Is Lump-Sum Taxation Profitable?

Lump-sum taxation has recently become a popular form of taxation in PIT settlement. Its appeal lies in its simplicity and lower tax rates. However, while lump-sum taxation has its advantages, it also has certain drawbacks that should not be overlooked.

What is Lump-Sum Taxation?

Lump-sum taxation is a simplified method of calculating income tax, where the taxpayer essentially settles based on the revenue earned. As a rule, this means that there is no possibility of deducting costs. Lump-sum tax rates are lower than, for instance, the flat tax rate, ranging from 2% to 17%. There is also no requirement to keep a book of income and expenses, only simplified revenue records. This type of taxation is an attractive option for those who incur minimal business costs and cannot take advantage of tax reliefs (e.g. the IP Box relief).

A comprehensive analysis of the other forms of taxation, can be found here:

Lump-Sum Taxation and Health Insurance Contribution

Every entrepreneur is required to pay ZUS contributions (both social security and health insurance). The form of taxation method affects the amount of the health insurance contribution.

For lump-sum taxpayers, the health insurance contribution depends on the entrepreneur’s revenue and the average salary announced by GUS (Central Statistical Office). The health insurance rate for entrepreneurs taxed under the lump-sum system is 9% of its base and is divided into three thresholds:

• 60% of the average salary (in 2024: PLN 419.46) – for annual revenue not exceeding PLN 60,000.
• 100% of the average salary (in 2024: PLN 699.11) – for annual revenue between PLN 60,000 and PLN 300,000.
• 180% of the average salary (in 2024: PLN 1,258.39) – for revenue exceeding PLN 300,000.

The actual amount of the average salary will be announced by GUS in January 2025, so it will only be possible to precisely calculate the new health insurance rates for lump-sum taxpayers at the beginning of 2025.

Who Cannot Use Lump-Sum Taxation? What to Watch Out For?

Lump-sum taxation is not available to all entrepreneurs. The law includes several exclusions that prevent certain individuals from choosing this form of taxation. If any of the negative criteria specified in the Act on Lump-Sum Income Tax are met, the entrepreneur cannot opt for lump-sum taxation for their business income.

Key exclusions include:

• Exceeding the annual revenue limit of EUR 2 million.
• Providing services listed in Article 8 of the Act on Lump-Sum Income Tax, such as operating pharmacies, currency exchange services, trading in automotive parts, or producing excise-taxed goods (except for renewable energy production).
• Business transformations and changes made by spouses (Article 8, paragraph 1, point 5 of the Act on Lump-Sum Income Tax).

For more details on exclusions, we have covered this in a previous post:

Important – Invoicing a Former Employer! Entrepreneurs who derive income from providing services or selling goods to a former or current employer are not eligible for lump-sum taxation. This applies to activities that correspond to tasks performed in the current or previous tax year under an employment contract.

For more on B2B cooperation with a (former) employer, see our previous article:

Lump-Sum Tax and PIT Reliefs

Those using lump-sum taxation will not benefit from many income tax reliefs and preferences. The revenue can generally only be reduced by the following deductions:

• Contributions to an Individual Retirement Security Account (IKZE).
• Expenses for rehabilitation purposes (rehabilitation relief).
• Internet expenses (up to PLN 760 annually).
• Donations to public benefit organizations, religious purposes, or vocational education in public schools.
• Blood donation relief.
• Expenses for thermal modernization (thermal modernization relief).
• Relief for historical monuments.
• Relief for returning emigrants.

It’s also important to note that choosing lump-sum taxation excludes joint taxation with a spouse or as a single parent.

Lump-sum tax rates

Selecting the appropriate lump-sum rate is a crucial issue for entrepreneurs who opt for this tax method. The lump-sum tax rate varies depending on the type of business activity and ranges from 2% to 17%.

For more information, see our previous article:

A significant portion of the IT sector can use the 12% lump-sum rate (e.g. software development), but some taxpayers may qualify for a preferential rate of 8.5%. Lump-sum taxation can be beneficial for programmers (generally 12%), designers (generally 14%), project managers, manual testers, or network administrators (potentially 8.5%).

Note! The lump-sum tax rate does not depend on job titles (e.g. project manager) but on the actual scope of work performed. Therefore, before selecting the lump-sum rate, it is advisable to apply to GUS (for a PKWiU number) and to KIS for confirmation of the tax rate.

We encourage you to review our previous posts on lump-sum taxation for specific professions:

Managers in IT (link):

UX/UI Designers (link):

Data processing (link):

How We Can Help?

Proper preparation is essential for a safe and beneficial change in the form of taxation. We assist our clients in verifying the possibility of applying a more favorable lump-sum rate for their activities (analyzing contracts and activities performed, preparing opinions for GUS, submitting requests for interpretation to KIS, and making changes in CEIDG).

We encourage you to reach out to us regarding lump-sum taxation.

If you have questions about using lump-sum taxation, visit us atwww.outsourced.pl.