WHERE AUSTRIAN ECONOMICS MEETS REAL WORLD ACTION

Hungary is reopening its fixed monthly tax to every sole trader. Let one client reach half your revenue and you lose it, and genuine freelancers pay most.

You photograph weddings outside Budapest. Couples book you a year ahead, and between seasons a marketing agency keeps you busy with product shoots.

From next year, the government says, you can go back to paying one fixed monthly sum for your taxes, and invoice businesses as well as couples. It sounds like the simplest tax news in years.

Then the agency calls. It has won a big account and wants you on all of it.

Say yes, and the agency could end up paying half of everything you earn this year. Under the draft law, that costs you the fixed tax for all of next year.

Say no, and you keep the tax but lose the work. Nobody records the job you didn't take.

On 6 October, Hungary's Finance Ministry published a draft law to rebuild KATA, a scheme that lets sole traders replace income tax and social contributions with one fixed monthly payment. The consultation closes on 14 October. If Parliament passes the bill, applications open on 1 December and the rules apply from 1 January 2027.

Around 450,000 people used KATA in 2021, according to reporting at the time. In 2022 the previous government cut it back at seven weeks' notice: anyone who invoiced a business, Hungarian or foreign, lost it. Most moved to what is now the standard scheme for sole traders, which taxes a share of revenue rather than charging a fixed sum.

KATA today and under the draft

The last row is this issue. If one business client, together with the companies related to it, reaches half your revenue in a year, KATA ends on 31 December and you cannot rejoin for the next 12 months. Revenue from your own employer, or one you left within two years, ends it at once.

The ministry says sole traders need a simple, predictable option with little paperwork, and that business owners asked for it. Its own impact assessment projects a net gain to the budget of HUF 60 billion. On those figures, it is a tax relief that raises money.

And the 50% rule answers a real problem. When a fixed monthly payment sits far below the taxes on a salary, an employer has every reason to move staff onto invoices. The treasury loses revenue, and the worker loses the protection that comes with a contract of employment.

Take every word of that as true. What follows is unaffected.

What the rule can see

Employment is a relationship: who sets your hours, who directs the work, whose tools you use, who carries the risk. You and your client know which arrangement you have made, because you made it.

A tax office cannot see any of that. What it can see is invoices. So the draft does the one thing it can: it counts.

The law can't see whether you're employed, so it counts whose name is on your invoices.

A share of revenue says nothing about control. Above the 50% line sits the disguised employee. So does the specialist whose work suits one buyer, the new business with its first anchor client, and the contractor whose client is part of a large group. The rule treats them all alike. A claim about someone's status should rest on the facts of their own relationship, not on what is true of people who look like them on paper.

Three ways to be paid for the same work

This issue isn't about whether Hungary should tax work. Take the tax as given. What matters is that the same work is taxed three different ways, depending on how you are paid.

More than 406,000 sole traders use the standard scheme, according to the Hungarian tax authority. The state assumes half your revenue went on costs and charges income tax and social contributions on the rest, so your bill rises with every forint you earn. KATA is the alternative: one fixed monthly payment, plus 15% on anything you earn from businesses. Here is what each costs when the work costs the client HUF 15 million. For a salary, that means the employer's total bill.

Three ways to be paid HUF 15m

There are two gaps here. The big one is between a salary and self-employment: about HUF 3.6 million against the standard scheme. That is the gap that rewards an employer for moving staff onto invoices. The small one, a few hundred thousand, is between the standard scheme and KATA.

The small gap grows when the money comes from private customers rather than businesses. The 15% applies only to business revenue, so HUF 15 million from private customers costs HUF 1.2 million on KATA, against about HUF 2.6 million on the standard scheme. That is what KATA is really for.

Who pays for crossing the line

Lose KATA under the 50% rule and you move to the standard scheme. Here is what that does to two people on the draft's 2027 terms: the disguised employee the rule was written for, and the photographer.

What crossing the 50% line costs (full-time, 2027)

A rule aimed at disguised employment costs the genuine freelancer nearly five times what it costs the disguised employee.

The disguised employee loses little, because all their money comes from one business and KATA barely beats the standard scheme on business revenue. The photographer loses a lot, because half her money comes from couples, which is exactly where KATA does its work.

Notice, too, what the rule asks her to ignore. A client wanting more of your work is information: it tells you where your work is valued most, and following that signal is how a small business grows. Under the draft, whether she follows it is settled by a ratio.

Why the rule exists at all

So the 50% rule polices the small gap, between KATA and the standard scheme. The big gap, the one that actually rewards disguising employment, is left as it is.

Each step answers a problem made by the one before. Taxing the same work two ways creates a reason to disguise it. A cheaper scheme for the self-employed sharpens the reason. A ratio is added to police the cheaper scheme. And the ratio lands on the photographer.

The 50% rule exists because the same work is taxed in different ways. Everything it gets wrong follows from that.

In fairness, the 50% line is a rule, not a judgement call. A sole trader can see it coming and plan around it, which beats an official deciding case by case whether her clients are really her employers. You can price a rule. The objection is to what this one measures.

This is analysis, not tax or legal advice. The bill is a draft and its figures may change before it becomes law. Check your own position with an adviser.

The 50% rule polices a gap the state created. The implementable fix is to narrow that gap with levers Hungary already uses. It has cut the employer-side social tax from 27% to 13% since 2017. The next step is to aim the cuts at salaries alone, since the self-employed pay the same social tax and contribution on their own income. On the HUF 15 million example, each point off the employer's social tax on salaries narrows the gap by about HUF 80,000, and each point off the employee's 18.5% contribution by about HUF 130,000. Every step shrinks the reward for disguising employment.

A simple test of what a rule is for: a rule aimed at protecting workers would bite hardest on the disguised employee. This one bites hardest on the photographer with forty couples a year and one agency.

Narrow the gap and the 50% rule has less to police. Close it entirely and there is nothing to disguise, nothing to count, and no reason for the state to ask what your relationship with your client really is.

Stay free,

Jean-Pierre

The Austrian Actor

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