What is the best form of taxation for starting a sole proprietorship?
Choosing the right form of taxation is an important decision for anyone starting a sole proprietorship. It can affect the final tax costs and the method of financial documentation.
The most popular forms of taxation include the tax scale (settlement on general principles), flat tax, and lump sum on recorded income. Each of these options has its own unique features and limitations. In this article, you will learn how the different forms of taxation for sole proprietorships differ from each other. This will make it easier for you to determine which solution is best for you.
Why should you carefully consider the form of taxation for your sole proprietorship?
When registering a sole proprietorship, you should choose the form of taxation when filling out the CEIDG form. If you do not do so, you will be taxed according to general principles. Why is this so important?
This has a direct impact on the amount of tax you will pay in connection with running your business. It may also affect your accounting obligations and the method of calculating your health insurance contribution to the Social Insurance Institution (ZUS). The available forms of taxation, i.e., flat tax, tax scale based on general principles, and lump sum, are settled in different ways. Choosing the right one can help you optimize your taxes and thus reduce the costs of running your business.
When making your decision, it is worth considering several factors:
- planned level of income,
- nature of the business,
- anticipated costs of obtaining income,,
- available tax reliefs,
- preferences in terms of joint tax settlements with your spouse.
Settling a sole proprietorship on general terms (tax scale)
The tax scale is very popular among entrepreneurs who run small sole proprietorships. It is progressive, with two tax rates – 12% for income up to PLN 120,000, and 32% for the surplus above that amount. Settlement on general principles is profitable mainly for those companies that do not forecast higher annual income.
What are the advantages of taxing a sole proprietorship on general principles?
Taxation according to general principles, i.e., within the so-called tax scale, has several advantages. First of all, it is a beneficial solution for people with lower incomes who do not fall into the second tax bracket. Secondly, in this case, you can take advantage of tax-free allowances and deductions, for example, for children or the Internet. Another important advantage is the possibility of joint settlement with your spouse. In addition, the tax scale also allows you to deduct costs related to running a business.
What are the limitations of general tax settlement?
Although the tax scale has its advantages, it also has several significant limitations. If you earn more than PLN 120,000 per year, you must take into account that the tax rate will increase from 12% to 32% – it will be calculated on the surplus.
Using this solution requires you to keep a tax revenue and expense ledger, which means more work related to documentation. You have to monitor every form of income and every expense. An additional disadvantage is the health insurance contribution of 9% of income, which cannot be deducted from tax.
Flat tax in JDG – when is it profitable?
The flat tax in JDG has a fixed rate of 19%. It is a great choice for entrepreneurs who expect high earnings and value ease of tax settlements. If your business income exceeds PLN 120,000 per year, you will avoid the 32% tax levied under general taxation rules.
Advantages of a flat tax
A flat tax rate of 19% has its advantages, which attract a certain group of entrepreneurs. The biggest benefit is that the tax rate does not change depending on your earnings. This means that even with higher income, you will pay the same tax. Such predictability makes it much easier to plan your company’s budget. In addition, with a flat tax, you can deduct health insurance contributions up to PLN 14,100 from your income, reducing your tax base.
Limitations of the flat tax
However, this form of taxation in JDG has certain limitations. It does not allow you to take advantage of the tax-free amount, so it forces you to pay tax on every zloty you earn. In addition, it prevents you from filing jointly with your spouse and taking advantage of most of the tax reliefs available on the tax scale. It should also be remembered that a flat tax requires full accounting.
Lump sum on recorded income in sole proprietorships
A lump sum on recorded income is one of the simpler forms of taxation for small entrepreneurs. It consists of paying a tax set as a percentage of income, without the need to deduct costs. The tax rate here is variable, depending on the industry in which the company operates – it can range from 2 to 17%.
