As you have seen (click here to read our previous post about self/employed part 1), there are a number of issues to take into account prior you start working for yourself, (also known as freelance) or prior to becoming owner of your own business.
Part (1) provided you with valuable information from registering with Jobs+, VAT, if not exempted, to employing personnel.
Workers need to be rewarded for their labor. Keep in view paid vacations, cost-of-living increases, statutory bonuses and more. Furthermore, for every worker a business employs, you must pay the government taxes and social security contributions.
Employees’ social security contributions and income taxes deductions from their gross salary, payable to the Commissioner of Revenue are under your responsibility. Necessary payments are to be made by the 15th of the following month in order to avoid penalties for late payments and submissions.
An FS5 form needs to be filled in every month and sent to the cash office at the Inland Revenue Department together with payment. An online form of the FS5 is available so you may also opt for the electronic gateway (internet banking).
Social Security contributions are payments made to the government, by employers and their employees, on a one-half and one-half basis respectively, applicable contribution rates up to a specified maximum limit. The amount of deductions differ depending on category, year of birth and basic weekly wage. The basic weekly wage does not include allowances, bonuses, and/or overtime.
Contributions provide for contributory benefits. Contributory benefits include retirement, widows and invalidity benefit.
All persons who are over the age of 16 and who have not yet reached retirement age of 65 years, and who are in an insurable employment, are liable to pay Social Security Contributions.
Social Security contributions are paid in weekly rates, and each year of gainful occupation will carry 52 or 53 social security contributions (depending on the annual number of Mondays).
Social Security Contributions by Employed persons are called referred to as Class 1 Contributions and are paid by direct deductions from the same employees’ wages.
Part-time employees who therefore work less than 40 hours per week and who earn less than the National Minimum (weekly) Wage, can opt to pay 10% of their basic weekly wage. Keep in view that the employee needs to understand that this rate of contribution entitles him or her to pro-rata contributory benefits. This contribution rate is called the pro-rata rate and does not apply to your share (employer’s share) as you have to pay the full applicable weekly rate.
Click here to view the applicable rates due for Class 1 contributions, payable to the Commissioner of Inland Revenue in monthly payments by the employer. This can be done either by internet banking, bank draft or cheque payment addressed to Commissioner For Revenue or paid directly in any Malta Post Branch.
All Taxes are required payments of money that must be made regularly. The tax rates for basis year 2019 and 2020 can be viewed here. First and foremost, all income is taxed. Secondly, exactly how much tax is paid depends on how much is earned. Keep in view that income tax laws allow certain deductions – money that is tax-free which is deducted from gross income before the tax is paid.
Taxation in Malta of an individual’s income is in that those with higher incomes pay more in proportion than those with lower incomes. Furthermore, a single individual pays a larger tax than a married couple, while a parent pays the least.
An employer is required to deduct the amount of tax payable at source (that is, deducted prior payment), each month, and forward to the Revenue department through the monthly FS5. This system prevents the taxpayer from receiving a large tax bill at the end of the year.
Every year, each employer needs to submit the Annual End of Year Reconciliation documents (FS3 and FS7 forms). Employers that have less than 10 FS3 forms have the option to submit the FSS end-of-year documents either manually or electronically. Employers having 10 or more FS3 forms are required to submit their end-of-year documents electronically through this link – https://cfr.gov.mt/en/Pages/Home.aspx
All FSS manual forms are to be sent to Central Mailing Unit Block 3 Office of the Commissioner for Revenue by the 15th of February.
During the year, you as a self-employed person must make 3 equal advance payments on April 30th (20%), on August 31st (30%) and on December 31st (50%) as Provisional Tax. The advance payment is based on the taxable income for the previous year. You are then obliged to pay your pending tax due by 30 June of the following year. For example, You are then obliged to pay the tax due for 2019 by 30 June 2020 which is the tax return date for the submission of the self-assessment which covers basis year 2019.
For the first year of business you are not obliged to pay any provisional tax.
Where any provisional tax is not paid by the due date, additional tax at 1% per month (or part thereof) is charged. Such additional tax will continue to run up to the actual date of payment or the relative tax settlement date.
If you are positive that your tax liability for the year will be less than the PT benchmark, you may fill in the prescribed “PT reduction form” and send by post or downloaded PT reduction form online. On this form you are to indicate the amount of tax which you estimate will be payable for the year.
Great care is to be taken when using the PT Reduction Form. If you use this form in order to obtain some undue advantage by reducing the PT instalments, you will be making yourself liable to PT additional tax of 1% per month on any unpaid amount, in the event that the tax due for the basis period exceeds the total of the reduced PT payments.
Apart from the fact that you need to take off tax and social security contributions from your employee’s salary, you’ll also need to pay your own tax and National Insurance Contributions.
Class Two Contributions are to be paid if income derived is of more than €910 from an economic activity and are not employed. The Social Security Act defines two categories of persons that are required to pay Class 2 Contributions as follows:
- Self Occupied Persons – persons who earn income from Trade, Business, Profession, Vocation or any other economic activity that exceeds €910 per annum.
- Self Employed Persons – persons who receive income from rents, investments, capital gains or any other income.
Rates for Class Two Social Security Contributions are based on the annual net profit or income for the year immediately preceding the contribution year. Class 2 rates for year 2020 can be viewed here. For a business start up the rate of €30.77 per week (for 2020) can be paid for the first year, also know as the SA rate.
The due dates for Social Security Contributions (Class Two) are the same as for the PT payments, that is: 30th April (Number of Mondays from January to April) 31st August (Number of Mondays from May to August) 21st December (Number of Mondays from September to December).
An additional contribution of 1% per month is charged on the amount of Social Security contributions which are paid late or are not paid at all.
The Malta enterprise offers various schemes to undertakings including start-ups, family businesses and self-employed to invest in their business, innovate, expand or develop their operations. Through the Micro Invest scheme such self-employed persons will be supported through a tax credit representing a percentage of the eligible expenditure including wages of newly recruited employees.
Malta Enterprise will approve a tax credit equivalent to 45% of eligible expenditure and 65% tax credit applies to undertakings operating from Gozo. The maximum eligible tax credits per single entity is capped at €50,000 over any period of three (3) consecutive fiscal years. A capping of €70,000 for entities operating from Gozo, registered as Family Business or have more than 50% of the ownership attributed to female persons.
Costs claimed must have been invoiced between 1 st January and 31st December of the year preceding the year in which the claim is submitted. Costs claimed must not be assisted (even partly) through other incentive measures. Costs claimed must be covered by the appropriate fiscal documentation.
One can apply for a tax credit on the below costs:
- Wage Costs (Eligible undertakings may apply for a tax credit on an increase in wage costs that exceeds 3%)
- Furnishing & Refurbishing (requires photographic evidence)
- Investment Costs (includes machinery, technology (devices, hardware & software), apparatus and instruments)
- Commercial Vehicle Costs
- PV System Costs
More information on the Micro Investment scheme can be found on the Incentive guidelines provided by the Malta Enterprise.
Applications forms are submitted online.