In our previous post, we laid out the 5 basic steps a new entrepreneur can take to make their business stable. The first and perhaps most important strategic decision is the choice of business and tax form. This is the point where most people get confused, as there are significant differences between the two most popular options - KATA and flat tax.
Which is better for you? Which is better for you? To help you make your decision, we now present both tax forms in a clear and detailed way, with their advantages and disadvantages.
The Flat Tax Sole Trader: the Flexible Planner
Flat-rate taxation is the most popular choice among self-employed people today, and for good reason. Its logic makes it a brilliant way to simplify cost accounting.
How does it work?
Rather than collecting every expense bill, the state recognizes that a certain portion of its revenue is used for operating expenses. This portion is called the cost share and is not taxed. You only have to pay tax on the remaining part of your income (your earnings). The expense ratio depends on the activity carried out (typically 40%, but in some cases it can be 80% or 90%).
Benefits (Pro):
High income limit: up to 24 times the annual minimum wage (expected to exceed HUF 7.9 million in 2025).
Simplified expense reporting: no need to administer each and every expense invoice, which significantly reduces paperwork.
Flexibility: you can invoice individuals, companies and abroad without limit.
Full-time and part-time jobs are also available.
Disadvantages (Cons):
More complex tax calculation: income is subject to personal income tax (PIT), social security contributions (SS) and social contribution tax (SCOCHO), which require expertise to calculate.
No fixed tax: the tax payable increases in proportion to the revenue.
Accountant needed: the help of an expert is almost indispensable for tax returns and tax planning.
Ideal for whom?
Someone who plans as a full-time entrepreneur also invoices companies regularly and their real costs are lower than the statutory cost share (e.g. consultants, IT specialists, marketers).
The (new) KATA: Super Facilitation for Adjacent Workers
The KATA (Small Business Rate Tax), since its overhaul in 2022, offers an unbeatably simple solution for a narrow but very grateful group of people.
How does it work?
This is the simplest form of taxation: the entrepreneur has to pay a single fixed amount of HUF 50 000 per month, which excludes all taxes. No complicated calculations, just a single payment.
Benefits (Pro):
Maximum simplicity: calculable, fixed monthly tax burden.
Minimal administration: apart from the revenue records, there is little to do, and it can be managed without an accountant.
Perfect for supplementary income: ideal for legally accounting for extra work alongside an existing job.
Disadvantages (Cons):
Very strict limits: You must be a part-time worker (i.e. you must have a 36-hour-per-week employment contract or be a full-time student or retired).
You can only invoice individuals: companies and other businesses are not allowed to issue KATA invoices.
Low income limit: The annual income limit is HUF 18 million, but you should be careful because income above HUF 3 million from the same partner is subject to declaration.
Ideal for whom?
For someone who wants to earn a little extra income as a second job, in addition to their full-time job, and who provides services exclusively to individuals (e.g. tutoring, photography, massage, graphic design for residential clients).
Decision Aid: the key differences
To make the choice even easier, let's look at the main differences between the two tax forms in a direct comparison:
Legal status: the KATA is clearly a form of taxation for part-time workers. If you do not have a 36-hour-per-week employment relationship or other legal relationship as defined by law, you cannot opt in. By contrast, flat-rate taxation works for both full-time and part-time workers.
Clientele: This is the other critical point. This is a critical critical point. If you have or will have even a single corporate client, KATA is not an option. Flat tax gives you complete flexibility, you can invoice individuals, companies, both domestic and foreign.
Tax and administration: the KATA is unbeatably simple - one fixed monthly payment of HUF 50 000 and minimal paperwork. Flat-rate taxation, on the other hand, is more complicated: the tax payable varies in proportion to the income, and the assistance of an accountant is almost always needed to prepare the returns.
Conclusion: which is your path?
As you can see, there is no single „best” solution for everyone. The decision depends on your personal situation, your goals and your business model.
If you want to earn extra income legally from individuals while having a secure job, the simplicity of KATA is unbeatable.
If you want to build your business full-time, flexibly and working for companies, then flat-rate taxation is the logical and almost the only good choice.
This guide will help you understand the differences between the two systems. However, we strongly recommend that you consult an accountant before making a final decision. Based on your specific plans and expected income, a professional will be able to calculate exactly which tax form is the best for you financially. This discussion is one of the most useful investments you can make in the early stages of your business.