Any business starts with an idea. But no idea will work without financial miscalculations. Calculation of financial indicators, including costs — one of the main parts of the business plan. It is necessary to separate the starting costs from the monthly ones because the starting costs are one-time. The basic items of monthly expenses are:
- salaries of employees;
- purchase of raw materials or consumables;
- advertising and promotion;
- room rental;
- utility bills;
- taxes.
This list is the main one, for some industries, it is wider because you have to rent additional equipment or pay monthly transportation costs.
In our previous article How to start a business in Ukraine as a foreigner, we took a step-by-step look at how to register a business in Ukraine for a foreigner. Now let’s talk about it in numbers. Based on the experience of company “X”, in which the salaries of employees, as in most businesses, are the most important expense. I will give a specific example with specific figures to make the number of costs as real, transparent, and understandable as possible. Let’s talk about the “pitfalls”, but later.
So, we have company “X”, which sells groceries in the city of Kyiv and the region. Trade is carried out at eleven outlets. For the IV quarter of 2020, net sales revenue is about 44,000 thousand UAH (excluding VAT).
According to the staff list *, the company has 56 staff units, ie 56 employees. Of these, 48 people are employees of outlets (cashiers and salespeople) and 8 people administrative staff, including the director.
The salary budget for this period (IV quarter of 2020) amounted to UAH 2,980 thousand (excluding taxes). And together with taxes about 4 514 thousand UAH. At the same time, the average salary of the trade hall staff per month is 16 thousand UAH by hand, or 24.2 thousand UAH together with taxes and contributions.
It should be mentioned here that as of November 1, 2020, the Department of Social Policy of Ukraine reported that the average salary of Ukrainians in the capital is UAH 17,494 and UAH 11,579 per month in Ukraine as a whole, excluding taxes.
Wage taxes in Ukraine
At each payment of a salary the employer has to deduct (deduct) on each employee the following taxes:
- personal income tax (PIT) 18% (in more detail section IV of the Tax Code of Ukraine https://zakon.rada.gov.ua/laws/show/2755-17#n3610)
- military tax (VZ) 1.5%. (in more detail item 161 of subsection 10 of section XX of the Tax Code of Ukraine https://zakon.rada.gov.ua/laws/show/2755-17#n8462)
- single social contribution (SSC) 22%
Employers must accrue and pay SDRs for all employees. More details at https://zakon.rada.gov.ua/laws/show/2464-17#Text In general, it is not considered a tax but is an insurance payment. SSC is a mandatory payment to the system of compulsory state social insurance. SSC — does not belong to the deductions, as SSC is not deducted from the salary, but is accrued separately and paid by the employer.
That is, 19.5% of taxes are deducted from the salary. However, the company pays an additional 22% of SDRs from its own expenses, not from the employee’s salary.
Let’s analyze a simple example. If you agree with an employee on a salary in the amount of UAH 20,000, then “on-hand” such an employee receives UAH 16,100 (20,000–19.5%). Additionally, you will pay SSC 20,000 * 22% = UAH 4,400. The total budget, in this case, will be UAH 24,400 per employee.
Employee social guarantees
- The norm of working hours of the employee
One of the responsibilities of the employer is to comply with the law when establishing the work schedule of employees. The specific duration of working hours is determined in employment, collective agreements and internal regulations, but the working hours are regulated by the Labor Code https://zakon.rada.gov.ua/laws/show/322-08#Text.
Therefore, the normal working hours are approved to be no more than 40 hours per week.
- Holidays
There are several types of vacations, but we will consider here only the main ones. In Ukraine, the basic annual leave is not as generous as, for example, in Austria or Finland (38 and 37 days, respectively) and not “stingy” as in the United States. Article 6 of the Law on Leave https://zakon.rada.gov.ua/laws/show/504/96-%D0%B2%D1%80#Text stipulates that the annual basic leave is granted to employees with a duration of at least 24 calendar days. for the worked working year, which is counted from the date of concluding the employment contract.
The second most popular is maternity leave, which lasts 126 days. As well as childcare leave until the child reaches the age of three, which is used by 99.9% of women.
- Payment of sick leave
The law in this case guarantees the payment of sick leave to the employee during the period of temporary incapacity for work. In this case, in the case of payment of sick leave for temporary incapacity due to illness or injury not related to an accident at work and occupational disease, the first 5 calendar days of temporary incapacity for work the employer pays at its own expense, and all other days — at the expense of social fund.
- Guarantees upon dismissal of the employee
The Constitution of Ukraine guarantees every citizen protection from illegal dismissal. This guarantee is provided by fixing a number of requirements for the termination of the employment contract.
Termination of the employment contract is possible only on the grounds established by law, the list of which is enshrined in Art. 36 of the Labor Code https://zakon.rada.gov.ua/laws/show/322-08#n204. As a rule, problems with dismissal do not arise and occur most often by the agreement of the parties.
On the day of dismissal, the employer is obliged to make a final settlement with the employee. To make the final calculation means to pay the employee:
- wages for actual time worked;
- compensation for unused vacation days.
