge. Late payments attract interest charges. Even if it’s not possible to make the full payment due, make sure Revenue receive the return. Most back taxes, interest and penalties become due because people are inattentive or careless rather than fraudulent.

Brian Keegan is director of public policy and taxation at Chartered Accountants Ireland.

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