Starting an entrepreneurial business involves many decisions, and choosing the taxation model is certainly one of the most important. The “entrepreneur with personal salary” model is increasingly becoming the number one option for many who have outgrown lump-sum taxation or want a more transparent financial structure. If you work in the IT sector or provide services, here’s everything you need to know about this taxation model.
What does it mean to be an entrepreneur with personal salary taxation?
This model implies a taxation structure where taxes and contributions are calculated based on the “personal salary” — i.e., the wage the entrepreneur pays to themselves. This model offers flexibility and transparency but also requires bookkeeping.
Key characteristics of this model:
Personal salary as the tax base:
You determine the amount of your “salary,” and taxes and contributions are paid based on that amount.
Bookkeeping obligations:
You are required to keep books and monitor all income and expenses.
Possibility to deduct business expenses:
You have the right to reduce your tax base by recognizing business-related expenses (e.g. office rent, equipment, marketing).
Flexibility in income and expenses:
Your total obligations depend on your business performance and the amount of personal salary you pay yourself.
Advantages of personal salary taxation
Tax optimization:
By recognizing expenses, you can significantly reduce your tax base and obligations.
Business transparency:
Keeping books provides you with a clear overview of your business’s financial status.
More favorable than self-taxation:
Unlike self-taxation, where taxes are paid on total revenue, this model allows you to lower costs by recognizing expenses.
Suitable for higher income:
When your income exceeds the lump-sum taxation limit, this is the natural next step with lower overall obligations.
How to transition from lump-sum to personal salary taxation?
If you are already a lump-sum entrepreneur and your income exceeds 6,000,000 RSD annually, you are automatically required to switch to bookkeeping. But before switching to the personal salary model, there is a transitional period:
One year under self-taxation:
By law, you first switch to the self-taxation model, where taxes and contributions are calculated on total revenue.
After one year:
You may opt for the personal salary model, which allows greater control over taxes and contributions.
Obligations of entrepreneurs under the personal salary model
Bookkeeping:
You are required to keep records of income and expenses, invoices, and documentation of business costs.
Calculation of taxes and contributions:
Based on the personal salary you pay yourself, you pay:
- Pension insurance: 25%
- Health insurance: 10.3%
- Unemployment insurance: 0.75%
- Income tax: 10%
Regular submission of tax filings:
Every change in salary must be reported to the Tax Administration in the proper manner.
Advantages and disadvantages of the personal salary model
Advantages:
- Ability to deduct expenses:
Costs such as office rent, marketing, or equipment can significantly reduce your obligations. - Control over taxation:
You can adjust the amount of your personal salary according to business performance.
Disadvantages:
- Administrative complexity:
Bookkeeping requires additional resources or hiring an accountant. - Higher obligations than lump-sum taxation:
If you don’t have many expenses, this model may be more expensive than the lump-sum option.
Is the personal salary model the right choice for you?
If your income is growing and approaching the lump-sum threshold, or if you already have significant expenses you want to deduct, this model can be an excellent option. Also, if you want greater control over your finances and a more transparent way of doing business, personal salary taxation offers exactly that.
Author: Ivan Obućina
Source: Pitaj Knjigovođu website
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