Self employed and KATA tax

You are reading my mind I also wanted to ask this and would appreciate if somebody could clarify.

Yep, had a crystal ball and saw that somebody else is looking for answers too

SelfEmployedEd wrote:

- I make 10 million HUF a year being a full-time self-employed person in Hungary.
- I pay 0.6 million KATA tax (12 x 50000) for the first 6 million, netting 5.4 million from that lot.
- I pay 1.6 million (0.4 x 4 million) for the remaining 4 million, netting 2.4 million from that.
-> In the end, from the 10 million HUF I'll get 7.8 million after taxes and social contributions.

Yes.

However, is that 10,000,000 HUF revenue or income (i.e. profit after expenses)? It matters under KATA. For example, under KATA if you make only 500,000 HUF a year income after considering your expenses, you still have to pay 600,000 that year in taxes. You just paid 100,000 HUF more to the state than you actually put in your pocket. That is, KATA does not care if you make a profit or not. You have to pay the state your fixed rate month after month.

But, if you decide to be taxed as a normal self employed person, you only pay taxes on your actual after expense income at 10%. Which can make your overall tax considerably lower if your actual profits that year are low. Of you can elect to pay a flat 37% tax rate option on profits only by selecting a simplified entrepreneurial tax (EVA). Even if 37% seems high, your tax liability may be less than if you used KATA if your profits were less.

KATA is a good option only if you start the ground running with a good, steady reliable income (which is virtually unheard of for the self employed) and you hate paperwork. Else it may be better to start a KFT company, pay yourself a medium salary, and take the rest as a dividend. So, for example, you make a profit of 10 Million HUF as a KFT:

- You paid yourself a salary of 100,000 a month, and pay income and social taxes to the state of about 50,000 HUF a month which you took as an expense of the KFT (expense are not considered with KATA).
- The company pays a 16% company tax on the 10,000,000 profit only of = 1,600,000 HUF
- You pay the remainder of 8,400,000 HUF out as a dividend and pay 16% dividend taxes on that netting yourself about 7,000,000.
- Adding your salary plus your post tax dividend you get: 7,000,000+1,200,000=8,200,000

So you made 400,000 HUF more as a KFT than if you used KATA. Well, maybe. You might, or might not, also need to pay tax social taxes on the dividend. So in short, you need to really talk to an accountant to make sure what tax system option actually puts more money in your pocket. But that also assumes you pay out all that years profit to yourself. You can also leave that money in the company and use it next year for company needs. So money there is actually more money in the company's pocket with a KFT. And since you would have to pay those expenses yourself as simple self employed, you are actually fiscally better off business wise having a KFT.

Thanks klsallee for your detailed reply. This was exactly what I was looking for. Now that you mentioned the salary + dividend route, do you know if you have to pay social tax on dividends? Or is this something only an accountant can answer?

You will need to consult the US-Hungarian tax treaties to see what social taxes you pay and where on dividends. It will depend on your actual nexus status.

Thanks for the info again. If I choose the KFT (salary + dividends) route, I can not pay dividends every month, right? Because I'd need money for living and the (minimum or medium) salary is hardly going to cut it. So this will be a problem with KFT I think.

Also, can I freely choose KATA if I want to? In another words, it's just a matter of filling the paper and sending it to authorities and they'll accept me automatically?

A KFT is somewhat like a US S-Corporation: you are an employee and you pay yourself  a salary and live on that daily. You can also borrow money, in certain cases, from the business and avoid the double taxation.

But what type of business model you choose should in the end reflect your actual income. If your business has a good revenue and almost no expenses then income and revenue are essentially the same and KATA may be a good choice.

Paperwork in Hungary is rarely simple. You will have to first get a tax number, and maybe also a Hungarian national heath number for KATA. Then you will have to fill out more forms with the tax office to start your business as an entrepreneur. You may also need to get a VAT number (unlike the US services here also are taxed).

Finally, expect small business income in Hungry to be much lower than in the US. People are just paid less here. Unless you have already a remote business clientele already setup, which will pay above Hungarian local rates, plan accordingly.