How to Choose the Right Form of Taxation and Protect Your Profits

The Form of Taxation - an Opportunity That Pays Off

In business practice, I often see that choosing a form of taxation, instead of being a conscious strategic decision, is treated merely as a formality — something handled “along the way.” Such an approach can cost a company dearly — through additional contributions, non-deductible expenses, loss of access to tax reliefs, or the inability to reinvest funds that have instead flowed to the tax authorities.

In our portfolio, we have stories of entrepreneurs who, after years of running their businesses, decided to review their tax setup — and after just a few simple calculations, it turned out that even a small sole proprietorship could save several, and sometimes even a dozen or more, thousand zlotys per year.

It is especially important to remember that changing the form of taxation is not only relevant for newly established businesses. Further analyses show that even long-established companies regularly optimize their tax burdens with the support of professional advisors. Together with our team, we have guided many of our clients through this process and know which factors can make the decisive difference.

Questions Worth Asking

Not every form of taxation is suitable for every business

Oferując wsparcie przedsiębiorcom, zawsze zadajemy kluczowe pytania, by jak najlepiej poznać ich specyfikę:

When supporting entrepreneurs, we always start by asking key questions to fully understand the specifics of their operations:

• Does the company operate in a sector that generates high costs (e.g. manufacturing, wholesale trade), or rather in a service-based industry with relatively low expenditures?
• What has been the trend in revenues and expenses over recent months or years?
• What are the entrepreneur’s forecasts for revenues and costs in the next tax year?
• Are there any major investments planned?
• What does the employment structure look like?
• Are there significant employee-related costs, or is the business primarily based on the owner’s own work?
• Are there any substantial, deductible tax losses from previous years?

A real-life example: one of our clients — a partner in a general partnership engaged in retail trade — regularly invested in expanding his store network, thereby generating high deductible costs. After a detailed analysis, it turned out that the progressive tax scale was more advantageous than a lump-sum form, as the ability to claim deductions reduced his tax burden by almost half.

These issues are often highly individual, and even a seemingly minor detail can determine the profitability of the chosen taxation method.

Progressive Tax Scale, Flat Tax or Lump-SUm Taxation?

Advantages, Disadvantages, and When to Choose Each Option

Progressive Tax Scale
This is the general taxation system, based on two income brackets:

• 12% on income up to PLN 120,000, and
• 32% on the surplus above this amount.

For many entrepreneurs, this option is flexible and provides access to numerous tax preferences. A key advantage is the tax-free allowance of PLN 30,000 – if your income does not exceed this amount, no tax is charged. Moreover, you can file jointly with your spouse and take advantage of multiple deductions and reliefs, such as the child tax credit, R&D relief, or thermomodernization relief.

This form of taxation requires maintaining a tax revenue and expense ledger and paying income tax advances regularly – monthly or quarterly, always by the 20th day following the end of the settlement period. The progressive tax scale works particularly well for companies with high operating costs, where the ability to deduct expenses can significantly reduce the taxable base.

We particularly recommend this option for businesses with high cost structures, those eligible for multiple deductions, or when annual income does not exceed PLN 120,000. However, the progressive tax system requires discipline and good organization – careful bookkeeping and timely settlements with the tax office.

Flat Tax
The flat tax applies a single rate of 19%, regardless of the company’s income level.

This option works particularly well for entrepreneurs with stable, high income, and for those not eligible for tax credits or family-based settlements (joint filing with a spouse is not available). It is worth noting some limitations: the flat tax cannot be applied if you provide services to your current or former employer in the same scope as under your previous employment contract. Another drawback is the limited access to tax reliefs, which might otherwise help reduce your tax burden.

Like the progressive tax scale, this system requires maintaining a revenue and expense ledger and regularly paying income tax advances. For companies that value predictability and do not benefit from a wide range of tax reliefs, the flat tax can be an advantageous choice – but it requires a careful assessment of potential benefits and risks.

Lump-Sum Tax on Registered Income
This option is characterized by its simplicity and often very attractive tax rates – ranging from 3% to 17%, depending on the type of business activity.

The tax base here is gross income, meaning you cannot deduct business expenses. This can be an advantageous solution for entrepreneurs whose activities generate low operating costs or whose income-to-cost ratio is relatively high. It is a common choice among freelancers, professionals, and service providers in specialized industries.

However, not everyone can use this form of taxation. Exclusions apply, among others, to pharmacies, companies trading in currencies, automotive parts, or excise goods. In addition, this form is unavailable to entrepreneurs providing services to their former employer in the same scope as before.

The main advantages of the lump-sum tax include the lowest tax rates, simplified record-keeping (you only need to maintain a revenue register), and transparent settlements. The disadvantages are the inability to deduct expenses, limited access to tax reliefs, and no option for joint filing with a spouse. These factors should be carefully considered before deciding to choose this form of taxation.

When Should You Notify the Tax Office About a Change in Your Form of Taxation?

Time is on Your side!

In most cases, you have until February 20 of the given year to submit your notification. That’s not much time, considering the amount of data to review and the number of decisions to make. We strongly encourage you not to leave this until the last moment. Our experience shows that a calm, well-planned meeting with a specialist often helps identify important details that could otherwise be overlooked when working under deadline pressure.

How Does PKF BPO's Support Work in Parctice?

No two companies are the same. That’s why our advisory process always begins with a conversation. We analyze financial documentation from recent months, investment plans, and industry specifics, and then prepare detailed tax calculations for each possible taxation method. The client receives not only the figures but also clear explanations of the legal and accounting implications of each option.

In many cases, as cooperation develops, we also assist during the implementation of changes in accounting records or when submitting documents to the relevant authorities. We remind clients about deadlines, provide guidance when submitting clarifications, and, if necessary, represent them during inspections.

We focus on providing comprehensive support. That’s why our team includes tax advisors, accountants, and industry regulation specialists. Every year, we continue to develop our expertise to stay up to date with the constantly evolving legislation — enabling our clients to avoid mistakes and discover additional sources of savings.

What to Consider When Choosing a Form of Taxation

Practical Tips

• Carefully calculate your deductible expenses – even minor costs can affect the profitability of a particular tax option.
• Consider whether you plan to make major investments this year or if you have unclaimed tax losses from previous years that could be deducted in the upcoming tax year.
• Forecast your company’s revenues for the next year, taking into account your business potential and the current market conditions in your industry.
• Remember the limitations associated with lump-sum taxation (type of activity and relationship with a former employer) and flat tax (services provided to a former employer).
• If your personal situation changes — for example, you get married or your family grows — check whether you may become eligible for additional tax reliefs.
• Don’t hesitate to ask questions and seek expert advice — a well-informed decision today means greater peace of mind and lower taxes tomorrow.

Trust Expertise and Seize the Opportunity

With the right support, choosing your form of taxation doesn’t have to be difficult or stressful. Whether you run a sole proprietorship or are a partner in a larger company, we invite you to contact our team. Together with PKF experts, you’ll choose a solution that gives your business a real competitive advantage.

A well-chosen form of taxation means additional profit for your company — more resources for growth and building a competitive edge. Take advantage of the knowledge and experience of professionals who analyze hundreds of cases every day, ensuring that each client feels confident — regardless of the size or nature of their business.