Article 26.1.2021

How to deduct YEL contributions in taxation

Entrepreneurs can deduct YEL contributions in taxation – either in their own, their spouse’s, or their company’s taxation. Which method should self-employed persons who are sole traders use and when? What about entrepreneurs running a company? Do you know what the best method for you is?

The insurance contributions for self-employed persons’ pension are a large expense for an entrepreneur, but luckily they are tax deductible. This means that in the end there is less to pay. And the larger the insurance contribution, the lower the actual contribution percentage.

As an entrepreneur, you can select whether to deduct the contributions in your own or your spouse’s taxation – or your business’s taxation.

So, which method makes sense?

It depends on a few things, such as the company form and your other income for the tax year. As a rule of thumb, the contributions should be focused on the income that has the highest tax percentage.

Sole trader – this is how to deduct YEL contributions in taxation

As a sole trader, you should usually deduct your contributions in your personal taxes, which means that they will be fully applied to the earnings.

If your earnings are low, you can turn to your spouse’s taxation. If your spouse has a larger income, it’s a good idea to deduct the contributions from his or her taxes. The larger the earnings, the smaller the actual YEL contribution percentage – whether the income is your own or your spouse’s.

As a sole trader, you have ample time to make the decision whether to deduct the insurance contribution in your company’s or your personal taxation. You can make the decision even as late as when filling in your tax return form.

Entrepreneur running a company – this is how to deduct YEL contributions in taxation

If your entrepreneurial activities take place in a company, it usually makes sense letting the company take care of both the insurance contributions and their deduction, if the company is making a profit.  

The amount of other income matters in these situations as well. It may be worthwhile for someone with a low income to deduct the contributions through the company in capital taxation, because the accumulation of income as capital income, which is subject to higher tax, cannot be prevented in the same way as in the taxation of a sole trader.

Keep in mind that if you want to deduct the contributions in taxation as your company’s expenses, the company must also pay the contributions.

Keep it simple – estimate the tax impact with a calculator

A good ground rule for entrepreneurs when it comes to tax is: keep it simple.

Focus on your business because, in the end, optimising the deduction of your contributions only matters when your business is successful and you make a profit. And if you have a low income, always go with the taxes of the spouse who has the larger income.

You can estimate the impacts of different tax solutions on your total income using a tax calculator at vero.fi.

Keep in mind:

  • The YEL contributions are paid by you or by your company.
  • You can deduct your YEL contributions in your personal or your company’s taxation.
  • If you pay your YEL contributions yourself, you should deduct them in your or your spouse’s personal taxation. It is advisable to deduct the contributions in the taxation of the spouse who has the bigger earnings subject to salary income taxation and other progressive taxation.
  • If your company pays your YEL contributions, you can deduct the contributions as your company’s expenses.
  • As a self-employed person, you are responsible for deducting your YEL contributions in taxation. The payment details are not transferred from the pension company to the Tax Administration.

Tax Administration’s leading tax expert Sami Varonen was interviewed for this article.

 

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