Starting January 1st , the taxation of individuals changes dramatically as Emergency Ordinance 79/2017 enters into force. In case of wage income, the most important change represents the transfer of the social security contributions of the employer to the employee. Those who will suffer the most from this change will be those that are tax exempt.
Simultaneously with the transfer of the contributions, the tax rate will be reduced from 16% to 10%, which means that neither the net salary, nor the employer’s costs will change if the gross salary is increased by 19.9%.
As an example, currently, in order to receive a net salary of RON 6,000, the gross salary will have to be RON 8,550 and the employer’s cost is RON 10,500. Thus, for the employee to receive RON 6,000, the company will spend RON 10,500, as follows:
- RON 6,000 will be received by the employee
- RON 2,550 will be withheld and paid in the name of the employee
- RON 1,950 will be paid in the company’s name to the State
Transferring the employer’s contributions to the employee will mean that, starting 2018, for a net wage of RON 6,000, the gross wage will have to be almost RON 10,260 and the employer’s cost will stay just under RON 10,500, spitted like this:
- RON 6,000 will be received by the employee
- RON 4,260 will be withheld and paid in the name of the employee
- RON 230 will be paid in the company’s name to the State
As it may be observed, for an employee that does not benefit from any exemption, neither the amount received by him, nor the company’s costs are significantly changed as long as the gross salary is increased by 19.9%. However, if the gross salary (which is currently mentioned in the employment contract and represents the tax base for the social security contributions) will not be changed, the transfer of the contributions will result in a substantial decrease of the employee’s net income. Using the above example, the net salary will be reduced from RON 6,000 to RON 5,000.
Nevertheless, for the employees that benefit from tax exemption, as is the case for programmers employed under certain conditions provided by the law, an increase of 19.9% of the gross income will not be sufficient to cover the decrease of the net income. This is because the reduced tax rate (from 16% to 10%) is irrelevant in their case.
Using the same net salary as an example, the gross wage in 2017 is RON 7,185 and the cost of the employer is RON 8,820. An increase of 19.9% of the gross income (from RON 7,185 to RON 8,615) would mean a decrease of the amount actually received to RON 5,600 (a RON 400 cut in the income of the respective individual). Of course, the employer may increase the gross salary with more than 19.9%, in order to cover the difference, but this will result also in a higher cost for the company.
To be exact, in order to maintain the net income of a programmer to RON 6,000, a company will have to increase the gross income starting 2018 from RON 7,185 to RON 9,230 (28.46%), which will result in a total cost for the company of RON 9,440 (a 7% increase from the cost in 2017 of RON 8,820).
In conclusion, for programmers, the net income and the employer’s cost cannot remain unchanged in 2018 as compared to 2017, therefore one if the parties (or both of them) will have to bear the difference.
It must also be mentioned that the income tax exemption is also applicable to persons with disabilities which, if they will not negotiate with their employers a substantial increase of the gross salary, starting January 1st will receive less money for their work.
At the end of November, the Government promised a new piece of legislation for the persons that are exempted from income tax, so that their income will not be reduced when the social security contributions are transferred to the employee. As to this moment, no such legislation has been passed.