Do sole proprietors have to pay pension fund contributions? Which social deductions apply to the 13th month? Monthly salary? Are daily sickness benefits subject to withholding tax? Determining and paying social contributions is an important part of payroll accounting. In this blog post, we answer frequently asked questions about social contributions and deductions in payroll accounting.

More than 50,000 people founded a company in Switzerland in 2021, with the number of start-ups reaching a record high. This means: Thousands of Swiss people are running their own businesses for the first time this year, bearing entrepreneurial risks and being responsible for bookkeeping. According to the SME portal of the Swiss Confederation clean accounting is the “basic prerequisite for any successful business” and a lack of control over finances is one of the main reasons why companies fail in this country.

Reading Tip: Sole proprietorship, GmbH, or AG – which legal form suits you? In this blog post, you will find an overview of the most common legal forms in Switzerland and their advantages and disadvantages for you and your company.

Why Excel is not the right tool for bookkeeping

Under no circumstances should you neglect bookkeeping, regardless of the legal form and size of your company. This also applies if you only have to prepare an income statement at the end of the year. A sole proprietorship with less than CHF 500,000 turnover per business year must keep at least one set of accounts covering income, expenditure, and assets. With an annual turnover of more than CHF 500,000, accounting becomes more complex. For this purpose, the provisions described in the Swiss Code of Obligations Article 957 et seq. shall apply.

Many sole traders keep their financial figures in the spreadsheet programme Excel. However, as soon as a company grows and becomes more professional, Excel reaches its limits. Thus, manual entries are prone to errors. In addition, Excel is not compatible with many other tools. A dashboard with the most important key figures for analysis is also missing and there are no automatic notifications if you are late with payments. Fully automated accounting systems, on the other hand, cover all accounting needs of sole proprietorships and SMEs. At first glance, smart accounting solutions cost more than Excel. However, if you consider the time factor and the thus saved wage hours, fully automated accounting software is often worthwhile even for small businesses.

What entrepreneurs should know about payroll accounting

At the latest when you hire employees as a company founder, you should deal more intensively with payroll accounting. But it is also worth knowing about social contributions and deductions for self-employed people without employees.

What is payroll accounting? According to the Swiss Business platform Weka, payroll accounting is the part of financial accounting that deals with the accounting of wages and personnel expenses. Payroll accounting includes payroll accounting, managing the personnel master data, keeping the individual payroll accounts of all employees, and determining and paying social contributions.

These deductions must be considered in payroll accounting

Here you will find a list of which social deductions in Switzerland are important for your payroll accounting.

  • Old age and survivors’ insurance (AHV): Not only employed persons are insured under the OASI, but it also covers the entire population. By law, anyone who lives or works in Switzerland is compulsorily insured. All employed persons must pay OASI contributions from 1 January after reaching the age of 17.
  • Disability insurance (IV): AHV-insured persons are also insured under the IV and must pay IV contributions accordingly.
  • Unemployment insurance (ALV): All employees who are required to contribute to the OASI and their employers must pay contributions to the ALV.
  • Compulsory accident insurance (UV): Every person employed in Switzerland is compulsorily insured against occupational accidents and diseases. If someone is employed for at least eight hours per week by the same employer, they are also insured against non-occupational accidents (NBU).
  • Income replacement regulations for persons liable for military service and civil defence (EO): AHV and IV insured persons are also insured with the EO at the same time.
  • BVG (pension fund and occupational benefit scheme): According to the BVG, the obligatory Federal S<ocial Insurance Office for all employees who are already insured under the first pillar and earn at least CHF 21,510 per year (entry threshold).
  • Withholding tax for foreign employees: In Switzerland, according to the Federal Tax Administration (FTA), those gainfully employed persons who are not resident in Switzerland for tax purposes are liable to withholding tax.

How to calculate social deductions in payroll accounting

AHV, IV and EO distinguish between employed and self-employed persons. A person who is employed by an employer and receives a salary is considered to be gainfully employed. In most cases, this also includes freelancers. If you employ one or more employees as an entrepreneur, you have to pay social security contributions. For fees of up to CHF 2,300 per year, you only have to pay the contributions if requested to do so by the person liable to pay the contributions.

For payroll accounting, first calculate the complete gross wage per employee. This can be either a fixed wage, a variable wage such as working on an hourly basis or according to performance – or a hybrid between a fixed wage and a variable wage. Holiday pay is also part of the gross wage. Based on the total gross salary, you can determine the deductions.

The amount of contributions for employees for AHV, IV and EO is currently 10.6 per cent of the salary. The contribution rate for AHV is 8.7 per cent, that for IV 1.4 per cent and EO 0.5 per cent. A contribution rate of 2.2 per cent applies to unemployment insurance.

Deductions for AHV, ALV, NBU, BVG or withholding tax must be made for all wage types (monthly wage, hourly wage, holiday pay and 13th salary). In contrast, the daily sickness or accident allowance is only subject to withholding tax. IV and EO daily allowances as well as maternity allowances are exempt from NBU contributions.

What social security contributions do sole traders have to pay?

Persons who are self-employed under social insurance law are those who “work under their name and for their account, are in an independent position and bear their own economic risk”, writes the OASI-IV in a leaflet dated January 2022.

Founders of sole proprietorships are usually considered self-employed and are therefore largely responsible for their insurance. They are not insured against unemployment and joining a pension fund is voluntary. The OASI contribution rate for self-employed persons is generally 8.1 per cent of the gross salary, the IV contribution rate is 1.4 per cent and the EO contribution rate is 0.5 per cent. That is a total of 10 per cent of the salary. Note that a lower AHV, IV and EO contribution rate applies to annual incomes of less than CHF 57,400.

These social security contributions are relevant for your GmbH or AG

In the case of a GmbH, managing entrepreneurs are also considered to be employed and thus covered by social insurance. Employees of an AG are also employees and therefore subject to compulsory social insurance. As the owner of a GmbH or AG, you must therefore follow the rules described above for determining social contributions for yourself and your employees.

Prepare pay slips, keep payroll accounts, and determine social contributions: Would you like to know how you can reduce the effort for your payroll accounting? Book a free demo of the Swiss accounting solution Accounto here.