5%

entrepreneur deduction

20%

net-asset return as capital income

€170

smallest advance tax charged

2–12

instalments a year

Three steps from profit to tax

First a 5% entrepreneur deduction comes off the business profit. It is a straight deduction from taxable income rather than an expense — nothing needs justifying. Then the YEL contribution paid is deducted, and it is fully deductible. Only after that is the remaining sum split in two.

The split follows net assets. Capital income is 20% of the return on the previous year’s net assets, taxed at 30% up to 30,000 euros and 34% above that. The rest is earned income, taxed progressively like wages. If there are no net assets — common for a service-sector sole trader with no machinery or stock — the whole profit is taxed as earned income.

Instalments by size of the tax

The instalment count is indicative — the final breakdown and due dates are set by the Tax Administration in OmaVero. The practical difference is large: with two instalments the payments land at two points in the year, while monthly instalments spread the money evenly. Monthly is easier on cash flow, but you only reach it above 10,000 euros of tax.

Why underestimating costs more

Estimate the profit too low and too little advance tax is paid during the year, leaving a back tax bill. Back tax carries reduced late-payment interest, around 9.5% in 2026. In effect the state extends credit, but not for free.

Overestimating is the cheaper mistake. Excess advance tax comes back as a refund and carries no penalty at all — it merely ties up money for a year. For a new entrepreneur who does not yet know the order of magnitude of their profit, estimating slightly high is the safer starting point.

Advance tax is not VAT

These two are constantly confused. Advance tax is income tax set by the Tax Administration and sent out with due dates. VAT is a self-assessed tax that you declare and pay yourself by period if you are registered. They are different taxes, with different due dates and different reference numbers — and both have to be remembered.

• ·Advance tax: income tax, set by the Tax Administration, 2–12 instalments a year.
• ·VAT: self-assessed, declared by you monthly, quarterly or annually.
• ·YEL contribution: paid to an insurance company rather than the Tax Administration, but deductible in income taxation.
• ·Back tax: if the advance fell short, payable with interest once the assessment is complete.
• ·Tax refund: if too much advance was paid, returned without interest.

The first year is the awkward one

A new entrepreneur has no history to base an estimate on, so the first income estimate is in practice an informed guess. The Tax Administration knows nothing about your activity until you tell it yourself when registering the business.

The second year surprises people more often than the first. If the first year’s profit came in above the estimate, the back tax falls due at the same time as the second year’s advance tax has already been set higher — two tax years effectively overlap. This is the most common reason a profitable sole trader hits payment trouble in its second year. The fix is dull but works: a buffer in a separate account from the start.

What happens if an instalment goes unpaid

An unpaid instalment does not go away. Late-payment interest starts accruing from the due date, and the Tax Administration sends first a reminder and then a demand for payment. If the debt is still not settled it moves to collection and eventually to enforcement, and the information appears in the tax-debt register — which is exactly what clients check before signing a contract with a subcontractor.

A cash shortage is not a dead end, though. You can apply in OmaVero for a payment arrangement that spreads the instalments over a longer period. Apply before the due date rather than after it: applied late, the terms are stricter and interest has already accumulated. Lowering the advance tax itself remains the first resort — if the profit is falling short of the estimate, reduce the instalment rather than skip it.

A monthly buffer: the practical rule

A sole trader has three recurring outgoings: advance tax, YEL and VAT. They fall due at different times but come from the same account. The simplest way to manage that is to move a fixed share of every invoice into a separate account the moment the money arrives — the same day, not at month end.

The calculator suggests a monthly figure covering both the advance tax and YEL. If your activity is VAT-liable, add the VAT share of each invoice on top. Then a due date is a transfer rather than a surprise.