- Quota for the disabled
According to the Law of Ukraine “On the Fundamentals of Social Protection of Persons with Disabilities in Ukraine”, the state guarantees persons with disabilities equal opportunities with all other citizens. For the employer, this means only one thing — there is a mandatory standard of jobs for the employment of people with disabilities in the amount of:
- 4% of the average number of full-time employees of the accounting staff for the year. On the example of our company “X” is 58 x 4% = 2.3, ie the staff must be 2 disabled;
- if 8 to 25 people work — in the amount of one job.
Finding disabled people for employment is not a problem, it is enough to contact the Fund for Social Protection of Disabled People https://www.ispf.gov.ua/kontakti/kontaktna-informaciya.
If the average number of disabled people working is less than the norm, it is necessary to pay annual penalties to the Social Protection Fund for the disabled.
Other options for cooperation with specialists
Every employer wants to minimize its costs in terms of taxes. Currently, in Ukraine, 13% of employees received a salary “in an envelope” during the last year. This is evidenced by the results of a sociological study of the group Rating http://ratinggroup.ua/.
The Main Department of the Pension Fund in Ukraine https://www.pfu.gov.ua/ reports that there are companies (especially small businesses) that pay their employees two salaries: official and unofficial (“in an envelope”), and there are those who pay only unofficially. In most cases, the decision to pay the salary in an “envelope” is made by the employer. However, when hiring new employees, they are offered to determine which salary to pay — lower official or higher “in an envelope”. In addition, in the first case, the employer offers to pay taxes on wages (income tax, single social contribution, contributions to the payroll). And in order not to pay the extra money, employees choose the latter without thinking about the consequences.
This is beneficial to the employer, and the employee does not seem to be offended, as he is given the opportunity to save on taxes withheld from wages.
Unfortunately, this practice occurs. Unscrupulous employers, as well as employees, ignore each other’s social guarantees and rights.
It should be noted that paragraph 2 of Part 2 of Art. 265 of the Labor Code https://zakon.rada.gov.ua/laws/show/322-08#n1422 clearly defines the grounds for prosecution in the case of:
- actual admission of the employee to work without registration of the employment agreement (contract);
- registration of an employee for part-time work in the case of the actual performance of full-time work established at the enterprise;
- payment of wages (remuneration) without accrual and payment of a single contribution to the obligatory state social insurance and taxes
- in 10 times the minimum wage for each employee in respect of whom the violation was committed, or UAH 60,000 (as of January 1, 2021), and for legal entities and individuals — entrepreneurs.
Instead, instead of minimizing, you can always choose the path of optimizing the payroll for work performed. For example, during the period of quarantine restrictions, a large number of businesses moved to remote work, in the process of which the dynamics of employees’ working hours were monitored. Experience has shown that for some types of work, the presence of a permanent employee is not required. Instead, in search of additional earnings, employees opened their own businesses in the form of a sole proprietorship (individual entrepreneur), in order to be able to accept payment from legal entities to their own current account, which does not require taxation, as wages. Thus, you can solve several issues at once:
- enter into an agreement between the LLC (limited liability company and sole proprietorship for a certain list of services and pay according to the act of acceptance of the transfer of work performed;
- pay for the clean services of a specialist. At the same time, it is not necessary to register it in the staff of permanent employees. The savings in this case on taxes will be about 34%;
- to reduce the burden on the accountant of the LLC, who will no longer have to keep records of wages, because each sole proprietor keeps records of their income and taxes independently.
Of course, in such operations, you need to be careful and cautious because this only applies to work that is performed without a permanent basis and has a variable nature. For example, if you don’t need a lawyer on a permanent basis in the state, but you need legal support for business processes from time to time, you don’t have to register with the state. It is enough to simply conclude a contract for certain works and pay for these works at the rate.
Alternatively, you can turn to outsourcing companies with the problem of finding staff. In this case, the employment contract is concluded between the employee and the company that is the contractor. The employer is a company that provides outsourcing services. You, in turn, as a customer company, pay under an outsourcing agreement to the contractor company for the actual result achieved. Outsourcing is more similar in nature to a service contract, which regulates in detail how such services are provided and the persons involved in the process. When using outsourcing, there is usually no resemblance to an employment relationship, as employees remain employees of the contracting company in all aspects of providing services to the customer company.
We are not talking about savings in this case, but if you want to minimize the legal and tax risks associated with hiring an employee, reduce the cost of personnel, and accounting support for labor relations in the company, it is advisable to consider the use of recruitment schemes. through outsourcing with the involvement of specialists to help avoid pitfalls and comply with Ukrainian law.
Voluntary insurance of employees
As part of the “social package”, employers can provide the employee with the opportunity to insure themselves. Insurance in Ukraine is voluntary. It is mandatory only for medical and pharmaceutical groups of employees or athletes.
