The dream of becoming my own boss had been a long-time aspiration. After working under someone else for years, I decided to venture out and offer my services as an Expert specialized in Internet of Things systems and Firmware engineering.

Although I already have clients, in order to reach my goal I need to form a legal business entity. If you came for the calculator only, scroll till the end of the page

Self-employed vs KFT

The two most common ways of launching a business in Hungary are to register as a self-employed entrepreneur, which has a straightforward setup and requires no investments, or to set up a limited liability company (KFT). The second option needs the help of a lawyer, and requires an initial investment of 3 million Forint, as well as an mandatory accountant.

Creating and managing a limited liability company is complicated, but the trade-off is worth it. You are shielded from being personally liable, and you have more freedom to sell the organization if you want. Limited personal liability is part of the package. The sole proprietor is liable to his creditors and suppliers with his entire private property. With Kft, the member is generally not responsible for the company’s debts.

If an individual is self-employed, they bear all of the financial responsibility for their business activities.

Overview of sole proprietorship

In this article, I will focus on the formation of a self employed (egyéni vállalkozás) sole proprietorship business. It is much simpler for foreigners living in Hungary to form one of these businesses, especially for freelancers who are just beginning their journey.

For registering as self employed, the best place to look is the NAV tax administration’s articles:

NAV sole proprietorship info(in Hungarian)

Eligibility

Who are eligible:

• A person with Hungarian citizenship,
• Anybody belonging to a member state of the European Union,
• Someone exercising their right to move and live in Hungary, anyone with a residence permit issued to be employed, reunited with family members or study, and someone with a residence permit issued for humanitarian reasons.

Who are not eligible:

• a minor,
• someone who is part of a single business or jointly liable for a corporation,
• an individual who has been convicted of criminal activity.

Anyone who is legitimately living in Hungary and has not been charged with any criminal activity can become self-employed as long as they are not part of a limited liability company (KFT). Each individual is allowed to have only one sole proprietorship at a time.

Where it can be arranged

Starting a sole proprietorship can be done:

• with electronic notification via mo.hu, you need to register with ügyfélkapu first.
• in person, at any local NAV customer service office.

Necessary documents

Nothing special. Either identity card, passport, driver’s license (in card format) or power of attorney must be presented as the original version.

Expenditures

The notification of the start of the activity is free of charge and any fees.

Administrative time

If the notifier has correctly filled out the notification form available on the Web Ügysegédor received from any of the NAV’s customer services, the NAV will immediately determine the individual entrepreneur’s tax number and obtain the individual entrepreneur’s statistical number. The individual entrepreneur can start his activity on the day of registration.

Nota bene

Before launching a single-person business, it is important to look into whether the chosen venture requires a permit or license and also find out what qualifications are necessary to run the activity based on the current regulations.

An individual entrepreneur can find an activity in the Register of Self-Employed Entrepreneurs (ÖVTJ codes) Failing to comply with these can lead to one’s activity being shut down.

The website of the Hungarian Chamber of Commerce and Industry has an Entrepreneur Information System KAVIR that provides information about licensces, qualification and notification needs for individual activities. In the database TEÁOR’08 codes with ÖVTJ codes can be found.

Extra help in classifying potential activities based on their ÖVTJ code may be found on the KSH website.

Taxation

There are two easy ways to handle taxation as a sole proprietor: KATA and a flat rate taxation.

Every month, members of the KATA system pay a fix sum of HUF 50,000 for income tax, social security contributions, and social tax. All revenue made over this amount is kept by the individual. Unfortunately, certain people are unable to take advantage of this system. Those selling goods or services to other businesses or foreign entities are not eligible. Additionally, anyone who is not working as a full-time self-employed individual is not able to use KATA. This applies to students and other employed people as well.

Providing consulting services for businesses means I cannot use KATA.

The flat rate tax system requires freelancers to deduct 40%(or up to 90% rate if their activity is in retail or agriculture) of the revenue. This leaves 60% of the revenue as the amount of money they to pay taxes on. The taxes are divided into personal income tax (15%), social security contribution (18.5%), and social contribution tax (13%) for a total of 46.5%. It should also be noted that as a self-employed you will need to pay for the accountant services (15000-30000 HUF) each month.

I made flat rate taxation calculator based on Excel table found on NAV website, you can use it to approximate tax burden when working as a full time entrepreneur under flat rate taxation and decide if going self-employed is a good choice.

Flat rate tax calculator 2022

Calculator description

The calculator can be used to make predictions based on simplified assumptions, such as earning the same income each month. The calculator gives a full-year report that contains the tax rates and minimum wage valid in 2022. It does not account for any deductions that can be applied to the income included in the flat rate of the consolidated tax base or to the entrepreneur exemption (for example, discounts for mothers raising four or more children, young people under 25, personal discount, first married couple discount, and family discount). In addition, the flat tax takes into account any tax-free income. It assumes that you’re also working as a sole proprietor full-time. Employees and pensioners will likely have better conditions than what is presented in the calculator’s calculations.

Input your data in the calculator!

Conclusion

The flat rate taxation system is a great alternative to the KATA system, as it allows me, as a Software Engineer consultant, to pay a tax burden of around 30% or even lower. Coupled with the freedom that comes with being self-employed, it makes for an attractive option compared to traditional employment.

In next posts I will cover topics of business registration using web portal, bank account, and managing invoices.