The final withholding tax (versement libératoire) for sole traders: how to choose?

When setting up your sole trader business (auto-entreprise), you must choose between standard income tax and the final withholding tax (versement libératoire). Let’s look at what “versement libératoire” means and whether it’s in your interest to choose it for your specific situation.

Standard income tax for sole traders

As a sole trader (auto-entrepreneur), you are subject to income tax (IR). Despite the introduction of withholding at source, you are still required to file your annual income tax return, using form 2042-C Pro.

A flat-rate allowance is applied to your revenue, at a rate that depends on your activity:

• 34% for service activities or professional activities falling under non-commercial profits (BNC);
• 50% for service activities falling under industrial and commercial profits (BIC);
• 71% for sales activities or accommodation services.

In all cases, a minimum allowance of €305 is granted.

Once you have deducted your allowance, you obtain your taxable profit, which you must then add to the other taxable income of your household. Your tax is then calculated based on the progressive income tax brackets.

The final withholding tax for sole traders

There is an alternative to standard taxation called the final withholding tax, or versement libératoire. It follows the principle of withholding at source, since it is based on your actual revenue at the time you declare it, monthly or quarterly. This payment comes on top of the social security contributions you already pay.

Its rate is fixed and depends on the nature of your activity:

• 2.2% for service activities or professional activities falling under non-commercial profits (BNC);
• 1.7% for service activities falling under industrial and commercial profits (BIC);
• 1% for sales activities or accommodation services (excluding the rental of furnished residential premises, for which the rate is 1.7%).

Be careful, this payment is final and non-refundable. If, at the end of the year, you realize that you would not have been taxable under standard taxation, you will not get this money back — hence the importance of doing your calculations carefully.

Furthermore, the final withholding tax on income does not exempt you from filing your annual income tax return. Your income will not be taxed again, but it will count toward determining your reference tax income (revenu fiscal de référence), as well as the average tax rate applied to the other income of your household.

Thresholds for the final withholding tax on income

To be eligible for the final withholding tax, your household’s reference tax income (RFR) for year N-2 must not exceed certain thresholds. These are calculated on revenue excluding tax, even if you are liable for VAT:

• €27,519 for a single person;
• €55,038 for a couple, i.e. 2 shares (parts);
• €82,557 for a couple with two children, i.e. 3 shares (parts).

The amount is then increased by 25% per additional quarter-share and by 50% per half-share.

The second condition relates to the previous year’s revenue, or revenue calculated over a twelve-month period. It must be less than or equal to:

• €70,000 for other service providers falling under industrial and commercial profits (BIC) and professionals falling under non-commercial profits (BNC);
• €170,000 for businesses whose main trade is the sale of goods, items, or food supplies for takeaway or on-site consumption, or the provision of accommodation (hotels, guest houses, rural gîtes, furnished tourist accommodation, etc.);
• if you carry out a mixed activity: your total annual revenue must not exceed €170,000, and the portion related to service activities must not exceed €70,000.

For sole traders liable for VAT

Beyond a certain threshold, sole traders become liable for VAT, which does not in any way prevent them from being eligible for the final withholding tax. You remain part of the sole trader (auto-entreprise) scheme and, as such, benefit from the same regulations.

However, don’t forget that your income declarations must state your revenue excluding tax.

Is it possible to switch between standard taxation and the final withholding tax?

The choice between standard taxation and the final withholding tax for sole traders is made when you set up your business. If you do not specify anything on your form, you will be subject to standard taxation by default. Your choice is then automatically renewed year after year.

You still have three months after setting up your sole trader business to change your choice.

After this period, if you want to opt for the final withholding tax, you must contact the Centre de Formalité des Entreprises (CFE), or the Social Security fund for self-employed workers (SSI) you depend on. Your request must be made by September 30 at the latest for the change to take effect on January 1 of the following year.

The same applies if you had chosen the final withholding tax and wish to switch to standard taxation.

Withholding at source and the final withholding tax

Automatic withholding at source (PAS), which came into effect on January 1, 2019, applies to self-employed workers, including sole traders.

For self-employed workers, the tax authorities calculate advance payments on the current year’s income tax, which must be paid monthly or quarterly. If you have opted for the final withholding tax on income, you are not subject to PAS.

If you decide to switch status between standard taxation and the final withholding tax, you must go to your personal account on the tax authority’s website to modify or delete the advance payment that will be deducted for your household.

Go to the “Manage my withholding at source” tab, then “Manage your advance payments,” then use the “delete” button next to the advance payment related to your self-employed activity for which you have opted for the final withholding tax.

How to choose between standard taxation and the final withholding tax

It is up to you to calculate what each of these options costs you, since only your personal figures determine the most advantageous situation, depending on your activity.

Get your calculator out and lay out all your figures. Don’t forget to include all the income of your tax household when doing your calculations. Calculate your standard tax liability taking into account the allowances related to your activity. If you don’t reach the taxable threshold, or barely exceed it and pay little tax, don’t opt for the final withholding tax, since it taxes you from the very first euro. It’s up to you to calculate the threshold beyond which your standard taxation exceeds the final withholding tax. That will be the time to switch schemes.

If your revenue is growing fast and switching to the final withholding tax becomes worthwhile, don’t wait to do your calculations, because after September 30, it will be too late to change.

If the final withholding tax is more advantageous, thanks to its fixed rate, once you’ve exceeded a certain threshold, it also lets you settle your situation throughout the year. You can calculate the amount and plan the management of your finances ahead of time. The advantage of the final withholding tax is that it smooths your tax burden over the year.

Note for young people still part of their parents’ tax household: by opting for the final withholding tax, you automatically leave your parents’ tax household and must then file your own separate income tax return.