Income plays a central role in managing personal finances. It can be in both monetary and non-monetary form. The standard of living of each person depends on it. They are decisive for both savings and investments, as well as for taking on debt. On the one hand, long-term financial planning is based on their current size, and on the other – on the desired future.

The level of income is influenced by many factors. Some of them are a given in a person's life, while others can be influenced. These factors include: universal (soft) and technical (hard) skills, education and qualifications, professional experience, regional and sectoral differences, economic and political environment, and others. Some people start their lives under more favourable conditions, as they already have various family assets (business, real estate, etc.). However, this start is not a guarantee of their financial success. It is important for a person to manage their income actively – to show entrepreneurship, discovering different opportunities to increase them. This can happen both by taking risks and by putting in a lot of work or by demonstrating unique qualities and talents.

In general, sources of income are considered as active and passive. Active sources are related to work, while passive sources are not. This means that with active sources, you have to invest your time in work, i.e. exchange it for compensation that you receive.

 

Remuneration from Employment

The main source of income for most people is income from remunerations from employment. Remuneration is a payment by the employer to the employee for the labour provided. It is regulated in the employment contract in accordance with the Labour Code. It consists of two main elements – basic salary and additional remuneration.

The basic salary is determined under normal working hours, full employment during the month and normal working conditions. In these cases, it cannot be lower than the minimum wage (MW). In case of less time worked, it can be reduced proportionally to the MW.

Additional remunerations are due for acquired work experience and professional experience, for a scientific degree, for night work, for overtime, for work on public holidays, for the time in which the employee is at the employer's disposal, for achieved results (premiums or bonuses). In certain cases, depending on the working conditions, funds are also paid for clothing and protective equipment. It is becoming increasingly common for employers to provide various social benefits – food vouchers, a public transport card, a sports card, additional health insurance, additional pension insurance, a company phone, a computer or a car for personal use, etc. Practically, each of these benefits has a certain value that a person can calculate in order to most accurately assess their remuneration and compare it with that of another employer.

The taxable income from employment relationships includes the salary and all other payments in cash and/or in kind made by the employer or at the employer's expense, except for the incomes specified in Article 24, paragraph 2 of the Personal Income Tax Act.

Compulsory deductions for social insurance contributions and personal income tax are made from the gross salary. This results in the net salary, which the employee receives either in cash or via bank transfer. The deductions for social insurance contributions at the expense of the insured person include contributions to the state social insurance (SSI), supplementary compulsory pension insurance (SCPI) in a private fund, and health insurance. Once these are deducted from the gross salary, a 10% income tax is applied to the remaining amount. All deductions are transferred by the employer to the National Revenue Agency (NRA), which allocates them accordingly. Note that the employer also owes social insurance contributions on the gross salary at their own expense.

Keep in mind that whenever it comes to regulatory acts, statistical data, etc. such as the minimum or average salary, the gross salary is taken into account. The employment contract you conclude also indicates the gross salary. The net amount you receive will be lower.

If a person receives income only from employment relationships with one employer, they are not required to submit an annual tax return with the National Revenue Agency.

 

Remuneration from Non-Employment Relationships

Another source of income from work are the so-called non-employment relationships. The contract in them is concluded not according to the Labour Code, but according to the Obligations and Contracts Act. Therefore, we do not speak of an employer and an employee, but of a client and a contractor. In practice, they are known as civil contracts. They have many peculiarities. They differ from an employment contract because with them there is no workplace, working hours, subordination or specific recurring obligations. Their subject is the performance of specific work or the achievement of a specific result for a given period of time.

However, in civil contracts, the worker has almost no protection. It is for this reason that some employers prefer them, de facto concealing employment contracts. Such a practice constitutes a violation of the regulations and damages the employee. In addition, in civil contracts, legally recognized costs of 25% are applied, i.e. gross income is reduced by 25% before insurance and tax are calculated. Individuals who perform work without an employment relationship are subject to mandatory insurance for disability due to general illness, for old age and death, for supplementary compulsory pension insurance (Universal Pension Fund – UPF) if born after 31.12.1959, and for health insurance. They are not liable for contributions to the General Illness and Maternity Fund, the Unemployment Fund, and the Occupational Accident and Disease Fund. This is yet another reason why those working under civil contracts are disadvantaged.

Individuals who perform work without an employment relationship are insured on the basis of the monthly remuneration received, after deducting business expenses and not exceeding the maximum monthly amount of the insurable income as defined in the Social Security Budget Act for the respective year, if:

•        they are insured on another basis for the remuneration received, regardless of its amount

•        they are not insured on another basis, provided that the remuneration is equal to or exceeds the minimum monthly wage after deducting business expenses.

If the monthly remuneration, after deducting business expenses, is below the minimum monthly wage and the contractor is not insured on another basis during the respective month, no insurance contributions are due.

It is also important to emphasize that in the hierarchy of incomes on which insurance contributions are paid, employment contracts take precedence. Insurance contributions on civil contracts are due only if the remuneration received under the employment contract does not reach the maximum monthly amount of the insurable income.

Despite the above-mentioned shortcomings, civil contracts are often used and are a good source of additional income. In some areas they are very typical – for example, in the field of education, when small additional commitments are often undertaken.

Receiving income under a civil contract gives rise to an obligation to submit an annual tax return. In principle, the tax is withheld and paid by the client, but in the last quarter of each year the contractor has the right to request that it not be withheld, but to pay it themselves after submitting their tax return. Income from civil contracts also forms a taxable turnover for registration under the Value Added Tax Act (VAT) as an individual.

 

Income of Freelancers and Farmers

Freelancers are a special case. Such people can be, for example, lawyers, auditors, translators, photographers, architects, journalists, etc. For such employment, a person is self-employed and is a self-insured person. They themselves declare and pay their insurance and income tax. Just as with civil contracts, the liberal professions benefit from statutory expenses of 25%, and for lawyers - from 40%. They pay social insurance contributions for the state social insurance (SSI), the Universal Pension Fund (UPF) under the supplementary compulsory pension insurance (if born after December 31^st, 1959), and for health insurance. They have the right to choose their insurance scheme under the SSI. This can be limited to the Pensions Fund only (similar to civil contracts), in which case they will not be entitled to benefits for temporary incapacity for work or maternity. At their discretion, they may also choose to be insured under the General Illness and Maternity Fund. In this case, they will be entitled to benefits for temporary incapacity and maternity, but not to unemployment benefits. The income of self-employed individuals constitutes taxable turnover for VAT registration as a natural person.

There are some peculiarities with farmers. They can be taxed as sole traders or as individuals. In the latter case, they can use 60% statutory expenses for income from unprocessed products and 40% – for processed products. Due to the specifics, it is recommended to consult specialised websites (e.g. the one of the National Revenue Agency) and/or consult a specialist.

 

When starting a business, check the current status of the tax rates on different types of income from employment in the relevant regulatory documents.

 

Useful Links:

National Revenue Agency

Labour Code

Personal Income Tax Act

Personal Income Taxes

Obligations and Contracts Act

Value Added Tax