Short answer
Tax prepayment is paying income tax in advance throughout the year — a small instalment at a time. Without tax prepayments, you would have to pay the entire year's taxes in one lump sum, which would be a very large amount.
Why are tax prepayments made?
For employees, the employer automatically withholds tax from every paycheck. As an entrepreneur, you do not have an employer, so you must handle tax payments throughout the year yourself. That is what tax prepayment is for.
Think of it this way: Tax prepayment is like a tax account where you pay a little each month. At the end of the year, the Tax Administration checks whether you paid too much or too little, and credits or charges the difference.
How is the tax prepayment rate determined?
When you start as an entrepreneur, you provide the Tax Administration with an income estimate — an estimate of how much you expect to earn this year. The Tax Administration calculates your tax prepayment percentage based on this.
If you estimate high income → higher percentage
If you estimate low income → lower percentage
Important: Your business income is your personal income. The tax rate is calculated based on ALL your income — both business income and any other income (salary, capital income). The more you earn in total, the higher your tax rate.
What does PalkkaOnline do?
PalkkaOnline can handle tax prepayments for you automatically:
Withholds tax prepayment — When a customer pays an invoice, PalkkaOnline withholds the amount according to your tax prepayment percentage in the client funds account.
Pays tax prepayment to Tax Administration — PalkkaOnline pays the withheld amount to the Tax Administration by the due date.
You do not need to remember due dates or make payments yourself.
Income estimate — why does it matter?
The income estimate directly affects how much tax prepayment you make. If the estimate is wrong:
Too high estimate → You pay too much tax prepayment. You get the excess back as a tax refund, but money is unnecessarily tied up.
Too low estimate → You pay too little. You have to pay the difference as back taxes, which may incur interest.
Tip: If your income changes significantly during the year, submit a new income estimate through PalkkaOnline. We will update it with the Tax Administration.
When are tax prepayments made?
Tax prepayments are paid in instalments throughout the year. Instalments are usually monthly or every two months. PalkkaOnline handles payments automatically once you have provided an income estimate.
Tax prepayment vs. VAT — what is the difference?
These are two different things:
Tax prepayment = Your income taxes, paid in advance. This money goes towards your own taxes.
VAT = Value added tax, which you collect from the customer and remit to the Tax Administration. This money is never yours.
Both are withheld during settlement, but they are different taxes for different purposes.