Types of voluntary insurance are specified in Article 6 of the Law of Ukraine “On Insurance” №85 / 96-ВР https://zakon.rada.gov.ua/laws/show/85/96-%D0%B2%D1%80#n97. The employer may not provide such kind of additional benefit as voluntary insurance without the prior consent of the employee, because taxes on this additional benefit will be deducted from the employee’s salary. You can get permission in several ways:
- the employer’s obligation to ensure employees under voluntary types of insurance may be provided for in the employment contract;
- provided for in the collective agreement concluded at the enterprise;
- the manager issues an order on insurance, under which each employee will put his signature;
- Each employee will write a statement of consent for insurance in the name of the manager.
In total, there are more than 22 types of voluntary insurance. The most common of these are life insurance, accident insurance, health insurance (continuous health insurance), health insurance in case of illness.
In order to objectively assess the need and budget of such insurance, it should be borne in mind that the number of insurance payments that the company paid to the insurance company for the benefit of employees must be included in the total monthly taxable income of employees. This is provided by paragraphs. 164.2.16 of the Tax Code of Ukraine https://zakon.rada.gov.ua/laws/show/2755-17#n3627.
For employees, such funds are non-monetary income. After all, the funds were not handed over to employees personally but transferred to a third party (insurance company) in their favor. And in this case, personal income tax (personal income tax) must be deducted from the amount of taxable income at his expense. The procedure for complying with this rule is given in paragraph 164.5 of the Tax Code of Ukraine. The amount of income issued in kind must be multiplied by a factor. For a personal income tax rate of 18%, it is equal to 1.21951.
That is if the company transferred to the insurer the insurance payment for one employee for the first month of UAH 1,000.00 to calculate the personal income tax — it is necessary to increase it by a factor of UAH 1,219.51 (UAH 1,000 × 1.21951). The tax rate will be constant — 18%. Accordingly, the amount of tax will be equal to UAH 219.51. You must transfer this amount to the budget within three banking days after the day when the funds were transferred to the insurance company.
The military levy is also unchanged at 1.5%. But it must be calculated on the amount of payment. So it will be 15 hryvnias.
In total, when paying the insurance payment in the amount of UAH 1,000, the employer will pay UAH 1,234.51. Which is 23.5% higher than the amount of insurance payment. The Pension Fund of Ukraine clarifies that the costs of voluntary insurance should be divided into two categories:
- Those on which SDRs are accrued.
- And those for which SDRs are not accrued. We see the list of additional benefits that are not the basis for accrual of SDRs in Resolution №1170 of 22.12.2010. https://zakon.rada.gov.ua/laws/show/1170-2010-%D0%BF#Text (this is also confirmed by the letter of the PFC dated 29.12.2012 №31740 / 03–20).
Therefore, voluntary health insurance is not the basis for SDRs, but the employer must accrue SDRs for the cost of additional benefits in the form of life insurance and accident insurance (also confirmed by the PFC letter dated 14.05.2012. №10966 / 03–20 https://zakon.rada.gov.ua/rada/show/v1096572-12#Text. This means that from the above types of insurance you need to pay another 22% of the fee.
Labor protection at the enterprise
Ensuring safe and secure working conditions for its employees is a priority for any employer.
In order to avoid unnecessary questions from inspectors, in the person of the labor protection inspectorate, and to secure employees at their workplace, the employer should take care of a number of things.
According to Art. 15 of the Law “On labor protection” https://zakon.rada.gov.ua/laws/show/2694-12#n100 labor protection service must be established at the enterprise with 50 employees or more in accordance with the Standard regulations on the labor protection service https://zakon.rada.gov.ua/laws/show/ru/z1526-04#Text.
The responsibilities of the employer include:
- development and approval at the enterprise of regulations, instructions on labor protection
- conducting briefings on health and safety.
- providing training and periodic testing of knowledge on occupational safety
- conducting medical examinations. Here we consider in more detail:
There is a list of mandatory medical examinations performed by the employer at his own expense:
• medical examination when hiring with harmful or dangerous working conditions, periodic medical examinations of employees engaged in the above work. The list of such works was approved by the Ministry of Health of Ukraine https://zakon.rada.gov.ua/laws/show/z0051-94#Text;
• annual compulsory medical examination of persons under 21 years of age.
The list of professions, productions and organizations, the employees of which are subject to obligatory Professional Medical Examinations and the procedure for their implementation were approved by the Resolution of the Cabinet of Ministers of Ukraine dated 23.05.2001 № 559 https://zakon.rada.gov.ua/laws/show/559-2001-%D0%BF#Text.
The results of medical examinations are entered in the medical records of employees, which must be kept by the employer.
- providing employees with personal protective equipment. Personal protective equipment usually includes: special clothing, special footwear, and other means necessary to perform work with harmful and dangerous working conditions or for work related to pollution or adverse temperature conditions;
- certification of jobs.
A properly constructed occupational safety management system, as practice shows, gives a noticeable economic effect: increased productivity, reduced costs associated with injuries and occupational diseases, reduced staff turnover, increased professional activity.
* Staff list — an organizational and administrative document that reflects the structure of the company, the number of departments, employees, as well as the size of their salaries. In addition, the staff list may also include accounting for all possible additional payments to employees — bonuses, compensation, etc., depending on the position.
