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By Jan Stojaspal
Polish companies with employees earning more than 127,890 zloty ($35,000) a year may be looking at higher labor costs following a government proposal to remove the income cap on the calculation of old age and disability insurance taxes, and many high-grossing employees will see net incomes decrease as they are also required to pay higher social security taxes.
The maximum income on which the taxes are paid “was set quite high so its removal doesn't impact front-line staff, but it will much increase labor costs for higher-level staff,” Piotr Liss, a tax partner at RSM Poland in Poznan, told Bloomberg BNA in a Nov. 8 telephone interview. “This will be a huge issue for both employers and employees, since it is going to, on one hand, increase costs for employers and, on the other hand, result in employees receiving less money every month.”
Old age and disability insurance are the two biggest components of social security taxes in Poland, and the only two with a capped wage base. The old age insurance tax amounts to 19.52 percent of gross wages and is split evenly between employer and employee. For disability insurance, employers pay 6.5 percent of employees' gross wages and employees pay an additional 1.5 percent.
The maximum taxable income is 30 average estimated national salaries, 127,890 zloty in 2017.
The proposal to remove the cap was approved by the Council of Ministers, the decision-making body of the Polish government, Oct. 30 and, if approved by the parliament, will take effect the beginning of next year.
According to an explanatory note published by Poland's Ministry of Family, Labor, and Social Policy, which drafted the proposal, the aim is to promote “social solidarity” while giving high earners the possibility of eventually receiving larger pensions. In addition, employers will no longer be required to continually monitor employees' year-to-date wages and adjust taxation when the earnings cap is reached.
These benefits come with higher labor costs for companies with large numbers of high-earning individuals, however, such as banks, media companies, and IT businesses, as well as reduced income for many employees, Joanna Narkiewicz-Tarlowska, a tax director at PwC Poland, told Bloomberg BNA in a Nov. 7 telephone interview.
Narkiewicz-Tarlowska estimated that up to about 500,000 individuals could be affected.
“It will be difficult because [employers] will actually have two problems,” she said. “The company cost will increase, and the employee's net income will decrease.”
For example, an employee earning 15,000 zloty per month—180,000 zloty ($50,000) per year—will cost his or her employer an additional 8,473 zloty per year in old age and disability taxes. At the same time, the employee will lose 3,917 zloty in annual net salary.
According to Narkiewicz-Tarlowska, companies will need to consider carefully how to address the loss of net income on the part of their high-earning employees at a time when Poland's unemployment rate has hit historic lows and skilled labor has become scarce.
Employers “will still have to somehow motivate their employees to work,” Narkiewicz-Tarlowska said. According to her, companies may, for example, implement additional incentive schemes, such as providing employees with stock options, which are only subject to capital gains tax.
“I think net incomes will decline,” however, as companies will be – in most cases – unwilling to compensate their employees for higher social security contributions, Liss said.
“It's common in Poland to sign employment contracts with gross value,” he explained. “It means that an employee would need to go to the employer and ask for higher pay. I don't really think this will happen, barring top positions in multinational firms.”
Instead, Liss expects the contractual basis for rewarding high-earning employees, such as managers, to begin to change.
“Probably there will be a flow towards management contracts, which is a kind of freelancer contract,” he said. “I think this is something that will gain in importance with this change.”
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The draft proposal is available in Polish here.
For more information on Polish HR law and regulation, see the Poland primer.
Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.
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