Currently, most IT specialists operate in a remote or hybrid model, which is becoming a new standard. It goes hand in hand with the higher popularity of B2B cooperation in the IT industry. As a result, more and more programmers decide to start their own companies and sign a B2B contract. If you are a software developer wondering if you should choose a B2B contract, this article will help you in your decision.
B2B contract — how does it work?
B2B stands for “business-to-business.” Thus, a B2B contract means a civil law contract between two or more entrepreneurs. The parties of such contract can be:
- sole proprietorship (a self-employed person);
- partnership (a company co-owned by two or more partners).
The B2B contract, therefore, assumes cooperation between two equal entities. This means a company is not an employer, but a client, and the employee offers their services as a contractor. So, from the legal point of view, there is no employment relationship. Being on a B2B contract, you are not your clients’ subordinate but only provide service(s) for them. So the client cannot impose working conditions like working in a designated place and time or exclusive cooperation.
As is known, B2B allows you to cooperate with other contractors, so non-competition clause does not apply in this case. Sometimes you can find such clause in a contract from a client. So it is worth clarifying what each party understands by “competition”. You can mention industries or positions and even specific companies that are behind it.
B2B vs. employment contract
Many companies are increasingly reluctant to take the burden of formalities and costs associated with employment contracts. Therefore, they willingly switch to B2B cooperation with their (de facto) employees, attract people with their own businesses, or encourage them to start one. They usually offer a higher salary (in place of social and health insurance fees) and some full-time benefits. So, what should every developer know before deciding to start their own business?
An employment contract is attractive because it provides stability and certainty. Employees can focus on their profession-related duties. They are given specific tasks and theoretically are not obliged to go beyond their scope. They do not have to deal with payment of social security contributions, taxes, and many other formalities involved in running their own business.
Compared to a B2B contract, the employment contract provides better legal protection – resulting from the Polish Labour Code. The document defines work standards, like 40-hour working week or overtime paid in the amount of 150% of the standard hourly wage. An employment contract for software developer is still a beneficial solution – especially for those who want stable employment and do not feel up to running their own business.
Lately, the IT industry has entered a stage in which more and more specialists appreciate professional freedom and work on their own terms. Despite the lack of employment privileges, such as paid holidays, fixed slary or legal protection under the Labor Code, the B2B contract has other advantages.
It enables flexible cooperation and is an excellent alternative to a traditional employment relationship. Especially valued is the opportunity of flexible time and place of work. Another advantage may be the possibility of taking many projects (and thus – earning more).
In addition to these pros, B2B is also associated with financial profitability. For example, including the cost of purchasing goods into a company’s expenses can lower the amount of taxes paid. Expenses mean that the entrepreneur can reduce the income tax, and VAT payers can deduct VAT.
B2B contract for a programmer – is it worth it?
Each programmer should individually answer whether this solution is beneficial for him. Not only legal and financial but also organisational issues are essential. The form of B2B cooperation means that full responsibility for the results of work rests with the programmer. There are also additional tax, financial and logistic matters.
At the same time, the B2B relationship seems more straightforward. It consists of exchanging information, valuing and implementing orders, at the end — issuing and paying an invoice.
B2B contracts seem financially beneficial to both parties: the employer and the developer. However, it is worth adding that a B2B contract is less profitable with lower salary. So it may not work for programmers at the beginning of their careers. However, for those earning more than PLN 5,000–6,000 net, a B2B contract may be more profitable than an employment contract.
Taxation of your own business – opportunities for developers
Considering that most experienced programmers have an income above the national average and likely to exceed the 1st tax threshold, they have a choice of:
- flat tax — a fixed tax rate of 19%, regardless of the earnings; allows to deduct the costs of running a business and enables to take advantage of some tax reductions; usually chosen by companies with a yearly income higher than 120 000 PLN;
- lump-sum tax of recorded revenue — in IT industry the tax rate of 12% [from 2022], calculated on pure income (not on revenue); it does not allow to reduce it by tax reductions (e.g., tax break for IT specialists, like IP BOX), but it is beneficial due to the amount of health insurance fee based on annual revenues.
However, if you are a novice developer with a slightly lower income, perhaps a better choice for your business would be:
- tax scale – the tax rate is variable, depending on the income obtained; it amounts to 12% with income up to 120 000 PLN and 32% above this threshold; it gives a possibility to lower the taxes by including business costs, using tax reductions and the tax-free amount (3600 PLN in 2022).
Tax changes in 2022
In 2022, due to the Polish Deal (Polski Ład) rules, many changes were made to tax, social security and health insurance fees. In January, the value of lump-sum tax changed for some sectors, including the IT industry. Lump-sum that developers currently pay is 12%, not 15%, as in 2021.
And from July 1, 2022, further changes have been introduced. For example, the tax value for companies with the tax scale has changed – it dropped from 17% to 12% in the first tax threshold. Companies that decide that the previously chosen tax form is not profitable for them may change it retroactively. So, if you are a software developer with a yearly salary lower than 120 000 PLN, the tax scale may be the best choice for you.
Advantages of a B2B contract
The B2B contract allows the developer to pursue a career on their terms and take up only their chosen challenges. By the way, it is also associated with various types of financial savings. Here are the most important advantages of running your own business:
- complete control over your time and place of work;
- remote work from anywhere in the world, as long as it does not interfere with the performance of the service;
- lower social security fees for the first 2 years of business, which gives savings of several hundred zlotys;
- including the purchase of goods in company’s costs (like work equipment) and reduction the amount of tax paid;
- the possibility to take additional work – when working on a B2B contract, you can be employed somewhere else, unless the contract contains a non-competition clause; you can also take many projects at the same time or work on your own projects;
- delegating some tasks to subcontractors – if you need more people to work on the project, you can delegate some work to them; the salary you pay them can be treated as a tax-deductible cost;
- flexible settlement of contracts and payments – if they are made according to an hourly rate, then additional hours are invoiced at the same rate, and vice versa; if the programmer is paid per hour and works less in a given month, the employer pays only for hours actually worked;
- the possibility of including additional clauses in the contract as it is a civil law contract;
- flexible decision about contracts duration and the number of hours worked per month;
- freedom to decide not to start another contract with a client, if you didn’t like the cooperation or just not have time.
Disadvantages of a B2B contract
A B2B contract and having your own business also have some cons you should consider. However, the most critical challenges that an entrepreneur can face are:
- bigger responsibility for all activities related to running a business;
- lack of employee privileges included in the Labour Code, such as paid holidays, sick leave, pregnant women protection or accruing seniority;
- the need to pay social and health insurance contributions oneself, regardless of whether it generates income in a given month or not;
- lower social insurance benefits in relation to the amount of declared and paid contributions (compared to those they would have received if they were employees);
- lack of employee benefits that you would get on an employment contract – B2B contractors are offered gym cards, health insurance, or company laptops, but the scope of such benefits can be narrower than in case of employees;
- lack of salary during holidays – therefore, you need to independently secure a “financial cushion.”
B2B contract fo software developers – summary
Whether a B2B contract is a good solution for a given software developer depends on the individual situation and preferences. For some, it may turn out to be a less profitable solution in terms of salary. Moreover, not everyone likes to deal with the tasks related to running a business.
However, for those who are not afraid of dealing with business formalities, a B2B contract may be very profitable. It offers many benefits for both the employee and the employer. Therefore, it has become the preferred form of contract in many IT companies.