Taxes and deductions for the self-employed

Once you have started your own business, there is a lot to think about, ranging from how your business idea should generate profits in the best way and how you should find new customers for your business. Learning about taxes may not be what you look forward to most when you start your own business — but it's an essential ingredient to success. Learn everything you need to know about taxes as an entrepreneur with the help of this guide.

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How much tax do you pay?

There is no simple answer to this question. The amount of tax you pay depends on many different factors, including how much income you have, your age, where you live, what form of business you run, what deductions you are entitled to, and more. If you earn less than $22,300 in one income year, you pay no tax at all and if you earn more than $613,900 in one year, you pay roughly 50 percent tax. After reading this article, you will hopefully have a better understanding of how different taxes affect your income.

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Different types of income affect the tax you pay

When you talk about taxes, it is good to first be familiar with what the different types of income mean. There are three different types of income that determine which taxes you will pay, differentiating the income law can make it easier to understand the big picture surrounding your tax situation. Within each type of income, there are many different taxes that are added, so you can see the income categories as overall categories.

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Income type Business activity

The income category of business activities is a relatively broad tax class that includes all types of business activities, such as sole proprietorships, trading companies, limited partnerships and limited liability companies. Thus, the income category business includes companies and not individuals (although the limit is fluid for, for example, an individual company).

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Income type service

Income from service includes money earned through an employment or assignment. If you run a limited company, you pay tax in the income category of business activities on behalf of your limited liability company and tax for the income class service for your salary as an individual.

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Income type capital

The income class capital includes income and expenses incurred in connection with the transfer or sale of capital. This can be, for example, interest costs or rental of real estate. For shareholders, a common contact with the income beat is capital when they withdraw dividends from their limited liability company and pay corporation tax.

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Taxes in individual firms

When you run an individual business, it is you who make sure that the tax is paid, unlike if you are an employee and the tax is automatically deducted from your salary. The first tax you need to familiarize yourself with as an individual trader is F-tax (business tax). If you have an employment alongside your individual firm, you pay F-tax with conditions, known as FA tax.

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Own contributions in an individual company

Part of the tax that you pay in your individual firm corresponds to the social security contributions that employers pay to their employees. In an individual firm, these are called self-contributions and consist, among other things, of health insurance contribution, parental allowance, old-age pension contribution and more. Since you pay self-contributions, you are entitled to sickness benefit when you are sick, parental allowance when you have children and more, even when you are self-employed.

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Own withdrawal individual company

When you run an individual company, you do not have a salary in the same way as when you are employed or run a limited company. All your surplus in the company, that is, the amount that remains after expenses have been deducted from income, is counted as income in the taxable sense and can therefore be equated to salary.

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Once you have paid preliminary tax on your excess, the rest of the money is free to be transferred to your private account. When you withdraw money from your individual firm in this way, it is called own withdrawal. When you make your own withdrawal, your withdrawals are not taxed per se, but the money is already taxed as the firm's earnings.

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When you make your own withdrawal, it is an expense that should be recorded, but no expense that affects the firm's bottom line. For example, if you have a surplus of SEK 50,000 and choose to withdraw the entire amount as your own withdrawal, the result report will still show a profit of SEK 50,000. The only thing that happens is that your private account gets more money while the corporate account gets less money and your cash balances decrease.

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Taxes in Limited Liability Companies

Many people tend to advocate limited companies as a form of business when the idea is for the company to grow, thanks to the favorable tax opportunities. Below we review the most common taxes for limited liability companies.

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F-tax

Limited liability companies pay F-tax in the form of preliminary tax charged. Based on the preliminary income tax return or last year's earnings, you pay in f-tax each month. When you receive your final tax return, you will either pay the tax arrears to the Swedish Tax Agency or you will receive a tax refund.

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Employer's fee

Before a salary ends up in the wallet of an employee, a significant amount has already been taxed from the company's payroll payment. Employer's contribution is a tax that ensures that the employee receives a salary in the event of illness, parental leave or when he retires. In total, employer contributions in 2022 amount to 31.42 percent of gross wages.

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Corporate tax

Corporate tax is a tax paid on the profit made by a limited company in a financial year, so in the case of a loss year, no corporation tax is payable. The corporation tax for 2023 stands at 20.6 percent and is paid in the form of preliminary tax each month.

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At the end of the year, the tax paid will be reconciled against the final tax. Corporate tax also covers capital gains in limited liability companies, such as dividends. Corporate tax is thus part of the first tax stage for limited liability companies. When you receive a salary as an employee of your own limited liability company, you are also taxed as an individual in a second tier.

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State income tax

For high-income earners earning above a certain amount, the state income tax is added. That means you need to pay an additional 20 per cent tax on that sum in excess of the cut-off point.

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There are various limits to keep an eye on when you are near the limit of being subject to state income tax; the layer limit and the cut-off points. For 2023, the tax limit is SEK 598,500, that is, if your taxable earned income, after deducting the basic deduction, exceeds SEK 598,500, you are subject to the state income tax.

