Taxing Wages 2020

2. How Tax Systems Influence Choice of Employment Form

Introduction

In a number of OECD countries, growing shares of workers earn income outside of traditional employee-employer relationships. While these trends are driven by many factors, there is concern that rising shares of non-standard forms of employment in some countries may be unduly driven by incentives embedded in tax systems. Differences in the tax treatment of non-standard workers (such as independent contractors) relative to standard employees may create tax arbitrage opportunities, both for firms in their selection of labour contracts offered to workers (e.g., a full-time employment contract versus a contract for services) and for individuals in their choice of organisational form (e.g., employee versus self-employment).

To the extent that they exist, opportunities for tax arbitrage across employment forms diminish the effectiveness of tax systems. This can mean that firms and individuals carrying out similar activities may be subject to different levels of taxation, with important implications for the equity of tax systems and tax revenue generation. A recent OECD Tax Policy Working Paper (Milanez and Bratta, 2019) investigated the potential for such tax arbitrage opportunities by assessing the extent to which the taxation of self-employment differs from the taxation of standard employment. This Special Feature highlights and summarises the paper’s methodology and results, which are of particular interest as the paper relied upon the Taxing Wages framework, extending it to cover non-standard workers.

In particular, for a set of seven countries – Australia, Hungary, Italy, the Netherlands, Sweden, the United Kingdom and the United States – this Special Feature reviews the modelling of the labour income taxation, inclusive of social contributions,1 of standard employees according to 2017 tax rules as well as the labour income taxation of non-standard employment forms and, in particular, of self-employed workers. The aim is to model the tax burden on labour for standard employees and self-employed workers, in order to understand whether countries’ tax systems treat these employment forms differently.

Methodology

Taxing Wages provides details on taxes paid on wages in OECD countries for eight different household types. While the Taxing Wages framework varies according to household composition (single persons, single parents, one or two earner couples with or without children), wage earners are assumed to have standard employment contracts. As a result, Taxing Wages does not consider the tax treatment of non-standard workers. However, it provides a framework that can be extended to cover non-standard workers on a comparable basis with the standard employees covered in Taxing Wages. This Special Feature holds household type constant – the individual is always considered to be single and without children – but considers this single household type across a range of employment forms (e.g., standard employee, independent contractor, etc.). This allows comparisons between the single, full time worker without children on a standard employment contract with a comparable worker on a different type of employment contract. The focus of this Special Feature is an analysis of self-employed workers that take unincorporated legal form.

The empirical analysis in this Special Feature models the tax treatment of workers' income for each employment form that exists in a given country, where the set of employment forms considered consists of a standard employee as well as the forms of unincorporated non-standard work. The analysis is then carried out across countries.

This section describes the forms of work analysed, the information required to model the tax treatment of non-standard work, the modelling assumptions and an overview of measures used to assess the tax burden across employment forms.

Employment Forms Considered: Unincorporated Self-employed Workers

The term “standard work” is shorthand for certain features of employment contracts that have become common across many OECD countries: full-time, open-ended and dependent employment. Conversely, “non-standard” identifies work relationships according to what they are not: not necessarily full-time, not of fixed duration and not dependent on a sole employer. According to the OECD (2015) definition, non-standard work includes self-employment (own account workers), temporary or fixed-term contracts, and part-time work. Because the focus of this Special Feature is the tax treatment of self-employed workers, it analyses the forms of unincorporated self-employed workers identified by Ministries of Finance in OECD countries. These forms of employment are summarised in Table 2.1.2

Table 2.1. Forms of Unincorporated Self-employed Workers

This table summarises the forms of unincorporated self-employed workers that exist in the countries considered.

		Unincorporated self-employed workers
		Free professionals	Craft workers, traders, farmers	Other
Australia		Contractors, sole traders
Hungary		Sole traders		Quasi-self-employed: a form to legalise people erroneously designated self-employed prior to 2006
Italy		Contractors, sole traders	Some free professionals may be considered artisans or merchants	Continuous and coordinated workers Merchants eligible for the forfait regime
The Netherlands		Contractors, sole traders
Sweden		Contractors, sole traders
United Kingdom		Sole traders		Workers
United States		Sole proprietorship; S corporation

Source: Milanez and Bratta (2019).