Advantages of lump sum taxation for sole proprietorships
The lump sum tax on recorded income is popular among entrepreneurs due to its simplicity. Its main advantages include simplified tax and accounting settlements – simplified accounting can be used. This allows you to focus on your business without wasting time on preparing complicated documentation.
In addition, it has a fixed rate, depending on the type of activity, so, like the flat tax, it facilitates financial planning. It is worth noting that it allows you to choose between paying monthly or quarterly income tax advances. Although it is available up to a certain annual income limit, this limit is very high – in 2026, it will be over PLN 8.5 million for sole proprietorships.
Restrictions on the lump sum tax on recorded income
Not all industries can settle their taxes in the form of a lump sum – this applies, among others, to legal services, pharmacies, and currency exchange offices. Choosing this form of taxation makes it impossible to deduct tax-deductible costs and settle accounts jointly with your spouse. However, it allows you to take advantage of the abolition relief and preferential social security contributions for new companies, partially reducing the initial costs of running a sole proprietorship.
When does it cease to be profitable to settle a sole proprietorship under general rules?
When the entrepreneur’s income grows rapidly and exceeds PLN 120,000 per year, it ceases to be profitable to use the general rules. Once this amount is exceeded, a higher tax rate of 32% applies, resulting in much higher tax liabilities. If the entrepreneur is not eligible for tax relief, joint settlement with their spouse, or does not incur significant tax-deductible costs, it is better to consider other forms of taxation.
A flat tax rate of 19% is often chosen by people with higher incomes because it is more attractive. If full accounting and the associated administrative obligations are burdensome for you, it is worth considering a simpler option, i.e., a lump sum on recorded income. This form of taxation is a good solution if you do not have many costs or if documenting them is complicated and time-consuming.
The high health insurance contribution (9% of income) under the general rules is also a reason why some sole proprietors choose other forms of tax settlement, where the burden is lower or more predictable. The decision on the form of taxation is best made after analyzing your financial situation and business structure. If you need it, we will be happy to help you choose the most cost-effective solution – we offer professional advice during company registration.
Is it possible to change the form of taxation after establishing a sole proprietorship?
It is possible to change the form of taxation in a sole proprietorship, but an entrepreneur can only do so once a year. In addition, the decision must be made within a specific time frame. A written statement must be submitted to the tax office by the 20th day of the month following the month in which the first income was earned in a given year – usually by January 20. Failure to meet this deadline means that the current taxation must remain in place until the following year.
If you want to change the form of taxation for your sole proprietorship, you need to update your data in CEIDG. To do this, simply go to the appropriate website and fill out an application to update your data, indicating the new method of tax settlement. The system will automatically forward this information to the appropriate tax office.
Comparison of the most important features of general rules, flat tax, and lump sum tax in sole proprietorships
When planning to register a sole proprietorship, you should carefully consider the form of tax settlement. Changes cannot be made often, and the method of taxation will significantly affect the costs of running a business. To help you make your decision, we have compared the most important features of the general rules, flat tax, and lump sum tax in sole proprietorships in the table below.
| Feature | General rules (tax scale) | Flat tax | Lump sum tax |
|---|---|---|---|
| Tax rate | 12% (up to PLN 120,000), 32% (surplus) | Fixed 19% | From 2% to 17% (depending on the industry) |
| Tax-free amount | PLN 30,000 per year | None | None |
| Health insurance contribution | 9% of income (non-deductible) | 4.9% of income (deductible up to a limit of PLN 14,100) | Fixed amount depending on income (PLN 498.35 – 1,495.04) |
| Cost deduction | Full (income minus costs) | Full (income minus costs) | No cost deduction possible |
| Settlement with spouse | Possible and very profitable | None | None |
Regardless of which option you choose, you should consider seeking professional support in settling taxes for sole proprietorships. This will give you the certainty that these formalities are being completed correctly, and you will also save time, allowing you to focus fully on developing your business. Bitfrost Group can provide you with such assistance – we provide accounting services for companies in all industries. Contact us to learn more about our offer!