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Because it can be difficult to know exactly how big the basic deduction is, you can instead start from the highest income you can earn before the basic deduction is deducted. This is what you call the cut-off point for state income tax, and there are two different cut-off points depending on whether you are over or under 66 years of age.

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For persons younger than 66 years, the cut-off point for state income tax is SEK 613,900.

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For persons who are 66 years of age or older at the beginning of the year, the cut-off point for state income tax is SEK 683,200.

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The difference is due to the fact that the basic deduction is higher for retirees.

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Preliminary tax

The F-tax is usually paid monthly in the form of a pre-tax charge. How much you pay is based on how much tax you paid last year or the amount that you listed on your preliminary income tax return. At the end of the financial year, your paid tax will be reconciled against your final tax.

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When do you get a tax refund?

If you have paid more provisional tax than you should, you will be reimbursed by the Swedish Tax Agency. There are many people wondering when you get money back from the tax, and the answer varies depending on when you filed your income tax return.

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If you filed your tax return before March 30, you will receive a refund on the tax April 5—7.

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If you filed your tax return after March 30, you'll receive a tax refund between June 8-9.

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Basic deduction

Basic deduction is a deduction made to lower your taxable income and thus reduce tax. If you run a sole proprietorship, the basic deduction is deducted from your income from business activities, and if you run a limited company, the basic deduction is deducted from your salary. You do not need to apply or register for the basic deduction — this will be deducted automatically.

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The purpose of the basic deduction is to reduce the tax rate for the income earner and to equalize the tax between different income groups. The basic deduction is higher for low- and middle-income earners and lower for high-income earners. For people earning less than 22,300 in the 2023 income year, the full amount falls away under the basic deduction -- meaning you don't have to pay any taxes at all. For an accurate list of the basic deductions of different income ranges: visit Swedish Tax Agency's website.

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Job Tax Deduction

The job tax deduction is another deduction that reduces your tax base. Like the basic deduction, the employment tax deduction is not something that you need to apply for, but it is deducted automatically by the Swedish Tax Agency.

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In order to qualify for the employment tax deduction, you need to receive your income through work or business activities, if the income comes from sickness benefit, parental allowance, income tax or the like, you are not eligible for the employment tax deduction.

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The job tax deduction may only be deducted from the council tax, the deduction does not apply to the state income tax, the property tax or the real estate levy. How big the job tax deduction is depends on how high your income is.

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Municipal tax

Municipal tax is a tax that goes to your municipality and county council registered as a citizen. Municipal tax is the largest tax paid by income earners, amounting to just over 32 per cent on average in Sweden in 2022. There are variations around the country with a minimum listing of just under 29 per cent and the municipality with the highest council tax having just over 35 per cent.

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Moms

VAT is a value-added tax found on the majority of goods and services bought and sold. There are three different VAT rates: 25%, 12% and 6%, the first of which is the most common. For you as an entrepreneur, it is important to keep track of VAT, as you add the VAT rate to your price. For example, if you want to invoice 1000 SEK for a work, you need to add 25 percent to the invoice to get the right amount.

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VAT is not a tax that affects a company's bottom line because you will always break even in the end. If your outgoing VAT costs are greater than your input VAT income during a VAT period, you will receive a refund from the Swedish Tax Agency, and if your input VAT is greater than your outgoing VAT, you will need to pay the difference to the Swedish Tax Agency.

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Marginal tax

The name “marginal tax” is somewhat misleading as it is not a tax that you pay. Marginal tax is a term for the total tax you pay in the event of an increase in income. It is usually said that marginal tax is the tax that you pay on your last earned crown.

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For example, if your salary increases by 1000 SEK and 700 SEK lands in your payroll account, the marginal tax is 30 percent. Typically, marginal tax tends to be about as high as council tax, but as you approach the limit of state income tax, marginal tax increases significantly.

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If your salary exceeds the cut-off point for state income tax of 20 percent, the marginal tax usually lands up toward 50 percent. If your salary increase of SEK 1000 means that you receive SEK 500 more in your salary account, the marginal tax is 50 percent.

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Benefit taxation

Sometimes employers provide compensation to their employees in addition to salary, if such compensation costs a private cost of living it is called a benefit. One of the most common types of benefits is company car. Like cash compensation, benefits also need to be taxed, both by employers and workers. Employers pay employer contributions for the benefit and the employee pays taxes.

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As a rule, all benefits are taxable, but there are exceptional cases that are regulated to be tax-free, such as health care allowance.

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Excise

In addition to all the taxes already mentioned, there are specific taxes on specific goods and services, known as excise taxes. Excise taxes are an effective way for the state to regulate consumption in a desirable direction and, in addition, provide increased tax revenues. The tobacco tax, the alcohol tax and the tax on plastic carrier bags are all examples where you want to influence consumption through a higher price.

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Bokio makes tax easy

In Bokio's accounting software, you hardly have to think about the tax. When paying wages, the tax is calculated automatically and the correct amount is deducted. After that, an employer declaration is generated, which you can easily submit to the Swedish Tax Agency.

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In cooperation with Bokio, you as a Froda customer receive a 20% discount on Bokio Premium. ‍

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Go to the offer.