Business owner's salary and social securities - how to pay yourself?

Business owner's salary and social securities - how to pay yourself?

As a business owner most probably, you would want to receive a personal income from your business operations. In Bulgaria you have few options to do that. Let's see what your legal obligations in the different scenarios are.

I. You are the owner and manager of your company (you do manage the business, but you don't actively participate in the daily business operations) 

In this scenario you will need to have a management contract and pay yourself a salary. The minimum gross salary you have to pay yourself varies between 933 BGN and 1500 BGN depending on the main activity of your company. Social securities you will be paying on this salary are identical to the social security paid on labor contract - for 933 BGN gross salary your full expense will amount to 1110 BGN. This cost will be tax deductible in your company and will save* you 111 BGN corporate tax. *provided you paid your salary by the end of the year, if you delay paying yourself regardless of the reason the tax deduction will also be delayed.

II. You are the owner and the manager of your company (you manage the business and actively participate in the daily business operations)

In this case you have few options but in general you need to insure yourself for both types of work - managerial and operational. This means you will need to have a management contract and to be self-insured at the same time. The minimum gross management salary you have to pay yourself varies between 933 BGN and 1500 BGN depending on the main activity of your company and the minimum amount for self-insurance is 933 BGN gross. When it comes to actually paying yourself in this scenario you have a few possible combinations

1. Get your salary from the management contract - similar to scenario I. the social securities you will be paying on this salary are identical to the social security paid on labor contract - for 933 BGN gross salary your full expense will amount to 1110 BGN. But in this case, you will also be obligated to be self-insured until your insurance income reaches the maximum of 3750 BGN. For example, management contract for 933 BGN + self-insurance for 933 BGN will be the minimum possibility which will cost you 1100 BGN for the management contract + 260 BGN (or 290 BGN) for self-insurance social securities*. Total cost is 1360-1390 BGN but only 1100 BGN will be tax deductible in your company. *It is not mandatory to actually pay yourself a salary for the operational work, but it is mandatory to pay the social security securities on it.
2. Get paid for your operational work  - in this case you can have a management contract which pays you 0 BGN and additionally pay yourself for the operational work you do via self-insurance. This way you won't pay social securities for you management contract and only for your self-insurance. In this scenario you can choose to pay yourself less then the minimum salary of 933 BGN gross but of course you will still need to pay social securities on 933 BGN. For example let's say you choose to pay yourself 933 BGN gross, on top of that you will pay 260 BGN (or 290 BGN) social securities + around 67 BGN personal tax so your total cost will be around 1223 BGN and 933 BGN will be tax deductible in your company and will save* you 93 BGN corporate tax. *provided you pay your salary by the end of the year, if you delay paying yourself regardless of the reason the tax deduction will also be delayed.

III. You are the owner of your company but not the manager (you don't manage the business, but you actively participate in the daily business operations)

In this case you can pay yourself as a self-insured owner. You are obligated to be self-insured for at least 933 BGN (social securities amount to 260-290 BGN) but you are not obligated to pay yourself a salary. If you choose not to pay yourself your social securities will be your personal cost and not your company's. If you decide to pay yourself, your salary will be tax deductible in your company, but your social securities won't. For example let's say you choose to pay yourself 933 BGN gross, on top of that you will pay 260(or 290 BGN) social securities + around 67 BGN tax so your total cost will be around 1223 BGN and 933 BGN will be tax deductible in your company and will save* you 93 BGN corporate tax.*provided you pay your salary by the end of the year, if you delay paying yourself regardless of the reason the tax deduction will also be delayed.

IV. You are a passive owner of your business (you don't manage the business and you don't participate in the daily business operations)

If that's the case, you don't need to pay social securities and you can receive dividends from your company's profit. Profit is taxed with 10% corporate tax and if afterwards distributed as dividend it is taxed with additional 5% tax. As a business owner you are allowed to receive dividends even if you fall into one of the previous scenarios provided your company is profitable. 

V. What if I have an active labor contract with my employer while I own a business?

No problem! All the previous scenarios are applicable to you, and you just need to make sure you don't pay social securities over the maximum insurance income of 3750 BGN. * When you have various personal incomes there is an order in which social security is paid: First your labor contract will be charged with social securities. Then if your gross salary is under 3750 BGN your management contract will be charged. Then if you're still under 3750 BGN you will pay social securities for your self-insurance. *10% personal tax is paid on all amounts and is not limited to 3750 BGN.

This article outlines the main scenarios you can choose from. Certainly, there are more details to the topic and it is important to talk to an accountant before you commit to any of them. A good accounting professional will be able to help you choose the best one that is legally correct and that will optimize your costs.