500 euro per week threshold for sole trader

mtsachev

I started as a sole trader almost 7 months ago, I'm looking at my own tax calculations and it seems that the 500 euro per week income threshold is a major one. Just wondering if my calculations and assumptions are correct. I assume the thresholds are calculated based on profit and not revenue.

At the moment my average monthly profit is 2565 euro, the 500 euro per week translates to 2167 euro per month.

My tax liabilities, I don't have any capital acquisitions, are 20% income tax, income levy at 2% (less than 75K pa), health levy 4% (less than 75K pa), PRSI class S1 at 7% for weekly income above 500 euro and in the first 1433 per week bracket.

So this means if I had 2167 income per month I would not pay the health levy 4% and would go to PRSI class S0 at 3%, so that's a total saving of 8%.

At 2565 euro per month and a total tax rate of 33% my tax liabilities per month are 846.45 euro and if my income is 2167 it would be taxed at 25% or 541.75 euro per month. So this means that if I spend 2565-2167 = 398 euro more per month for business expenses I'll pay 846.45 - 541.75 = 304.70 euro less in taxes.

So at the moment I can afford to buy 398 euro of goods/services per month at a cost of 398 - 304.70 = 93.30 euro for me because I'll save lots on taxes.

Does that sound right or am I making a mistake somewhere?

I guess contributions to a RAC/PRSA make lots of sense although I'm under 30 and the 15% limit won't be enough to kick me under 500 euro per week.

Legend100

you have mixed up the PRSI/Health levy theory.

Your final figure of Class So 3% PRSI is correct. It is not 7%. The 4% difference is the health levy. ie not 7% PRSI plus 4% health as you have written.

So if you annual profit is less than 26K, you will pay 3% PRSI
If you are over the 26K, you pay 3% PRSi and 4% health Levy. You don't save 8% as you have outlined if you get me.

Just be careful as it is your cumulative income that wil bring you over the 26K. ie did you work anywhere on salary or do you have any other income eg rental income, deposit interest etc

Just in relation to the 500 per week, that is really only for employees Class A. Did you decide on an accounting year end for your accounts. You will need to look at this as you are in a commencement situation. PM me if this reply leaves you lost..!

mtsachev

Oh, I get it. So PRSI class S1 actually includes health levy in it and it's not something I pay on top of the PRSI. So the difference is only 4% and not 8% because I double counted the health levy.

My other income is a lot less so I'm only looking at the self employment income.

The 500 per week is also a threshold for self employed: http://www.welfare.ie/EN/Publications/SW14/SW14_10/Pages/ClassS.aspx

not sure why you say only Class A employees.

I thought that the accounting date is something you select when you submit your TR1, will have to check. I guess this can also reflect on whether the total annual is less than 26K or more... I guess in the end I could always go on a short vacation - less income, less taxes = free vacation :-)

Legend100

the 500 per week for class S is really more to do with company directors on a payroll basis.

You can look at it that way for self emplyed sole traders also but its just that we tend to look on the annual basis (ie the 26K magic number) as you pay the PRSI/Health on an anuual figure, not weekly.

The weekly 500 cut off for Class S for directors is different as if they go over the treshold in their salary per week/month (depending on how they are paid) they pay the higher rate on the weekly amount, not on their annual salary.

That is why i was saying it is more relevant to Class A employees. Apologies for the confusion

Oh and you might want to talk to an accountant about your first year as your taxable profits in the first year will be from commencement to the 31 Dec, regardless of what date you have on the TR1. You don't go on what your profit is at that date (if you are working it out on a monthly basis as i think you are) it is the share of the final profit relating to the number of months in this year.

ie if you do a 12 month set of accounts for say Mar 10 to Feb 11, then your taxable profits in 2010 in Mar-Dec 10, 10/12 of the taxable profits ending in the accounting year end 2011.

mtsachev

I think that if the weekly rule applies you can still get a refund at the end of the year:

http://www.welfare.ie/EN/Publications/SW14/SW14_10/Pages/ImportantInformation.aspx

Where an employee's weekly pay fluctuates above and below €500, but the annual pay during 2010 is not more than €26,000, the employee may claim a refund of the 4% or 5% Health Contribution deduction.

I'm not 100% sure whether that applies to company directors though. Anyway, yah, the magic number is 26K, I usually calculate monthly since bills are monthly and easier to wrap up the numbers for a complete month than a week.

mtsachev

Thanks for the clarification on commencement year tax calculation. I didn't realize that.