Information on the Tax Treatment of Unincorporated Self-employed Workers

Modelling the tax treatment of unincorporated self-employed workers required information in addition to the information available in Taxing Wages, namely, details on their taxes paid and the tax and social contribution liabilities faced by firms choosing to engage unincorporated self-employed workers. This information was gathered from Ministries of Finance in OECD countries and made available in Milanez and Bratta (2019).

The information on the tax treatment of firms with respect to different employment forms spans the following categories: employer social contributions, employer non-tax compulsory payments (NTCPs),3 payroll taxes, firm tax allowances and firm tax credits (see Table 6, Milanez and Bratta, 2019). The information reveals that employers are generally liable for social contributions and NTCPs on behalf of employees. This tends to include contributions for pension, health insurance, unemployment and accident, sickness or injury insurance. However, employer liability for social insurance does not tend to extend to self-employed workers. In Hungary, Italy, the United Kingdom and the United States, employers are not required to make contributions of any kind on behalf of the self-employed.4^, 5

The information on the tax treatment of individuals with respect to different employment forms spans the following categories: personal income taxes, employee social contributions, individual tax allowances, individual tax credits, cash transfers and any other non-standard tax reliefs or preferential tax treatment (see Table 8, Milanez and Bratta, 2019). It also includes NTCPs. While employee social contributions and NTCPs vary across employment forms for these seven countries, it is usually the case that both employees and self-employed workers are liable for some amount. In some countries, the self-employed face higher social contribution liabilities compared to standard employees.6

Modelling Assumptions

Regarding the Individual Worker Analysed

The individual considered is assumed to be unmarried and without children. The analysis makes no assumptions regarding a worker’s business activity. Where tax treatment differs based on individual characteristics, the analysis is carried out for each of the cases that may occur. For example, minimum social contributions in Hungary depend on the minimum wage, which in turn depends on a worker's skill level. Thus, for Hungary, results are generated for low- and high-skilled sole traders.

Regarding Geographic Location in the Presence of Sub-national Taxation

In countries where sub-national taxation applies, municipal and regional liabilities are modelled according to the assumptions in Taxing Wages. Among the seven countries considered, this is relevant in the following three: in Australia, an individual resides in New South Wales; in Italy, an individual resides in Rome (Lazio); and in the United States, an individual resides in Detroit, Michigan.

Regarding Wage Levels

For each country, the baseline results are generated according to the assumption that a standard employee earns the annual average gross wage consistent with Taxing Wages 2018 (OECD, 2018a). By focusing on results generated for a single wage level, it is easier to consider the decomposition of the total tax generated as a result of taxing labour income into different tax categories (e.g., personal income tax, employee social contributions).

However, examination of the results for different wage levels is also important because the employment form offering the lowest total employment cost at one end of the wage spectrum may differ from that offering the lowest total employment cost at another. Such differences are likely to, in turn, affect incentives regarding which employment form is preferable given a firm’s or an individual’s perspective. While this detail is not presented in this Special Feature, results are generated for wage levels between 10 and 250% of the average wage in Milanez and Bratta (2019), where the average wages are the 2017 average wages from Taxing Wages 2020 (OECD, 2020a).

Modelling the Tax Treatment of Different Employment Forms

Using the information on the tax treatment of different employment forms and the modelling assumptions described above, the main analytical exercise of the Special Feature is to model the tax treatment of different employment forms. In doing so, this paper adheres closely to the Taxing Wages framework.

For each country, each model begins with the assumed average wage for an employee. As for Taxing Wages, the average wage is used to calculate all applicable tax and social contribution liabilities, including personal income tax, employee social contributions, employer social contributions, payroll taxes, and all applicable tax provisions, including tax allowances and credits.7 These calculations are summarised by the total employment cost. The total employment cost is the sum of the employee’s take-home pay, the individual’s personal income tax liability, employee and employer social contributions and payroll taxes, less any cash transfers.

