In this article, we will take a general look at what taxes and social security contributions should be deducted when remuneration is paid under an employment contract, as well as under a management and control contract (abbreviated to M&C).
These two types of legal relationships have their similarities and differences, but in this case the tax and social security burden is exactly the same. Therefore, when discussing the calculation of social security contributions and tax when paying wages under an employment contract, the information is equally applicable to the DUK.
This is important information both for any employer planning to take on staff and for any employee.
At present, five types of social security contributions and one type of income tax are payable for every person employed under an employment contract in Bulgaria. These are:
DOO
This is the fund that raises money to pay state pensions. It is called the State Social Security Fund and involves the highest social security contribution.
For persons born after 31 December 1959 and working in the third category of labour (the most common case), it amounts to 14.8 per cent, whilst for insured persons born before 1 January 1960, it is 19.8 per cent.
It is important to note that all social security contributions are split between the employer and the employee on a 60:40 basis. What this means is that the employer bears 60 per cent of the cost, whilst the employee bears the remaining 40 per cent.
DZPO
Supplementary compulsory pension insurance. This is a contribution towards the so-called ‘second supplementary pension’ and is paid on behalf of insured persons born after 31 December 1959.
The contribution under the State Pension Insurance Scheme amounts to 5 per cent and is split between the employer and the employee, typically in a ratio of 60:40 (2.8 per cent:2.2 per cent).The funds contributed by each insured person to this scheme are managed by licensed pension insurance companies. Unlike the sums in the State Social Insurance Fund (DOO), the accumulated contributions in the Supplementary Pension Insurance Fund (DZPO) are invested, can be inherited, and the insured person has personal rights over them.
National Health Insurance Fund
Health insurance – this contribution amounts to 8 per cent of the insurable earnings.
4.8 per cent is payable by the employer and 3.2 per cent by the employee. This contribution entitles the insured person, should the need arise, to receive financial assistance when using certain medical services. It is funded by the National Health Insurance Fund and may cover the costs of treatment, either in part or in full, depending on the specific case.
Unemployment insurance
This contribution is paid so that we are entitled to unemployment benefit should we find ourselves temporarily out of work. Of course, we must also meet other conditions. The Unemployment Fund amounts to 1 per cent of the employee’s insurable earnings, with 0.60 per cent paid by the employer and 0.40 per cent by the employee.
For General Health and Maternity Insurance (GHMI) – The rate is 3.5 per cent.
The split is again 60:40 between employer and employee, or 2.1 per cent:1.4 per cent.This is insurance for maternity and temporary incapacity for work. A key feature of this insurance is that self-employed persons are not obliged to pay it. When starting a business, they have the right to choose whether or not they wish to pay it. Consequently, if they opt out, they are not entitled to claim benefits for temporary incapacity for work or maternity.
The OZM fund is compulsory for all employees working under an employment contract, as well as those under a management and supervision contract.
In addition to all the social security funds we have already discussed, employers also pay contributions to the Fund for Work-Related Accidents and Occupational Diseases. This is a differentiated contribution and varies from 0.4 per cent to 1.1 per cent of the insured earnings of persons employed under an employment contract. The rate is determined according to the company’s economic activity code. The Occupational Accidents and Occupational Diseases Fund is borne entirely by the employer.
It is important to note that Bulgarian legislation has set a minimum and a maximum social security income. At present, these stand at 780 BGN and 3,400 BGN respectively.
What happens when a person’s gross salary exceeds the maximum social security income threshold? Let’s take a monthly salary of 4,000 BGN as an example – social security contributions are calculated up to the maximum specified amount, i.e. 3,400 BGN.
Below, we will look at an example of how to calculate the social security contributions and taxes due, in order to illustrate the principle clearly.
Let us now turn our attention to income tax.
When calculating remuneration under employment contracts, income tax must be calculated and deducted in addition to social security contributions. In Bulgaria, this tax has a flat rate of 10 per cent. The amount due is calculated on the tax base and is payable by the employee. We will briefly explain how the tax base is determined and how this tax is calculated: the social security contributions payable by the employee (the 40 per cent payable by the employee) are deducted from the gross remuneration.
This is the tax base and forms the basis on which the 10 per cent income tax is calculated. Unfortunately for many people, there is no minimum or maximum taxable income when determining the income tax due. Both an income of 1,000 BGN and one of 10,000 BGN would be taxed at 10 per cent.
Of course, in specific cases, such as when taking leave due to temporary incapacity for work, persons with valid TELK decisions and a disability rating of over 50 per cent, and in the case of certain benefits calculated on different bases under the Labour Code, the tax base and the total income tax due would be calculated differently.
As promised, we will use two examples to illustrate what social security contributions and taxes should be calculated for two different levels of remuneration.
You can also use our calculators for reference. Developed by Anagami’s experts, they are extremely useful and convenient.
For an employee born after 31 December 1959, earning a gross monthly salary of 1,500 BGN and working under Category 3 labour conditions, the social security contributions payable would be:
Social security contributions payable by the employer amount to 18.92 per cent, or a total of 283.80 BGN (with a social security contribution rate of 0.4 per cent).
At the employee’s expense, the total social security contributions payable to the three funds – the State Social Security Fund (DOO), the State Pension Fund (DZPO) and the National Health Insurance Fund (NZOK) – amount to 13.78 per cent, which is 206.70 BGN.
In this case, the tax base for calculating the income tax due will be:
1,500 BGN – 206.70 BGN = 1,293.30 BGN
Income tax will be equal to 1,293.30 BGN × 10% = 129.33 BGN.
The employee’s total deductions amount to 129.33 BGN + 206.70 BGN, or a total of 336.03 BGN.
Net pay: 1,500 – 336.03 = 1,163.97 BGN.
The total recognised cost to the employer is the gross remuneration plus the employer’s share of social security contributions, namely 1,500 + 283.80 = 1,783.80 BGN.
Let’s look at an example where the remuneration exceeds the maximum social security threshold. For example, with a gross salary of 4,500 BGN.
The employer’s social security contributions will amount to: 3,400 × 18.92% = 643.28 BGN.
Social security contributions payable by the employee: 3,400 × 13.78% = 468.52 BGN.
Income tax will be: 4,500 – 468.52 = 4,031.48 BGN, which is the tax base. The rate is 10 per cent, so the income tax due will be 403.15 BGN.
Total deductions from the employee’s pay: 871.67 BGN.
Net remuneration: 3,628.33 BGN.
The total recognised expenses for the company amount to 5,143.28 BGN.
The calculations have been made on the assumption that the person in question is working under Category 3 labour conditions.
For the management of any business, it is essential that the management is aware of the costs involved in determining staff remuneration.
When a perfect business plan is backed up by a high-calibre team, a great deal of hard work, motivation, projected revenue and clearly planned expenditure, this is a sure step towards success.
