Simplified advance payment, i.e. permanent income tax during the year

Service-Tax

A taxpayer running a business may choose the form of taxation himself. The company's financial liquidity may depend on its choice.In addition, he also has the option of choosing the method of paying advances for income tax - monthly in the basic form, quarterly or in a simplified form. What are the benefits of a simplified advance? We answer below.

Simplified advance payment - who can use it?

The possibility of paying simplified advances may be used by entrepreneurs conducting non-agricultural business activity, who settle accounts with the tax authority on general terms, i.e. according to a progressive tax scale or a 19% flat tax. However, there are situations where the regulations do not allow you to take advantage of permanent income tax advances.

Taxation with the simplified advance payment will not be used by a taxpayer who:

  • started running a business for the first time in a given tax year;

  • in the tax declaration submitted in the previous year and 2 years back, it showed a loss;

  • he settles income tax using a tax scale, and his income is lower than the amount that does not result in the obligation to pay the tax.

What is the simplified advance payment?

The simplified prepayment method consists in paying the due income tax every month in a fixed amount. Then the amount of the advance payment is 1/12 of the output tax shown in the declaration submitted in the year preceding the given tax year. On the other hand, if in the previous year the tax was not shown to be paid, then the period from two years ago should be taken into account.

The amount of advance income tax calculated in this way should be reduced each month by the amount of health insurance contributions in the amount of 7.75% of the calculation basis, which was paid in a given month. At the same time, when determining the amount of the simplified advance payment, it is not possible to reduce its amount by any other reductions or allowances.

Example 1.

Mr Łukasz has been running a business activity subject to flat tax for 5 years. In the annual tax return for 2019, which he submitted on April 30, 2020, he showed the income tax payable in the amount of PLN 12,000. Can Mr. Łukasz pay simplified advances in 2021?

Yes, due to the fact that in the previous year, in the annual tax return, income was shown and the tax due is PLN 12,000, Mr. Łukasz may from 2021 pay simplified advances in the amount of PLN 1,000 per month (PLN 12,000 / 12).

What are the benefits of a simplified advance?

A simplified advance payment is a special method of settling accounts with the tax office, because the taxpayer pays a fixed amount of advance payment for income tax throughout the year, regardless of the amount of income obtained.

This method of tax settlements is the best solution if the entrepreneur anticipates an increase in investment income in a given tax year and in the case of taxation with the tax scale, he is entitled to a pro-family allowance, which can be deducted in the annual tax return. Then, it often results in the fact that after submitting the tax return there is no need to pay the tax.

Moreover, an additional advantage of simplified advances is the possibility of creating a forecast of the structure of monthly expenses and investment opportunities.

It is worth mentioning, however, that if the income in a given tax year significantly exceeds the income constituting the basis for calculating simplified advances, it may result in the obligation to pay a high one-off tax amount resulting from the annual tax return.

End of the obligation to notify the tax office of the selection of simplified advances

By the end of 2018, the change regarding the use of the option to settle income tax using the simplified method had to be reported to the head of the competent tax office no later than February 20 of the new tax year. From 2019, when the taxpayer decides to pay simplified advances, he will inform the tax office about this fact, only by submitting the annual tax return for the tax year in which he paid the advances in a simplified form. Therefore, the tax office will be informed only in 2021 as a result of submitting the annual tax return for 2020 that the taxpayer paid simplified advances in 2020.

To sum up, simplified advances are a favorable method of paying the tax liability due to income tax for people in a hurry, who have little time and are reluctant to pay attention to payment deadlines. However, the simplified advance payment option does not cover all taxpayers. Additionally, entrepreneurs can plan their investment expenses and do not have to worry about high tax payable in connection with obtaining high income in a given month during the year.