Sole Trader Tax in 2026: Advance Tax, Deductions and the Entrepreneur's Deduction

Tulos.ai automates the monthly bookkeeping and tax routines of a sole trader (toiminimi), but before automation can optimise anything, you need to understand what sole-trader taxation actually consists of. This article breaks down the structure so you can read your own pre-tax assessment, plan during the fiscal year instead of waiting until April, and tell useful deductions apart from irrelevant ones.

Wouldn’t it be easier if your tax position were visible in real time, month by month, instead of only on next year’s return?

Table of Contents

1. The structure of sole-trader taxation in brief
2. Pre-tax: how it is set and when to change it
3. Earned-income vs. capital-income split
4. The 5% entrepreneur’s deduction
5. The most important deductible expenses
6. VAT liability and the small-business relief
7. Splitting business income between spouses
8. Tax-return timeline
9. The most common mistakes and how to avoid them
10. Summary and action list

This article is part of the business-form decision framework. If you have not yet decided whether a sole trader is the right form for you, start there.

The structure of sole-trader taxation in brief

A sole-trader entrepreneur and the business are the same person for tax purposes. There is no separate corporate tax, no dividend, no salary to yourself. The business profit is taxed directly as the entrepreneur’s personal income, partly as earned income and partly as capital income.

Rough structure for a fiscal year:

1. Turnover (revenue, VAT excluded) minus deductible expenses equals the business profit.
2. From the profit, 5% is removed as the entrepreneur’s deduction.
3. The remainder is split into earned income and capital income based on net assets.
4. Earned income is taxed progressively; capital income is taxed at 30% (and 34% for the part above 30,000 EUR).

Pre-tax (ennakkovero) is an estimate of this calculation in advance. The final tax is only set after the tax return the following year.

Pre-tax: how it is set and when to change it

Pre-tax is the Tax Administration’s estimate of how much you should be paying in tax for the current year. For a starting entrepreneur it is based on your own estimate of turnover and expenses. After that, the Tax Administration uses the previous fiscal year as the baseline.

Instalments: pre-tax is typically collected in 12 instalments (January to December), but a small sole tradership can also be billed in 2 or 6 instalments.

When to change it: pre-tax should be adjusted as soon as the estimate is clearly off:

• Too low results in a residual tax bill plus a possible penalty interest. Fix it as soon as the estimate is exceeded by more than 25%.
• Too high means you are paying tax that you only get back as a refund the following summer. A small business should not be financing the Tax Administration.

The change is made in OmaVero in a few minutes. A good routine: review the pre-tax level every six months and again at fiscal-year end.

Earned-income vs. capital-income split

The sole-trader profit is split into two parts based on the previous fiscal year’s net assets:

• Capital-income share: by default 20% of net assets. The portion of profit up to that amount is taxed at the 30% / 34% capital-income rate.
• Remainder: earned income, taxed progressively.

The entrepreneur can, however, claim in the tax return that the capital-income share is calculated as 10% or 0% of net assets. Why a smaller percentage? If your earned income otherwise stays below the progression threshold, taxing everything as earned income is cheaper.

Practical rule of thumb:

• Earned income (incl. the sole trader’s earned-income share) under ~20,000 EUR: claim a 0% capital-income share.
• Earned income 20,000 to 50,000 EUR: model both. Most often 10% is optimal.
• Earned income over 50,000 EUR: a 20% capital-income share is cheaper.

This calculation can be automated. When net assets and profit are real-time, the optimal claim shows up directly.

The 5% entrepreneur’s deduction

The entrepreneur’s deduction is automatic. You do not need to claim it separately. The Tax Administration removes 5% from the taxable business profit before it is split into earned income and capital income.

Example: if the sole-trader profit is 40,000 EUR after expenses, the entrepreneur’s deduction is 2,000 EUR. 38,000 EUR remains taxable.

It is not double-counted and there are no separate fees. It is simply a small but automatic relief.

The most important deductible expenses

A deductible expense is in principle one that relates to the earning of business income. The main categories:

• Office supplies and equipment: computer, monitor, software licences. Purchases above 1,200 EUR are depreciated over several years.
• Vehicle and travel: if a vehicle is used for the business, work-related driving is deducted either at actual costs or at 0.33 EUR/km (2026 level). Per diems: domestic around 51 EUR, foreign by country.
• Home office: a workspace at home, formula deduction of approximately 960 EUR / year (full-time use, 2026 level) without separate proof. To deduct more than that, documentation is required.
• Marketing and entertainment: marketing 100% deductible, business entertainment 50%.
• Insurance: YEL is always deductible, as are voluntary business insurance policies (liability, cyber, accident). See the entrepreneur’s insurance package 2026 for more.
• Training and books: courses, books and conferences related to maintaining your professional skills.
• Online services and subscriptions: bookkeeping software, project tools, cloud storage, email service.

