As a self-employed person, you have to deal with a few types of tax that do not always make doing business easier. Two big examples are sales tax (VAT) and income tax. They both affect your wallet, but are not at all similar when it comes to how they are calculated and applied. In this article, we dive into the differences. We also tell you how to calculate them and when to file that return again.
Tax liability as a self-employed person
As a self-employed person, you cannot escape the tax authorities. After all, you have to pay tax on your income. This is done in two different ways. Sales tax (VAT) demands its share on everything you sell, while income tax actually tackles the profit you actually retain.
What is VAT?
Sales tax, or the familiar abbreviation 'VAT' (value-added tax), is the tax you put on your products and services as an entrepreneur. You charge this to your customers and then you pass it on neatly to the tax authorities via your VAT return.
Is sales tax the same as VAT?
Yes, sales tax and 'VAT' are just two names for the same jar of sauce. As a business owner, you charge VAT to your customers and report it neatly to the tax authorities. But don't worry: you can deduct the VAT you pay yourself for business expenses from what you have to remit. We call this input VAT and it ensures that you have to deduct less.
What VAT rates apply?
In the Netherlands, we have three VAT rates to keep in mind.
- 21% (standard rate) for most products and services. Think of this as the 'big brother' of VAT rates
- 9% (low rate) for products such as food, books and your haircut at the hairdresser's
- 0% (exemption or export) for international deals or if you send something across the border
How do you file VAT returns?
Are you going to file VAT returns? This is usually done every quarter via the Tax and Customs Administration's entrepreneur portal. In this portal, you enter how much VAT you have received and how much you can deduct as input tax. The portal then calculates for you whether you have to pay or get a refund.
Sample sales tax calculation
Imagine this: in one quarter, you have managed the following:
- €10,000 turnover (without VAT, of course)
- €2,100 in VAT received
- €500 VAT paid on business expenses
Time to do the math: €2.100 – €500 = €1.600. This is the amount you will eventually have to pay to the Tax Office.
What is income tax?
By income tax, we mean the tax you have to pay as an entrepreneur on the profits from your business. This is the amount you are left with after you have eliminated all your business expenses and deductions. In short, it is the tax on profits.
What rates apply?
Income tax is calculated on your profits, but fortunately there are quite a few deductions that can help you ease the tax burden. In 2024, the tax rate will be as follows:
- Up to €75,518 you pay 36.97% tax
- Above that amount, the rate shoots up to 49.50%
With deductions such as the self-employed deduction, SME profit exemption and start-up deduction you can make your tax bill a lot lower. Want to know which deductions you can take advantage of? Read here further.
How do you file income tax returns?
You file your income tax return annually via My Tax Office. You will need your financial statements or a statement of your income and expenses to do this.
Sample income tax calculation
Suppose you have an annual profit of €40.000.
- Self-employment deduction: €3.750
- SME profit exemption (13.31% of €36,250): €4.825
- Taxed profit: €31.425
- Load (36.97%): €11.630
And voila, so you pay €11,630 in income tax. You can say: just do the maths and you're done!
Overview of differences between sales tax and income tax
| Feature | Turnover tax (VAT) | Income Tax |
| About what? | Turnover from sales | Profit after deductions |
| When to pay? | Per month, quarter or year | Annual |
| Who pays? | Customers (remitted by you) | You over your profits |
| Deductible? | Input tax is deductible | Many deductions possible |
| Tax rate | 0%, 9%, 21% | 36.97% and 49.50% |
Conclusion
The big difference between sales tax and income tax is simple. Sales tax (or VAT) you pass on to your customers, while income tax has to do with the profit you pocket yourself.
So as a self-employed person, you need to take both taxes into account. And don't forget to set aside enough in time so there are no surprises when it comes time to pay your returns.