The total employment cost of an employee can, in turn, be considered as two separate components: the employee’s take-home pay and the tax cost of the worker, which is also known as the average tax wedge (the “tax wedge”), defined below. For the individual’s perspective, an employee's take-home pay is defined as the gross wage less their personal income tax and employee social contribution liabilities.

In modelling non-standard employment forms, two approaches can be adopted. The first is from the firm’s perspective (i.e., given a range of employment forms to choose from, which is most advantageous to a firm?) and the second is from the individual’s perspective (i.e., given a range of employment forms to choose from, which is most advantageous to an individual?). Both perspectives are important, as individuals have one set of incentives in choosing among different employment forms while firms may have another in choosing among different contract types.

The firm’s perspective is modelled by equalising the take-home pay of an individual across employment forms. If all employment forms offer the same take-home pay, from a tax perspective, an individual will be indifferent between them. This allows us to focus on which employment form is tax-preferable to a firm, thereby shedding light on the tax system-based incentives facing firms.8 While the choice of contract offered will depend on factors beyond the tax system,9 if we abstract to consider the tax system in isolation, a firm will choose the employment form that minimises its total employment cost.

Conversely, the individual’s perspective is modelled by equalising the total employment cost of a firm across employment forms. If all employment forms have the same total cost, from a tax perspective, the firm will be indifferent between contract types. This allows us to focus on which employment form is tax-preferable to an individual, thereby shedding light on the tax system-based incentives facing individuals. An individual will choose the employment form that maximises his or her take-home pay.

These two exercises may be viewed as simulations that correspond to two different cases of tax incidence. In equalising the total employment cost of a firm, the incidence is assumed to be fully on the worker; in equalising the take-home pay, it is assumed to be fully on the firm. In reality, incidence is likely to be somewhere in between and will depend on the competitive structure of the labour market. Note that only the results showing the firm’s perspective are presented in this Special Feature for the sake of brevity. See Milanez and Bratta (2019) for results on the individual’s perspective.

Measures of the Tax Burden

The results are summarised according to two measures of the tax burden: the tax wedge, as mentioned, and the average compulsory payment wedge (the “payment wedge”). These measures are described in more detail below. The results are also summarised by an indicator of the percent difference between the total employment cost of unincorporated self-employed workers and that of standard employees.

The Tax Wedge

The tax wedge is the net amount that government receives as a result of taxing labour income. It is the sum of the individual’s personal income tax liability, employee and employer social contributions and payroll taxes, less any cash transfers, over the employee’s total employment cost. This expression is especially useful because it reveals how the tax wedge can be decomposed into different tax categories. The tax wedge is one of the primary tax burden measures used in Taxing Wages.

The Payment Wedge

The payment wedge is similar to the tax wedge, the difference being that the payment wedge includes employee and employer NTCPs in the numerator and in the calculation of the total employment cost. The payment wedge is defined as the sum of the individual’s personal income tax liability, employee social contributions and NTCPs, employer social contributions and NTCPs and payroll taxes, less any cash transfers, over the employee’s total employment cost. The payment wedge also includes NTCPs to parties other than non-governments organisations, such as compulsory payments to private insurance companies or private pension funds (e.g., compulsory superannuation guarantee contributions paid into superannuation funds in Australia). The calculation of payment wedges departs from the Taxing Wages methodology, which highlights tax wedges. However, additional detail on NTCPs can be found in OECD (2018b).

Indicator of the Percent Difference in Total Employment Cost

Having computed measures of the taxation on labour for the different employment forms within a given country, it is useful to return to the initial question posed: to what extent do tax systems treat non-standard work differently from standard work? This can be understood by looking at a simple indicator calculated as the percent difference between the total employment cost of a non-standard worker compared to the total employment cost of a standard employee, where NTCPs are included. Where the total employment cost of a non-standard worker is lower than that of a standard employee, this indicator can be interpreted as the extent to which the tax system enables a firm to save on labour costs by selecting a non-standard worker as opposed to a standard employee.

