When are you an entrepreneur for income tax purposes?
Not every entrepreneur qualifies as an entrepreneur for income tax purposes. If you participate in economic activity and expect to generate profit, this is considered a source of income. Then you may be an entrepreneur for income tax purposes. Participation in economic activity means that you carry out activities for compensation outside the private sphere. If your activity takes place within the context of a hobby or family sphere, you are not an entrepreneur for income tax purposes.
For income tax, there are 3 sources of income:
- Profit from business activities
- Salary from employment
- Income from other work (explanation at the bottom of this article)
Which source your income belongs to depends on several factors.
Requirements for entrepreneurs for income tax
The law and case law set certain requirements that entrepreneurs must meet. After your registration, the tax authority evaluates whether you meet these requirements based on your circumstances. We look at:
- Are you making a profit? If so, how much? If you only make a small profit or consistently incur losses, it is unlikely that you will generate profit. In that case, it is not considered entrepreneurial activity.
- How independent is your activity? If others determine how you should organize and carry out your activity, independence is lacking, and this is generally not considered entrepreneurial activity.
- Do you have capital? Capital is needed for many businesses. You must invest in machinery, advertising, hiring people, and insurance. Sufficient capital to start and sustain operations indicates that you may have a business.
- How much time do you spend on your activity? If you spend a lot of time on activity without making a profit, this is generally not entrepreneurship. But you must spend enough time to make your activity profitable.
- Who are your clients? Your goal is to have multiple clients to reduce the risk of non-payment and ensure stability. With multiple clients, you are less dependent on one or a few clients, and your independence increases.
- How do you advertise your activity? You depend on clients for your existence. To be an entrepreneur, you must ensure sufficient visibility, for example through advertising, a website, social media, a sign, or your own letterhead.
- Do you bear risks as an entrepreneur? Is there a chance that your clients will not pay? Do you use your good name to carry out your activity? Are you dependent on supply and demand for your products and services? If so, you bear risks as an entrepreneur and likely have a business.
- Are you liable for the debts of your business? If you are liable for the debts of your business, you may be an entrepreneur.
The tax authority evaluates all criteria listed above to determine whether you meet the requirements of entrepreneurship.
What is income from other work?
Do you receive income from activities you perform? And you are not an employee, but the tax authority does not consider you an entrepreneur for income tax purposes? Then you have "income from other work." Your profit is calculated the same way as for entrepreneurs. But you are not entitled to certain entrepreneurial facilities, such as the self-employed deduction or investment deduction.