Cooperation with a former employer within self-employment

Many employees consider self-employment, counting on tangible financial benefits. Is employment based on an employment contract the best solution for an employee? Does providing services to a former employer within a B2B business activity allows you to achieve more benefits? What should you pay attention to when changing the form of cooperation with an employer, from an employment contract to the provision of B2B services (the so-called self-employment)? Is it always possible to become self-employed? Are there any tax and ZUS (social security) restrictions in connection with performing work for a former employer?

Self-employment is carrying out business activity in one’s own name and on one’s own account. It involves the need to set up a business activity as well as settle taxes and ZUS contributions.  

Self-employment in the light of the Polish Labour Code 

Polish Labour Code does not prohibit the employer from employing an employee on the basis of a civil law contract, even if both parties had concluded an employment contract.   

There are two important elements in an employment relationship:  

• An employee performs work under the direction of the employer and on their behalf, in the place and at the time specified by the employer  

• An employee receives remuneration for their work and cannot appoint a subcontractor. They must do their job in person.  

It is illegal to conclude a civil law contract in order to hide the employment relationship. An employment contract cannot be replaced by a civil law contract if the employment has the characteristics of an employment relationship.   

Sole proprietorship and VAT 

An employee who registers their business activity becomes an entrepreneur. Generally, they settle VAT, provided that they do not benefit from any subjective or objective VAT exemption.  

Subjective exemption results from the turnover achieved (up to PLN 200,000 per year). If an employee starts running their own business activity in the course of a year, the above limit should be reduced proportionally. It should be remembered that the subjective exemption is sometimes not available, for example to taxpayers providing legal or consultancy services. Details can be found in Art.113(13) of the Polish VAT Act.  These exemptions apply to all taxpayers, including those performing activities for a former employer.  

However, objective VAT exemptions are exemptions due to the type of activities performed, e.g. insurance or financial services. The list of such services is regulated in Art. 43(1) of the Polish VAT Act.   

Income tax when providing services to a former employer 

An entrepreneur must choose the form of taxation. A taxpayer running a sole proprietorship has the option of choosing one of the following forms of taxation:   

• in line with general principles in accordance with the tax scale,  

• flat rate,  

• flat rate on recorded revenue. 

When choosing the form of taxation, one should remember about certain limitations. An entrepreneur who wants to choose a flat rate tax may do so only in the following year, from the moment of termination of the employment contract. Therefore, they cannot benefit from the flat rate tax in the same year in which they performed the same activities on the basis of an employment relationship.  

On the other hand, an entrepreneur interested in a flat rate on recorded revenue may do so only after a period of two years from the termination of the employment contract. They cannot use this form of taxation in the year in which they were employed under an employment contract and in the following year.  

ZUS contributions for an entrepreneur working for a former employer 

An entrepreneur who has started a business activity has the right to certain preferences in paying social security contributions. And the amount of the health insurance contribution depends on the form of taxation.  

People starting a business activity can benefit from the so-called start-up relief for the first 6 months, and then for 24 months from ZUS contributions at preferential rate, the so-called small ZUS.   

When an entrepreneur performs the same activity that the one performed under an employment contract for a former employer before the start of business activity in the current or previous calendar year, they cannot make use of above-mentioned reliefs.  An entrepreneur is obliged to pay ZUS contributions in full. Working for a former employer does not allow for benefiting from the so-called small ZUS plus.   

If an entrepreneur provides other services to the former employer and the scope of their duties has changed, the restrictions regarding the form of taxation and ZUS do not apply to them.   

To sum up, before switching to self-employment, you need to know all the effects as well as advantages and disadvantages of this solution. 

Advantages of self-employment  

• possibility of achieving higher income  

• greater creativity in running a business  

• free organisation of your work  

• opportunity to establish cooperation with other entrepreneurs and thus an opportunity to increase your profit  

• access to offers addressed to entrepreneurs, e.g. in banking, or the possibility of using EU or local government funding, etc.  

Disadvantages of self-employment  

• additional costs related to running a business, e.g. accounting, office rental, etc.  

• documenting revenues by issuing sales invoices  

• collecting cost invoices and other accounting documents  

• documentation storage   

• paying ZUS contributions and taxes  

• higher liability of an entrepreneur   

Self-employment involves as well the lack of privileges provided by an employment contract:  

• no paid holidays  

• potential lower employment stability  

• no statutory notice period  

• lower pension from ZUS  

• no right to maternity and parental leave  

• no access to employer-financed social packages. 

Author: Agnieszka Bojar Manager in the Warsaw office of MDDP Outsourcing.