As crazy as it may sound, not everyone is an entrepreneur for income tax purposes. Even though you have a Chamber of Commerce (KVK) number and pay VAT every quarter/year.
Start-ups in particular often make the mistake of thinking that if you pay VAT, you are also immediately an entrepreneur for income tax purposes. Therefore, it is important to check this first before filing your income tax declaration.
How can you check?
To determine whether you are an entrepreneur in the eyes of the Belastingdienst, it is important to first determine whether you have a business.
For the KVK, a business must meet three criteria:
- you provide a service or product,
- you charge a commercial price for it,
- you do business with more people than just friends or family.
Did you answer “yes” to these three questions? Good news, then you have a business!
Sales tax and income tax
Now that you have a business according to the KVK, you should know that there are two types of taxes:
• the VAT (Sales Tax)
• the Income Tax
Both have different criteria for entrepreneurship to take into consideration.
Sales tax criteria
You are required to file VAT returns if you are:
• receive regular income
Whether you meet these criteria is determined when you register at the KVK.
If you are not registered here yet but you meet the above criteria, then you are required to apply for a VAT number.
Income tax criteria
To determine if you can be considered as an entrepreneur, the Belastingdienst assesses whether the relevant requirements have been met.
The following questions are considered, for example:
Do you make any profit? If so, how much?
If you have a very small profit or a structural loss, it is not likely that profits will be made. There is then no business unless you can make a plausible case that you will make a profit in the future. This may be the case, for example, when you have just started your business and, in particular, have yet to make many investments.
How independent are you as entrepreneur?
You have the freedom to do your work the way you want, and you set your own rates. If others determine how you should carry out your work, independence is lacking and there is usually no entrepreneurship.
Is capital available (in form of money)?
Capital is necessary for many businesses. For example, investments must be made in advertising, laptop, tools and insurance. The fact that you put capital into your business indicates that you are an entrepreneur.
How much time do you put into your activity?
If you spent a very large amount of time on an activity without making a lot of profit, there is usually no business. In contrast, sufficient time must be devoted to the work to make it profitable.
Who are the clients?
The goal is to have multiple clients (in the future blog an explanation on multiple clients will be broached), in part to reduce payment and continuity risks. If you have clients, dependence on one or a few clients decreases and independence increases. However, if the clients consist mainly of family and friends, then a person is not considered as an entrepreneur.
How is your business publicized to the outside world?
An entrepreneur relies on clients for his existence. To be an entrepreneur, you yourself need to be sufficiently known, e.g., through advertising, a website, a signboard or your own stationery.
What is the “entrepreneurial” risk?
As a business owner, you run higher risks than employees. For example: your service or product is dependent on supply and demand (so you are not always 100% sure of income), there is a possibility that customers will not pay, and there is a chance that the money you invested in your business will be lost if your business goes bankrupt. This entrepreneurial risks count heavily in the Belastingdienst’s assessment.
Liable for the debts of your business?
If you are responsible for the debts of your business, then you can be an entrepreneur. The Belastingdienst pays attention to liability in addition to entrepreneurial risk. In order to be eligible to be an entrepreneur for income tax purposes, you must be responsible for what you provide or the services you provide to your business. You also have to be responsible for your business’ debts.
As you can see, the above criteria are not always defined. This means that you, as an entrepreneur, you must take a proactively stance on this yourself. You can use the Belastingdienst Entrepreneur Check for this purpose. Upon receipt of the return, the Belastingdienst can always make a different judgment and ask you to file either a profit return declaration or a private return declaration.
WHY IS IT IMPORTANT TO CHECK?
The primary benefit for being an entrepreneur for income tax purposes is the possible allowance of deductions for entrepreneurs.
Entrepreneur deductions consist of several types of deductions, such as:
• self-employment deduction
• start-up deduction
• deduction for research and development work
• small investment deduction KIA
In addition, as an entrepreneur, you automatically claim the SME profit exemption (MKB vrijstelling), which means a 14% reduction on your taxable profits.
So, both regulations can make a tangible difference in your profit tax return!
If you are not an entrepreneur for income tax purposes, but you do have an income, you have to report it as “other income”. You can still claim the expenses you incurred in earning this income, but you cannot claim the entrepreneur deduction or the SME profit exemption.