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Before we start working with our online shop it is important to be aware of the tax and social security burden and what the different options are for allocating it. In this article we will try to explain the main ones to help you make an informed choice. We invited our partners at Tax Monkey to help us write it.
What are the different options for managing an online store?
When running your own online store, there are two main options to choose between:
- Sales by an individual trader;
- Sales by a company (LLC, Ltd. or other form).
Each of them has its advantages and disadvantages, which we will discuss in the following paragraphs.
Taxes and social security on sales as an individual
Making sales through an online shop is a commercial activity. This means that the moment you start running your shop, you become a trader. According to the Trade Act, all traders are subject to registration in a special register. However, for natural persons the obligation to register is a consequence of acquiring this capacity. It is a misconception that a person becomes a trader only after registration as a sole trader.
Individuals who run an e-shop personally should prepare for the following taxes and social security contributions:
- 15% tax on annual profits;
- Taxes on profits.
It is important to have general terms and policies in your online shop. Learn more about our Website Terms & Policies service
Calculation of tax due
The tax payable shall be calculated in accordance with the provisions of the Income Tax Act. Profit is determined on the basis of the difference between income and expenses that are related to the trading activity. We stress that these are not personal expenses and care must be taken when accounting for them.
Benefits for individuals when running an online shop
As the income from running an online shop is business income, it is subject to social security contributions. National insurance contributions are paid in advance on an amount chosen by the person, but on an annual basis a reconciliation is made, the national insurance income being the annual profit made.
What matters is whether you are already insured on another basis. Bulgaria has a maximum insurable income. For 2021 it is 3000 BGN. Up to the amount of 3,000 BGN average monthly income, social security contributions are due, above that only tax.
Tax and social security when running an online shop with a company
First of all, we need to make it clear that if you are not doing your shop yourself, a company (LLC) is the only logical way to arrange your partnership. Not that there aren’t other legal mechanisms, but LLC registration is certainly the most appropriate.
In the case of a company, the following taxes and contributions must be taken into account:
- Corporate income tax of 10%;
- Dividend tax of 5% on distribution of profits;
- Contributions for the manager at least on the minimum wage.
Corporate tax
Corporate tax is calculated as for traders. On an annual basis, expenses are deducted from income to calculate profit. A 10% corporation tax is payable on this profit.
Dividend tax
The realised profit, after being taxed, can be distributed to the partners (or entirely to the sole proprietor). If such a decision is taken, the balance after tax (90% of the profit) is subject to a dividend tax of 5%. This means that the final tax on distribution of realised profits is 14.5% (corporation tax and dividend tax).
Benefits for the manager
Partners in a firm are not insured if they do not receive a salary for their work. Dividend income is not social security income and is not subject to social security contributions. However, the manager is insured as there are two options for this:
- If he receives a salary, the manager owes social security contributions on what he receives;
- If not, the manager is insured as a self-employed person.
In most cases, the manager is also a partner and does not receive any remuneration. This is done precisely to avoid high social security contributions. In this situation, the manager is insured as a self-employed person unless he is already so on another basis or the maximum insurable income has been reached in respect of him.
Final words
In most cases, it is much more appropriate to run an e-shop through a trading company. Apart from a more advantageous tax and social security regime, companies provide another advantage. This is the limited liability. If the business goes bad, the partners are not liable for the company’s debts. The reverse is true in the business activities of individuals.
On the other hand, the initial costs of registering a company may be slightly higher than for a sole proprietorship. In both cases, however, bookkeeping is necessary and the ongoing costs are relatively equivalent.
At the moment, our advice would be to look into registering your own company to manage your online store.