Results

This section presents the results of the empirical analysis. The first sub-section shows results using a single country – the Netherlands – in order to discuss the tax policies driving the results in detail. The second sub-section shows results across the countries considered using the measures discussed above.

Case Study: The Netherlands

The empirical analysis for the Netherlands considers two employment forms: standard employees and unincorporated self-employed workers. The analysis of the labour taxation of an employee begins with an assumption that annual gross earnings totalled EUR 50 850 in the Netherlands in 2017, chosen for consistency with Taxing Wages 2020 (OECD, 2020a). For the case of an employee, this gross wage is used to calculate all applicable tax liabilities, including personal income tax, and employee and employer social contributions.10 Figure 2.1 shows these amounts for the two employment forms (where the take-home pay of an unincorporated self-employed worker has been set equal to the take-home pay of an employee in order to focus on the firm’s perspective).

The results show that different employment forms can face very different tax burdens. In the Netherlands, the difference stems from two tax system features. First, a firm that engages an unincorporated self-employed worker is not liable for social contributions on such a worker’s behalf, reducing the firm’s total employment cost. In Figure 2.1, this can be seen in the presence of the employer social contribution component (EUR 5 743) for an employee but not for an unincorporated self-employed worker.11

Figure 2.1. Decomposition of the Tax Wedge for the Netherlands

Note: In this exercise, the gross wage is equal to the average wage in 2017 for the employee category (EUR 50 850) (OECD, 2020a). The take-home pay of the unincorporated self-employed worker has been equalised to the take-home pay of the employee. This ensures indifference on behalf of the individual with respect to employment form. It is done in order to assess the incentive of a firm to shift between employment forms.

Note that the amounts of the personal income tax liability and of the employee social contribution liability of the employee depart slightly from Taxing Wages 2018 (OECD, 2018a). This is due to the update of the average wage (OECD, 2020a) and a slight difference in how the weighting of the tax credit applies to the personal income tax liability and to the employee social contribution liability. This analysis assumes that the tax credit applies to the personal income tax liability with a weight equal to (personal income tax liability / (personal income tax liability + employee social contribution liability). However, this difference does not affect the tax wedge result, as total payments to general government are equal EUR 15 448 in both analyses.

Source: Author's calculations.

Statlink

Second, unincorporated self-employed workers in the Netherlands are entitled to two deductions from their personal income tax liabilities: a lump sum of EUR 7 280 and a small business deduction that entitles them to a tax exemption of 14% of profits. These deductions have the effect of lowering the personal income tax liability of unincorporated self-employed workers and, in turn, the firm’s total employment cost relative to that of standard employees. In Figure 2.1, this can be seen in the fact that the personal income tax component is larger for an employee (EUR 7 841) compared to an unincorporated self-employed worker (EUR 1 674).12

These two differences in tax treatment between a standard employee and an unincorporated self-employed worker imply that a firm hiring a self-employed worker may do so at a lower cost, due to tax-related savings. The lower tax cost of an unincorporated self-employed worker is reflected in the tax wedge, which is 15.1% for a self-employed worker compared to 37.4% for an employee. Alternatively, the lower cost can be seen by looking at the difference in the total employment costs: a firm choosing to hire an unincorporated self-employed worker would face a total employment cost of EUR 40 905 compared to a total employment cost of EUR 56 593 for a standard employee. This represents a labour cost savings of 28%.13

In interpreting these results, however, it should be noted that self-employed individuals may volunteer to self-insure. To the extent that they do, the tax wedge differential compared to standard employees will be smaller. This decision is also a question of how much bargaining power the worker possesses, and thus will vary by labour market segment, across occupations and depending on skill levels. For example, in a country such as Germany, the category of self-employed is largely comprised of doctors, lawyers, craftsmen and other skilled professionals. As such, there is a high incidence of voluntary self-insurance. The tax wedges in this analysis may thus be somewhat understated. An alternative analysis could additionally model the average level of voluntary self-insurance, for example, if data were available.

