Ireland Fact-File Part 6:
Individual Business Employment Issues
6.2 Ireland Employment vs Self-Employment Tax Issues
The differences between employment and self-employment
Employed individuals are generally taxed under the PAYE system,
whereas the self-employed and other types of freelance workers
(including taxpayers receiving income from sources where some
or all of the tax cannot be collected under the PAYE system,
such as: profits from rents, investment income, foreign income
and foreign pensions, maintenance payments to separated persons,
fees, profit arising on exercising various share options/
and share incentives) are taxed under the self-assessment
system.
Under the PAYE system, the employer is obliged to calculate
and deduct the tax due on payments made to employees, and
additionally, to Pay-Related Social Insurance (PRSI), at the
applicable rates.
Under the self-assessment system, the payment of tax and
filing of tax returns must take place by October 31. This
system, which is known as 'Pay and File', is designed to allow
self-assessment taxpayers to file their return and pay the
balance of tax outstanding for the previous year at the same
time.
The payment schedule for self-assessment taxpayers is as
follows:
- Preliminary tax (an estimated amount of income tax payable
for the year, calculated as the lower of: 90% of the current
year's liability, 100% of the liability for the year just
passed, or, exceptionally, 105% of the year previous to
that) must be paid for the current tax year on or before
October 31 each year;
- The tax return can be filed after the end of the tax year,
but must not be filed later than the following October 31;
- The balance of tax due for the previous tax year must
be paid on or before October 31;
- Additionally, by the October 31 deadline, taxpayers must
file their Capital Gains Tax return for previous tax year,
and pay any Capital Gains Tax due on disposals made between
January 1 and September 30 of the current year.
In Ireland, there is no legislation directly comparable to
the UK's IR35 regulations, which aim to prevent the avoidance
or illegitimate minimisation of tax and national insurance
(PRSI equivalent) payments by the claiming of self-employment
– often via the use of personal service companies or partnerships
– where the contractor is actually effectively employed by
the company for which he or she is working.
However, principal contractors in industries including construction,
engineering, forestry, and meat-processing, must generally
register for Relevant Contracts Tax (with the principal and
sub-contractor obliged to sign a declaration for the Revenue
stating that they are entering into a ‘relevant contract'),
and must withhold tax on payments made to a subcontractor.
Updated in December 2010
Prior to the delivery of the austerity
budget in December 2010, a RCT was imposed at 35%; the budget
introduced a two-tier system, with a 20% rate withheld in
the case of tax-registered subcontractors with a proven compliance
record, and a 35% rate to be withheld where the subcontractor
is not registered for tax. It was also announced that the
monthly repayment system was to be replaced by an offset system.
The Revenue Commission does have guidelines in place for
determining whether a taxpayer is truly self-employed, or
is in actual fact employed, which centre on whether the person
in question is undertaking the work “as a person in business
on their own account”, effectively economically independent
of the person engaging them.
A person can be considered to be an employee, for tax, benefits,
and employment legislation purposes, according to the ‘Code
of Practice in Determining Employment Status' (agreed between
the Social Partners, with input from the Revenue Commission)
if they are:
- Controlled by another person in terms of the work in question,
who can stipulate how, when and where the work is carried
out;
- Unable to subcontract the work;
- Only supplying labour;
- Paid a fixed wage, and working set hours;
- Not supplying the equipment or materials required to complete
the work;
- Not exposed to financial risk in the undertaking of the
work;
- Not involved in the investment and management of the business.
Conversely, a person can be regarded as being self-employed
for tax and other purposes if they are:
- Running their own business;
- Exposed to financial risk as a result of undertaking the
work, and assuming responsibility for the investment and management
of the business;
- Able to profit from good management which results in efficient
scheduling and performance of tasks;
- Able to subcontract the activity;
- Able to provide the same services to more than one business,
in parallel;
- In charge of providing the necessary equipment and materials.
Although this is not an exhaustive list, these criteria will
certainly be used by the tax authority to make a decision.
The National Employment Rights Authority (NERA) explains
the distinction as the worker being engaged either under “contracts
for services” (self-employed), or under a “contract of service”
(employed, and therefore afforded protections under employment
legislation).
However, it admits that: “ The distinction between a contract
of service, on the one hand, and a contract for services,
on the other, is sometimes unclear” but warns that “the type
of contract a person is engaged under can have serious implications
for both employer and employee in matters such as employment
protection legislation, legal responsibility for injuries
caused to members of the public, taxation and social welfare”.
Small businesses can make provision for employees to work
from home, and computers and other equipment provided by the
employer to allow the employee to do their job will not incur
a benefits in kind charge for incidental personal use by the
employee. Additionally, the employer can make nominal payments
to the employee to compensate them for electricity use, heating,
etc, without deducting PAYE or PRSI. However, businesses employing
homeworkers should be aware that they will likely be required
to extend their office liability insurance to such employees,
sometimes necessitating a health and safety assessment of
the home office, or other working environment.
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