Converting a B2B contract into an employment contract – a hidden tax risk worth remembering
1. Why is the tax office suspicious of this?
The Polish tax administration and the Social Insurance Institution (ZUS) are increasingly scrutinizing B2B relationships. If a sole proprietor provides services almost exclusively to a single client for a long period of time and then transitions to full-time employment, it may appear to be a sham B2B relationship. The office may consider that the previous cooperation met the actual characteristics of an employment relationship and the contract was merely a “shield” to reduce taxes and contributions. Effect: the possibility of demanding overdue PIT, ZUS contributions and interest from both the entrepreneur and the client.
2. Retroactive tax audit and assessment
A change in the form of cooperation can be a red flag. The tax authorities have the right to conduct a review going back up to five years and verify:
- whether the contractor actually bore the economic risk,
- whether he had many clients,
- whether he himself decided about the place and time of work.
If the answers are unfavorable, the income may be reclassified from business activity to employment relationship. This means that additional payments will be required: advance payments for personal income tax (PIT) according to the scale, full social security contributions, and sometimes also penalties for arrears.
3. A trap for both employer and employee
The risk isn’t limited to entrepreneurs. Companies that use B2B services may be subject to:
- social and health insurance contributions,
- default interest,
- possibly sanctions for incorrect settlements.
The employee – already in a new role – may also be responsible for his/her previous settlements, especially if he/she deducted costs of obtaining income or used preferential forms of taxation (e.g. flat tax, lump sum).
4. How to minimize the risk
- Document the market nature of the cooperation – agreements with other clients, independence in organizing work, investments in the company.
- Prepare a transfer of responsibilities protocol – showing that not only the form but also the nature of cooperation is changing.
- Consult a tax advisor or lawyer to assess the risk of a retroactive audit.
- Reach an agreement with your employer regarding liability for earlier periods.
5. Summary
Converting a contract to an employment contract isn’t just a formality. It’s a potential signal to the tax authorities that previous settlements may have been understated. Before signing an employment contract, analyze your employment history and secure documents confirming that you were truly self-employed. Moving to a full-time job can be beneficial – but only if it doesn’t leave a “tax tail” behind.
