Michaela Culková

Self-employed or individual entrepreneur

If you are well versed in business, know how to find clients, and want to try to work for yourself, you can become self-employed or open an individual entrepreneur.

Let us tell you how these statuses differ from the point of view of the law, which privileges and who are suitable.

Who are individual entrepreneurs?

В Russian law – individuals who receive systematic profits without forming a legal entity and have passed the state registration procedure. These are those who were previously called PE (private entrepreneurs) and unincorporated entrepreneurs (entrepreneurs without the formation of a legal entity).

An individual entrepreneur can open a capable person after reaching the age of eighteen, sixteen with parental consent or after marriage, or any foreigner residing on the territory of the Russian Federation. Municipal and civil servants cannot be individual entrepreneurs.

Usually, individual entrepreneurship is opened by masters who independently provide qualified services and who want to hire specialists under the supervision of: accountants and copywriters, beauty masters and masseurs, taxi drivers and confectioners. As long as the income is insignificant, and the earnings are irregular, individual entrepreneurs may not open.

For example, you bake and sell Easter cakes or cakes for children’s parties. If this is an irregular part-time job with insignificant income and you work alone, you do not need to apply for an individual entrepreneur.

But if additional employment begins to compete with the main one, you hire workers, rent space and expensive equipment for business, it is better to arrange everything according to the law. Banks give entrepreneurs loans on more favorable terms than individuals, and the experience of an individual entrepreneur is included in the pension.

An individual entrepreneur also makes it possible to work with new partners and contractors: today, almost all organizations work by bank transfer to make accounting transparent. If you transfer large amounts to the card, the tax authority needs to explain the appearance of funds on the account – it is more difficult to do this without an open individual entrepreneur.

Individual entrepreneurs need to choose monthly or quarterly reporting, pay taxes on income or profits from 6% to 15% and be ready to answer to creditors with all of your property if something goes wrong.

Who are the self-employed?

These are the people who pay the NPD – tax on professional income. In Russia, self-employment is a state experiment in taxation: it is needed to legalize the income of those who want to start earning on their own.

From July 1, 2020, you can become self-employed in almost any region of Russia. Almost everyone who earns up to 2.4 million rubles a year and does not have employees can try the new tax regime. Citizens of Armenia, Belarus, Kazakhstan and Kyrgyzstan can also become self-employed – for this you need to obtain a Russian TIN.

The tax on professional income can be paid by nannies and home confectioners, photographers and tutors, repairmen and fitness trainers, foremen beauty and accountants, carriers of passengers and goods. Sellers of goods requiring labeling (alcohol, tobacco, drugs), lawyers and those who extract minerals cannot become self-employed. Self-employed people should not have an employer or employees.

To become self-employed, you need to register in the My Tax application or web version. Under the current legislation, NAP is paid only in those months when there was income, that is, money received from clients.
This means that if in January you have a simple and only receipt on the card – a transfer from relatives, it will not be taxed by the NAP. The government promises that the current conditions will not change until 2029.

And which is better to choose?

If you work for yourself, you will not hire employees, the annual income does not exceed 2.4 million rubles, and the future state pension for you not interested, apply for self-employment. If you intend to scale your business, open an individual entrepreneur.

Here are the main differences between an individual entrepreneur and a self-employed citizen from the point of view of the law.

Question Self-employed PI
Do you need registration? Yes, on the tax website or in the My Tax app. It’s free, takes six days. Yes. If you submit documents electronically through the website of the State Services, the MFC or with the help of a notary – free of charge. If you submit documents on paper – 800 rubles and three days of waiting.
How much can I earn? Up to 2.4 million rubles a year in total. No restrictions, if the taxation system is common. On the simplified tax system (STS) – 150,000,000 rubles, on the patent taxation system (PSN) – 60,000,000 rubles.
Can I hire employees? You can’t. If “simplified” – up to 100 people, if PSN – up to 15 people.
Can I continue to be employed? Yes. Yes.
What is the tax rate? 4% – for income from individuals, 6% – for income from legal entities. 6%
Are there mandatory premiums? No, pay as you wish. Yes, medical and pension insurance is required. Last year the amount was 40,874 rubles + 1% of income exceeding 300,000 rubles per year.
Do I need to buy an online checkout? No. Yes, if your customers are individuals, and the chosen activity does not allow you to work without a cash register.
How to keep tax records? All income is recorded in the “My Tax” application, other registers can be omitted. Submit a tax return, keep a book of income and expenses. If you have hired employees, also start personnel records.
What tax deductions and benefits are eligible? One-time tax deduction of 10,000 rubles. For STS – an annual deduction for the amount of GPT and OMI. For UTII and PSN – a deduction for the purchase of an online checkout.
Should you count on a government pension? If you do not pay voluntary pension contributions – no. In 2020, they amounted to 32 448 rubles for a full year, in 2019 29 354 rubles. Yes. It is formed in a general manner – the individual entrepreneur pays contributions to the song fund for himself, this is mandatory.
What can be fined for? For not issuing a check to a client or not displaying income in the application. FTS – for incomplete payment of taxes, false information in reports or failure to submit reports, lack of cash, etc.

Labor Inspectorate – for violation of workers’ rights.

Other government agencies – depending on the type of activity. For example, Rospotrebnadzor – for lack of disinfection or lack of personal protective equipment for individual entrepreneurs.

You can become self-employed if you want to do what you love, but don’t want to depend on colleagues and managers. You get conditional freedom of action – you can choose clients, set up a schedule, take vacation and sick leave whenever you want.

Along with freedom, personal responsibility also grows: you need to look for each client yourself, you have to pay out of pocket for the weekend, and there is a ceiling for earning.

An individual entrepreneur does everything the same as a self-employed one, but in addition he sets up production processes – he finds competent performers, fires those who cannot cope, pays salaries and is responsible for the entire company.

Instead, individual entrepreneurs are not limited in their maximum income, they can work with large suppliers, enter the federal and international markets.

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