Results across the countries considered

This sub-section presents results across the countries considered using the main metric of this Special Feature, the tax wedge. Figure 2.2 shows the tax wedge of each employment form in a given country, for each of the seven countries considered. The tax wedges for standard employees have been calculated at the point of the average wage in each country (OECD, 2018a), and the tax wedges for other employment forms have been calculated while equalising take-home pay (thereby placing focus on the incentives faced by firms).

Two key observations can be made. First, in some countries the tax wedges for different employment forms are rather clustered. This is true, in particular, for Hungary, Sweden and the United States. In each of these countries, the difference between the maximum and minimum tax wedges is below 4 percentage points. On the other hand, the tax wedges for different employment forms are strikingly dispersed in the Netherlands. The difference between the maximum and minimum tax wedges in the Netherlands is 22.3 percentage points. A moderate degree of dispersion is seen in Australia and the United Kingdom. A moderate degree of dispersion is seen in Italy for employment forms aside from merchants eligible for the forfait regime. The tax wedge differential between an employee with a permanent contract (47.7%) and a merchant under the forfeit regime (14.4%) is 33.3 percentage points.

The degree of dispersion between tax wedges across different employment forms within a given country is important because it reflects the incentive – in this case, of firms – to shift between employment forms for tax reasons. Clustered tax wedges reflect little incentive to shift between forms, while very disperse tax wedges reflect a greater incentive to shift between forms.

The second key observation is that, to the extent that a lower tax wedge for a given form of employment indicates an incentive for labour to shift into this form, tax systems appear to dis-incentivise standard employment. In Figure 2.2, this can be seen in the fact that in many countries, employees are the employment form with the highest tax wedge (e.g., Australia, Hungary, the Netherlands, Sweden and the United Kingdom). Thus, in these countries, firms may lower their tax-related labour costs by choosing an employment form other than standard employment. Of course, such disincentives must be viewed in a full context, as non-tax factors are also relevant to a firm’s choice of employment contract.

Figure 2.2. Tax Wedges for Employment Forms across Countries

Note: This figure presents the tax wedge for each employment form in a country across seven countries. The vertical axis shows the tax wedge in percent. The tax wedges for employees have been calculated at the point of the average wage in each country, and the tax wedges for other employment forms have been calculated while equalising take-home pay.

Source: Author's calculations.

Statlink

As mentioned, the tax wedge is one of the primary tax burden measures used in Taxing Wages. However, in some countries, it can be argued that the tax wedge may reflect less than the true labour costs faced by employers because it does not include NTCPs. In these countries, a more comprehensive measure is the payment wedge, which includes them.14 In the seven countries considered, NTCPs are present in Australia and in the Netherlands and, to a lesser degree, Sweden.15 Table 2.2 summarises the difference between tax and payment wedges for these three countries.

Including NTCPs in the analysis implies a significant increase in the tax burden for some employment forms. For example, employees in the Netherlands have a tax wedge of 37.4% but a payment wedge of 50.9%, an increase of 13.5%. The tax burden for unincorporated self-employed in the Netherlands also increases when considering NTCPs and the payment wedge, though by less, which also contributes to the tax treatment differential between employees and self-employed.

Table 2.2. Tax and Payment Wedge Comparisons for Australia, the Netherlands and Sweden

		Tax wedge (%)	Payment wedge (%)	Difference (%)
Australia	Employee	28.6	35.2	6.6
	Unincorporated contractor	28.6	35.2	6.6
	Sole trader	24.4	24.4	0.0
The Netherlands	Employee	37.4	50.9	13.5
	Unincorporated self-employed	15.1	22.3	7.2
Sweden	Employee	42.9	43.1	0.2
	Unincorporated self-employed	40.4	40.6	0.2

Source: Author’s calculations.

It is also important to be aware that use of one measure of the tax burden versus another may lead to different conclusions regarding which employment form represents the lowest tax-related cost to a firm. For example, using the tax wedge it appears that employees have a lower tax-related cost in the United States compared to workers organised as sole proprietors; however, using the payment wedge, employees have a higher tax-related cost compared to sole proprietors. This is because, in the United States, firms are liable for an NTCP for accident, injury and sickness insurance (workers’ compensation) at the state-level on behalf of employees but not on behalf of workers engaged under other employment forms. The difference between the tax and payment wedges is slight in this instance, but that may not always be the case.