What you cannot deduct:

• Fines, penalty fees and late-payment interest.
• Personal-life expenses (clothing, food at home, personal exercise, also not when paid by the business).
• Business-entertainment costs above the 50% portion.
• Purchases made before the business started that do not relate to earning income.

VAT liability and the small-business relief

The VAT-liability threshold in 2026 is 20,000 EUR of turnover during the 12 months of the fiscal year (the threshold has risen as part of the small-business-relief reforms). Above the threshold, the sole tradership must register for VAT and report VAT in the OmaVero service.

Voluntary VAT registration is worth considering even below the threshold if:

• Your customers are VAT-deductible businesses, in which case VAT-invoiced sales do not hurt them.
• You have significant VAT-deductible expenses you want to recover.

Small-business relief still exists, but its structure has been reformed. If your fiscal-year turnover is 20,000 to 30,000 EUR, you receive part of the remitted VAT back on a sliding-scale model.

VAT errors are the most common audit finding for small sole traderships. The VAT-side pitfalls are covered separately in the common VAT errors article.

Splitting business income between spouses

If a spouse works in the sole tradership regularly and substantially, the business income can be split between the spouses. This can lower the total tax meaningfully when the other spouse otherwise stays below the progression thresholds.

Conditions:

• The spouse’s work input must be real. Hours, tasks and responsibilities need to be demonstrable.
• The split is made on the tax return on the spouses’ joint claim.
• The capital-income share is split based on ownership; the earned-income share based on work input.

Practical recommendation: log the spouse’s work during the fiscal year. A monthly calendar or simple time log is sufficient evidence if the matter is later questioned.

Tax-return timeline

The sole-trader fiscal year follows the calendar year unless you have specifically chosen a different fiscal year.

Note: the tax-return deadline depends on the business form and the bookkeeping method. For a sole trader it is typically early April (varies slightly year to year). OmaVero shows your own deadline directly.

The most common mistakes and how to avoid them

1. Pre-tax is not adjusted during the fiscal year. Turnover grows but pre-tax payments stay at last year’s level. Result: a large residual tax bill. Fix in OmaVero as soon as the estimate is exceeded by more than 25%.
2. Personal expenses are charged to the sole tradership. The most common pitfall is clothing, food and “entertainment” with friends. In an audit these get rejected and you may receive a tax-increase penalty.
3. Receipts are not kept long enough. The Bookkeeping Act requires a 6-year retention period from the end of the fiscal year. Electronic receipts are fine, as long as they are permanently stored and readable.
4. Vehicle kilometres are not logged. Without a driver’s log, the kilometre deduction is in practice unavailable. A mobile app or simple spreadsheet is enough.
5. VAT registration is delayed. When the threshold is exceeded, VAT must be remitted retroactively from the moment the threshold was crossed. Delay does not save you, it only makes things worse.
6. The capital-income-share claim is left unmade when it would have been cheaper. Check annually whether 0%, 10% or 20% is the right choice.

Summary and action list

• A sole trader and its entrepreneur are the same person for tax purposes. No corporate tax, no dividend.
• Profit is split into earned income and capital income based on net assets. You can claim a 0%, 10% or 20% share.
• The 5% entrepreneur’s deduction is automatic.
• Deductions come from expenses tied to earning income. Documentation is essential.
• VAT threshold for 2026: 20,000 EUR of turnover. Small-business relief applies between 20,000 and 30,000 EUR.
• Pre-tax should be reviewed twice a year.

Action list for the next 30 days:

1. Open OmaVero and check what level your current pre-tax is set to. Compare it against actual turnover.
2. Pull this fiscal year’s expenses into one place and mark each as clearly deductible or borderline.
3. If you use a vehicle for work driving, start a driver’s log no later than next week.
4. Check whether you are approaching the 20,000 EUR VAT threshold. Calculate the rolling 12-month sum for the current fiscal year.
5. If a spouse works in the business, start logging their work input from this month.

Want to see your sole trader’s tax calculation in real time, with pre-tax and the business-income split always up to date? Tulos.ai computes them automatically from your bookkeeping and shows when the pre-tax should be changed. Try it →