This article is primarily written for founders and owners that work at their own companies – maybe even without any "outside" employees. This is the case at my current company Lightray, where the staff consists of only my co-founder and myself. It's important to note, that as a director you are employed at your company from a legal perspective, even though you probably don't have a formal work contract.
I know firsthand that handling all the employment duties and responsibilities can feel intriguing at first especially if you aren't educated on these topics. Luckily, it isn't as complicated, and once you understand what's required and have that in place, you only have to report and reconsider your setup once a year. I structured this article into things you must do to be compliant with Swiss laws and things you can do in order to optimize your income, retirement, and taxes.
Things You Must Do
Swiss law requires your company to pay social security and provide insurance for your staff, including you as the owner.
Social Security Insurance
For every salary beginning at the first Swiss Franc, a total of 10.6% must be paid to social security insurances (first pillar). The employer will cover half the contribution whereas the other half is directly deducted from the employee's pay. Even though half the amount is deducted from the employee, only the company must pay the social security department – the full amoubt. As you're employed in your own company, you can skip this 50/50 accounting and book the 10.6% directly.
For this whole process to work, your must register all your staff at your canton's social security department (SVA). In Zurich, where we reside, this is the SVA Zürich. The SVA will then send you preliminary (expected salary) and final salary (actual salary) declarations each fiscal year. The contribution must be paid yearly or monthly.
Everyone working at your company (including you as the owner) must be insured against occupational accidents and illnesses. If a person is working more than 8 hours a week at your company, he or she must also be insured against non-occupational accidents. The Swiss law regulating this is called the UVG and the resulting mandatory accident insurance is therefore often called UVG insurance. The benefits offered by mandatory accident insurance are legally defined in Switzerland and they cover the costs that can arise due to occupational and non-occupational accidents and occupational sickness.
In addition to mandatory accident insurance, insurance companies also offer voluntary supplementary insurance options (called UVGZ) such as daily benefits (covering salary loss from day one), private or semi-private hospital stays, extreme-sports accident coverage, and many more depending on the insurance company. I recommend looking at these supplementary options as the price premiums can be attractive compared to the base price of mandatory UVG insurance.
The insurance rate is calculated on a per-person basis as it involves demographic factors, personal risk, medical history, and sector factors. The whole insurance is paid for by the company and not billed to the employee, even though rates are individual.
All the information can be found on the Swiss government's website.
Choosing an Insurance Company
To find the insurance company that suits you best, you can either work with an insurance broker (easy) or request and compare offers by yourself (hard). I did it the hard way as I wanted to learn how it works and the detailed differences between insurance providers. In the process, I generally found that it takes a lot of time and contract reading whilst I still felt that I didn't find the best offers yet but we anyway settled with a provider. In hindsight, I would recommend working with an insurance broker that takes care of all that for you.
If you're older than 25 and your yearly salary exceeds CHF 21'510, the federal law on occupational old-age, survivors’, and disability benefits insurance (OPA / BVG) requires you to contribute to a pension plan (second pillar) to save for your retirement. The salary portion between CHF 25'095 and the upper limit of CHF 86’040 must be covered by the mandatory BVG pension. Salary components above CHF 86’040 can be contributed to extra-mandatory pension plans covered further below.
The contribution amount depends on your age. If you're between 25 and 34 years of age, the pension fund contribution amounts to 7% of your insured salary, whereas if you're between 55 and 64 years of age, 18% is due. All rates can be found at the Federal Social Insurance Office's website. The pension fund contribution isn't taxed, so this will reduce your taxable income. When receiving your savings, either as a monthly pension or a lump-sum, it will be taxed at a lower income tax rate.
At least half the contributions must be paid by the company, but as you are (part of) the company, you'll probably neglect this split and account for the full amount as a company expense. Properly handling the contributions may seem a bit complicated, but your pension plan provider (most likely a pension fund) will equip you with everything you need to know.
Choosing a Pension Plan
A company could manage its own pension fund, but doing so is usually out of reach for any smaller company or startup. As a small company, you probably want to contribute your pensions to a semi-autonomous collective pension fund.
