You have a steady job. The salary hits your account every month. But there’s an idea rattling around in your head — what if I start something of my own on the side?
Freelancing, a sole proprietorship, a limited liability company, consulting services, an online shop, an app — there are a million options. And that’s awesome. The less awesome question is: how do you do it without running into the tax authorities, an inspection, or some regulation you didn’t even know existed?
If you’re permanently employed (indefinite or fixed-term contract) and want to start your own business as a side gig, you’re in a specific situation in Croatia. You have the security of a job, but also additional tax obligations that someone who’s “just an entrepreneur” doesn’t have. Let’s break it down.
First: Which Business Structure to Choose?
As an employed person, your most common options are:
- Sole proprietorship (obrt — lump sum or income-based) — the simplest, cheapest, but you’re liable with your entire personal assets
- Simplified LLC (j.d.o.o.) — a bit more admin, but limited liability
- LLC (d.o.o.) — for serious income, minimum capital €5,000
- Copyright or service contract — if you work occasionally for one client
For most people starting out on the side, a lump-sum sole proprietorship (paušalni obrt) is the first choice. Why? Because it’s simple: one accounting agency, one annual tax return, a fixed monthly tax that doesn’t depend on your revenue (up to a certain limit).
But — a warning: If you’re already employed, social security contributions for your business work differently than for unemployed people. More on that below.
Social Security Contributions: This Is Where It Gets Confusing
As an employee, you already pay contributions — pension (1st and 2nd pillar), health insurance, work injury. Many people think: “Since I already pay contributions through my employer, I don’t need to pay them for my business too.”
Wrong. 🚫
As a business owner, you must pay contributions — but only those you don’t already pay through your job. Specifically:
- Pension insurance (1st pillar): Paid by employer, you don’t pay extra if you’re employed full-time
- Pension insurance (2nd pillar): Same — already deducted from your gross salary
- Health insurance: Already covered through your job, you don’t pay for your business
- Work injury insurance: Depends on the activity, but often not required if you’re already insured
This means your contributions for your business are reduced — you only pay the difference to the full base. This is a major advantage. But you need to know exactly what to pay, because accounting agencies often automatically calculate full contributions (~€450-500/month) and overcharge you.
Tip: When opening your business, explicitly tell your accountant that you’re already employed under an employment contract. They’ll calculate only minimum contributions (around €100-150/month instead of €450+).
Income Tax or Lump Sum?
Lump-Sum (Paušalni obrt)
You pay a fixed lump-sum tax that depends on your activity. For 2026:
- Lump-sum threshold: up to €40,000 annual revenue (expanded from 2025)
- Tax: from ~€100 to ~€500/month, depending on activity (coefficient 1-5)
- No right to deduct expenses — tax is paid on all revenue
- No business books required (except revenue records)
Advantage for employees: The lump-sum system is great because you don’t have to think about expenses, bookkeeping, or VAT. You pay a fixed monthly amount and you’re done.
Income-Based Business (Obrt na dohodak)
You pay progressive income tax (20% up to €50,400/year, 30% above). You’re entitled to:
- Personal deduction (€530/month, more for children and dependents)
- Deduction of business expenses (rent, equipment, marketing, fuel)
- Right to recognize losses
Comparison: If you earn €30,000/year on the side, lump-sum will cost you ~€3,000 in tax, while income-based will cost ~€2,000 (if you have expenses) to ~€5,000 (if no expenses with full tax).
VAT — The €50,000 (or €40,000?) Threshold
This is one of the biggest traps for new entrepreneurs.
Entering the VAT system in Croatia is mandatory when you exceed €50,000 in turnover in the previous 12 months. Since 2025, the threshold was raised from €40,000 to €50,000.
But: If you’re a lump-sum taxpayer, the threshold for staying in the lump-sum system is €40,000. So between €40,000 and €50,000, you’re in a situation where:
- You can’t stay in the lump-sum system
- But you’re not yet a VAT payer (until you exceed €50,000)
This is a “gray zone” where you must switch to income-based (or profit-based) accounting and start keeping books, but you don’t yet add VAT to your invoices.
Once you enter VAT, you add 25% VAT to all invoices. This means your €1,000 service becomes €1,250 for the client — or you receive €1,000 and pay €250 to the state. VAT-registered clients can deduct this, but individual consumers cannot, so your service becomes 25% more expensive for them.
Employment Contract + Business: Conflict of Interest?
This is a critical point.
When you’re employed, your employment contract likely contains a non-compete clause. This means you can’t engage in the same line of business as your employer, work for their clients, or act in a way that harms their business.
Example: If you work at a marketing agency and open a marketing business on the side — that’s a direct conflict of interest and your employer can terminate your contract (or even sue for damages).
What you CAN do:
- Activities that are different from your employer’s business
- Work outside working hours (not at work, not with employer’s equipment)
- Work for clients who aren’t your employer’s competitors
Practical advice: Before opening your business, check your employment contract. If you have a strict non-compete clause, consider talking to your employer or a lawyer. Better to prevent than to end up in court later.
Tax Return and Dual Status
As an employee + business owner, you file one annual tax return (form DOH) that aggregates all your income:
- Salary from employment (tax and contributions already paid by employer)
- Income from your business (calculated through lump-sum or actual income)
The tax authority calculates this automatically. If you’re on the lump-sum system, your business income is not added to your salary for income tax purposes — lump-sum is a separate system. But if you’re on income-based, your total income (salary + business) enters the 20% tax bracket up to €50,400/year.
Important note: If your business generates significant income and you’re on income-based taxation, you might end up in a higher tax bracket because salary and business income are combined. Lump-sum business owners don’t have this problem.
Other Regulations You Can’t Afford to Ignore
GDPR
If you collect client data (email, name, phone number), you’re subject to GDPR. You need:
- A privacy policy on your website
- Proper data storage
- Ability to respond to deletion requests if a client asks
Consumer Protection Law
If you sell to individuals (B2C), you’re required to provide:
- A 14-day right of withdrawal
- A clear description of the service/product
- An accurate price including VAT (if you’re a VAT payer)
Bookkeeping and Fiscalization
If you deal in cash, you must fiscalize invoices (connect to the tax authority). For cashless transactions (cards, bank transfers), fiscalization isn’t required, but you must issue invoices.
Activities Requiring Special Conditions
Some activities require additional permits or licenses:
- Catering/hospitality — minimum technical requirements
- Transportation — licenses
- Financial advisory — certifications
- Healthcare — chamber licenses
Bottom Line: A Practical Action Plan
If you’re employed and want to start something on the side, here are the steps:
- Check your employment contract — do you have a non-compete clause?
- Choose your activity — what will you do and under which code?
- Open a lump-sum sole proprietorship — the fastest and cheapest route
- Find an accountant who knows you’re employed and adjusts your contributions
- Open a business bank account — mandatory for all taxpayers
- Start working — issue invoices, keep records
- After the first 6 months — check if you’re approaching the VAT threshold
Disclaimer: This is not legal or tax advice. Laws change, and every situation is specific. I recommend consulting with an accountant and/or lawyer before starting your business.