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?
Two ways to deduct contributions
As an entrepreneur, you can deduct your YEL insurance contributions in either your personal or your spouse’s taxation or, alternatively, in your company’s taxation.
The best way depends on, for example, whether you are a sole trader or whether you carry out business activities in a company. Your other income and deductions for the tax year also have an impact. As a rule, it is best to focus the contributions on the income that has the highest tax percentage.
Remember that only mandatory pension insurance contributions can be deducted from the income from business activities. On the other hand, in addition to the mandatory contributions, other statutory and voluntary contributions can be deducted from earned income.
Sole trader: this is how to deduct YEL payments in taxation
As a sole trader, you can choose to deduct your YEL contributions as expenses from business activities or in your personal taxation. You can make the choice when filling in your tax return. But remember that you can claim deductions on the contributions in only one of the two ways.
As a sole trader, it is usually best to deduct the contributions in your personal taxation, so that the deductions will be made fully from your earned income. In that case, file the deductions on your personal pre-completed tax return. Remember, the contributions will be deducted from your earned income, not from your capital gains. If your earned income is low and you have a spouse whose income is higher, it is a good idea to have the insurance contributions deducted in your spouse’s taxation. The larger the earned income, the smaller the actual YEL contribution percentage – whether the income is your own or your spouse’s.
If you have no earned income, it is not a good idea to deduct YEL contributions in your personal taxation, because YEL contributions are not taken into account when confirming the loss for the earned income category.
You can estimate the impact of various situations on your total income using the tax rate calculator (vero.fi).
Business activities in a company: this is how to deduct YEL contributions
If you carry out business activities in a company that is making a profit, it is usually worth letting the company take care of both the insurance contributions and their deduction. The most important thing to remember is that if you wish to deduct the YEL contributions as the company’s expenses in taxation, the company must also pay the contributions. And vice versa, if the company has paid the YEL contributions, they can only be deducted in the company’s taxation.
On the other hand, if your business is making a loss, deducting YEL contributions from the income from business activities will increase the loss from the business activities to be confirmed. However, if you or your spouse have earned income, the only way to immediately benefit from the tax deductions for YEL contributions is by paying the contributions yourself and by deducting them from earned income.
Nevertheless, it is usually not a good idea for an entrepreneur with little earned income and a low earned income tax rate to pay the contributions themselves; instead, it is preferable to let the company pay the contributions and deduct them in the company’s taxation.
How does deducting YEL contributions affect the entrepreneur deduction?
As an entrepreneur, you get a 5% entrepreneur deduction from your income from business activities during the tax year. If you deduct your YEL contributions as expenses from business activities, your profit from business activities will be smaller. As a result, the amount of your entrepreneur deduction will also be smaller. If you deduct the YEL contributions in your personal taxation, this does not have an impact on your entrepreneur deduction.
Please note that the entrepreneur deduction does not apply to the taxation of a limited liability company.
What to do if you have forgotten to deduct the YEL contributions in taxation?
If you have forgotten to deduct the YEL contributions in taxation, you can claim the deduction within the appeal time limits. The usual appeal period is three years from the beginning of the year following the end of the tax year. If, for example, the claim concerns the tax year 2021, the claim for rectification must arrive at the Tax Administration by 31 December 2024.
Focus on your business and keep it simple
A good piece of advice for entrepreneurs when it comes to tax is to 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. If you have a low income, always go with the taxes of the spouse who has the larger income.
Remember this – How to deduct your YEL contributions in taxation
- 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 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.
Self-employed person, did you get a YEL income recommendation from us?
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YEL reform enters into force at the start of next year
The Self-Employed Persons’ Pensions Act will change at the start of the year: YEL income will be determined in more detail and adjusted more often. “Self-employed persons deserve the same level of pension and social security as employees. The reform will help achieve this,” says Minna Hakkarainen, Ilmarinen’s Director, Insurance Services.