The tax and payment wedge results indicate that firms that contract labour from self-employed workers instead of hiring standard employees generally face lower tax burdens on a per-worker basis. Another way of seeing this is by looking at the indicator, described earlier, of the percent difference in the total employment cost of self-employed workers relative to the total employment cost of an employee. Figure 2.3 shows the total employment cost savings achieved by a firm in choosing to hire a worker under a non-standard work arrangement as opposed to standard employment.

Where the values in Figure 2.3 are negative, forms of non-standard work offer a cost savings. For example, a firm hiring an unincorporated self-employed worker rather than a standard employee in the Netherlands achieves a total employment cost savings of 37%. To take another example, in Italy, a firm hiring a worker under the forfeit regime rather than a standard employee achieves a total employment cost savings of 39%.16

In countries where the tax treatment differential between standard employees and the self-employed is large (i.e., where the total employment cost savings is large), firms have strong incentives to hire non-standard workers. In such instances, tax systems may be drivers of rising shares of non-standard work. Alternatively, where tax treatment differentials are small, firms do not have strong incentives to hire non-standard workers over standard employees, and it can be expected that the share of standard employees in such countries would remain more stable.

Whereas the results discussed in this Special Feature focus on the incentives facing firms in their selection of labour contracts offered to workers (e.g., a full-time employment contract versus a contract for services), the incentives facing individuals are equally important. The individual will have her or his own incentive to choose a particular employment form. For example, for a high-income worker, it may be cheaper to self-insure than to rely on collective social insurance. See Milanez and Bratta (2019) for a full discussion of this aspect.

Figure 2.3. Total Employment Cost Savings of Non-standard Work Compared to Standard Employment (Expressed as a Percent Difference)

Note: In this figure, NTCPs are included in the calculations of total employment cost, which is relevant for Australia, the Netherlands and the United States.

Source: Author's calculations.

Statlink

Policy Considerations

Reflecting upon the evidence presented on the taxation of standard employees versus that of non-standard workers leads to several considerations for policymakers. First, there is a need to evaluate and re-evaluate tax systems to ensure that they keep pace with changes in the labour market. While the prevalence of non-standard workers is by no means a new phenomenon, the digitalisation of the economy has ushered in a variety of business models predicated on intermediation between consumers and contractors. Second, tax and benefit systems should be reformed to ensure that they do not unduly incentivise firms to hire workers as self-employed. Firms are naturally motivated to save on tax-related labour costs but this dynamic threatens public revenue and may lead to a world in which individuals in precarious economic positions lack important social protection. At the same time, tax systems should encourage legitimate self-employment.

While this Special Feature focuses on the results from the firm’s perspective, it can also be said that tax and benefit systems should also not unduly incentivise individuals to become self-employed to minimise their tax liabilities. This dynamic would also threaten public revenues. The largest scope for such tax avoidance appears to be among incorporated forms of self-employment. These forms are examined in detail in Milanez and Bratta (2019).

Finally, it is not the case that the tax treatment of different forms of work should necessarily be identical. While tax design principles suggest that tax systems should be neutral across employment forms, differences between workers can merit differential tax treatment (e.g., different benefit entitlements may warrant different tax treatments). To the extent that tax treatment differentials exist, they should be grounded in sound policy rationales.

References

Milanez, A. and B. Bratta (2019), "Taxation and the future of work: How tax systems influence choice of employment form", OECD Taxation Working Papers, No. 41, OECD Publishing, Paris, https://doi.org/10.1787/20f7164a-en.

OECD (2018a), Taxing Wages 2018, OECD Publishing, Paris, https://doi.org/10.1787/tax_wages-2019-en.

OECD (2018b), Non-tax compulsory payments (NTCPs) as an additional burden on labour income in 2018. https://oe.cd/taxing-wages-associated-materials.