Finding the best-suited pension plan is tricky, as pension funds are inherently more complex. I'll therefore explain what to look out for so that you're armed for your own research. When comparing different pension funds and pension plans, make sure to look out for and compare these factors:
- Interest or Returns: A pension fund may offer a fixed interest or a a return based on investment strategy and performance. Fixed interest offers (full-value insurance) are typically very low (less than 2% in 2022) but remove the risk of market volatility. Most pension plans (semi-autonomous
collective foundations), however, pay a dynamic return based on the investments' returns (i.e. the annual technical interest) that may also be combined with an ordinary (fixed) interest rate. Pension funds may invest differently so returns are dependent on the fund manager's investment strategy and market performance. You may want to look out for an investment strategy to your liking. Mind that the credited interest can't be lower than the minimum interest rate set by the Federal Council, which currently is 1%, even if the investment underperforms the minimum return. This risk is covered by the pension fund and is reflected in the coverage ratio explained further below.
- Conversion Rate: The conversion rate defines the annual pension payment from the individual old-age savings capital. The BVG currently requires a minimum conversion rate of 6.8% if you're retiring at the regular retirement age. Pension plans may offer a higher conversion rate, which translates to higher pension payments. A table of current minimum conversion rates by retirement age can be found on Finpension.
- Administrative Costs: The costs you pay the pension plan provider for their services. This portion can greatly differ between providers and is not regulated by law so make sure to compare a few offers. All administrative costs are fully paid by the company and usually aren't visible to an employee.
- Coverage Ratio: A coverage ratio of 100% means that all obligations (e.g. your promised pension) are backed by the fund's assets. A coverage ratio less than 100% means that the pension fund lacks the required assets (i.e. is underfunded) whereas a coverage ratio well-exceeding 100% is indicating a financially healthy pension fund. A chart with average current- and historical coverage ratios can be found here.
- Proportion of Retirees: The proportion of paying- (i.e. employees) vs. receiving members (e.g. retirees) of the pension fund. Usually the less retirees the lower the financial obligation of the pension fund. Look out for a low proportion of retirees.
Mind that your company's demographic factors also play role here: If your staff is far from retirement age, you'll probably want to favor returns over conversion rates and may change the pension plan at a later stage.
Also, in case you want to dive fully into the current BVG / OPA legislation, AXA offers a 200 page summary () of it.
Things You Can (And Probably Should) Do
Being your own employer allows you to manage your company's and your personal financials in ways that aren't easily attainable as a regular employee. This section explains some of these opportunities.
Extra-Mandatory Pension Plans
Income above CHF 86,040 per year is not subject to the statutory pension provisions but can also be insured by many pension plans. Unlike mandatory benefits (i.e. below CHF 86,040), there are no statutory requirements on conditions and benefits for voluntary saving. This means that pension funds are free to set the interest rate and conversion rate applicable to voluntary salary portions so the conversion rate for the extra-mandatory portion and the interest may be lower. This means that making extra-mandatory contributions may not be worth it, even though it would result in immediate tax savings.
Flat Rate Expenses
Being in a management position often requires paying for job-related expenses that may range from a postage stamp to a full client meal. To simplify the accounting, Swiss tax laws allow an annual flat rate expense that is paid from the company to the employee (you). Those flat-rate expenses are not a salary, hence no social security or insurance must be paid on it nor must it be taxed at your personal income tax. The maximum amount of the tax-free flat rate depends on many factors including your canton's local tax law, but a few thousand CHF a year should be permitted in most cases.
Instead of receiving a higher salary, your company can also pay a portion of your compensation as dividends. Dividends are taxed at a company level (as they're considered profit whereas salaries are considered expenses) and also at your private income level at a reduced tax rate. As dividends aren't part of your salary, the don't contribute to social security and insurance, which results in an expense reduction of at least 11%.
Defining the right mix between salary and dividends is tricky however, as there's an inherent conflict between social security, insurance, and taxes. I don't want to go into more detail here. Good summaries and example calculations can be found at Fasoon and Vermögenszentrum (both are in German).
1e Pension Plan
1e pension plans are available for annual salaries between CHF 129'060 and CHF 860'400 and are also part of the voluntary pension contributions, meaning they bring along favorable tax benefits. In contrast to mandatory BVG / OPA pension contributions, 1e pension funds can be managed more freely, similar to private investment accounts. If your salary falls into this category, contributing to a 1e pension fund probably makes sense if you're comfortbale with the limited access to your savings until retirement. If you want to dig deeper into 1e plans, Finpension highlights the many advantages of it.
Thank you for reading this far. I hope this article was helpful to you. Mind that I'm not a legal professional and this article doesn't contain legal advice and should not be treated as such.
If you have any suggestions, spotted any errors, or have any other input, please let me know below!