OECD (2015), In It Together: Why Less Inequality Benefits All, OECD Publishing, Paris, https://doi.org/10.1787/9789264235120-en.

Notes

← 1.  The analysis models personal income taxes, employer and employee social contributions, payroll taxes, any applicable tax allowances or tax credits (firm and/or individual), and any applicable capital taxes required of the self-employed. It also assumes, for the sake of simplicity, a stylised individual: a worker who is unmarried and without children.

← 2.  Delegates to the OECD also provided information on forms of incorporated self-employment. However, these employment forms are not covered here for the sake of brevity, as the modelling of incorporated self-employed workers entails a range of additional considerations and assumptions, such as the fraction of income taken in the form of capital versus labour income. This detail and the related analysis is presented in Milanez and Bratta (2019).

← 3.  NTCPs are defined as requited and unrequited compulsory payments to privately managed funds, welfare agencies or social insurance schemes outside general governments and to public enterprises. More information can be found at the following link: http://www.oecd.org/tax/tax-policy/tax-database/non-tax-compulsory-payments.pdf.

← 4.  In Germany, only wage earners are obliged to pay social contribution. Non-standard workers may contribute voluntarily to private health insurance schemes or save for their pensions. As such payments would be made from their after tax profit, the tax wedges of non-standard workers are always lower than for wage earners (at a given level of income).

← 5.  In the United States, the Tax Cuts and Jobs Act (TCJA) went into effect 1 January 2018. The changes it brought, such as the provision that qualifying pass-through owners can deduct up to 20% of their net business income from their income taxes, would produce results for 2018 that differ from the results produced according to 2017 tax information.

← 6.  For example, in the United States, sole proprietorships, in particular, face higher contribution rates: the rate for pension, survivor and disability is double for sole proprietors (11.45%) compared to employees, which leads to a total combined rate of 14.13% for sole proprietors compared to 7.65% for employees.

← 7.  The calculations also include NTCPs where the payment wedge is considered.

← 8.  The approach of equalising the take-home pay of an individual across employment forms aims to solve some of the problems that arise in comparing wage income with self-employment income. Self-employed income is profit income that relates to several factors, including competition and the market situation. In this sense, it may not be strictly comparable to the wage income of an employee.

← 9.  Other factors include labour market features such as labour protection measures and minimum wage requirements. In addition, demographic changes such as ageing will also be impactful.

← 10.  The case study results do not include NTCPs. The results are presented using the tax wedge measure. However, NTCPs in the Netherlands are considered in the following section, which also shows the payment wedges.

← 11.  In general, in other countries, employer liability for social insurance does not tend to extend to self-employed workers. This is the case in Hungary, Italy, the United Kingdom and the United States. While the self-employed are liable for social contributions on their own behalf, these are often lower than the sum of employer and employee social contributions required for standard employees. This may imply differences in benefit entitlements, as well.

← 12.  While tax deductions for the self-employed are a feature of the Dutch tax system, this was not typical of the other countries analysed.

← 13.  This calculation changes slightly when NTCPs are taken into account, as is done with the indicator presented in Figure 3. When NTCPs enter the calculation, tax-related labour cost savings rises to 37%, as described below.

← 14.  Taxing Wages results using the payment wedge are published in a separate paper alongside the annual Taxing Wages publication. See OECD (2018b).

← 15.  Not all countries have NTCPs. Of the seven countries considered in this Special Feature, four do not have them: Hungary, Italy and the United Kingdom. In these cases, the tax and payment wedges will be equal.

← 16.  The low tax wedge associated with the forfait regime in Italy for small firms derives from the reduced tax rate and reduced SSCs (calculated by multiplying the gross wage by a standard profitability rate). Therefore, while the tax rate and SSCs are above 15%, the tax wedge appears lower since the taxable income is smaller than the gross income used for the computation of the tax wedge. Since this methodology does not account for deductible costs in the calculation of PIT and SSCs, the tax wedge for the forfait regime is probably underestimated. For further information, see Milanez and Bratta (2019).