Georgia’s Small-Business Tax Cliff: How Micro and Small Business Regimes Can Discourage the First Formal Hire

GILS Research Team

Editor: Prof. Giorgi Pkhakadze, MD, MPH, PhD

Georgian Institute of Labour Studies · GILS Analysis

2 October 2026

Georgia’s special tax regimes for micro and small businesses are among the most generous in the region: zero tax on turnover below GEL 30,000, and 1% on turnover up to GEL 500,000. They have made it easy to register a business. This analysis argues that they also create a structural “tax cliff” at the point where a small entrepreneur takes on a formal employee — and that this helps explain why so much of Georgia’s informal employment is found in tiny firms run by informal employers.

1. Introduction

Since the 2010s Georgia has used simplified tax regimes to encourage small entrepreneurs to register and to reduce the administrative burden on them. By most accounts these regimes have succeeded in their main aim: registering as an individual entrepreneur is quick, and taxation is low and simple.

This analysis asks a narrower question: what incentives do these regimes create at the moment a small business considers hiring someone formally? Our thesis is that the regimes tax the owner’s business income very lightly, while leaving formally hired labour subject to the full income tax — and, in the case of micro businesses, prohibit employees altogether. The result is a cliff in the cost of formality exactly where Georgia’s informality is most concentrated.

2. The Regimes

Sources: PwC Worldwide Tax Summaries (2025); Tax Code of Georgia, Articles 81, 84 and 89; Government Resolution No. 415.

Small business status is lost if turnover exceeds GEL 500,000 in two consecutive years (Tax Code, Article 89). A micro business that hires an employee or exceeds GEL 30,000 must move to small business status or lose its preferential treatment.

3. Where Informality Sits

ILO analysis of Labour Force Survey data shows that informal employment in Georgia is overwhelmingly a small-firm phenomenon. In firms with one to four workers, 74% of employment is informal, falling to 35% in firms with five to nine workers and 7% in firms with 50 or more. Among informal men, 56.9% are employers — typically owners of small, unregistered businesses — while among informal women 30.7% are contributing family workers, often unpaid (Pignatti, 2026).

4. Discussion

Argument 1: The cliff at the first employee

Consider a sole trader on micro business status. As long as she works alone and stays below GEL 30,000, she pays no tax on her business income. The moment she hires a formal employee, she loses micro status. As a small business she will pay 1% of turnover on her own income — still very low — but the wages she pays her employee will be taxed at 20%. The tax system thus treats the owner’s income and the employee’s income very differently. An informal arrangement avoids both the loss of status and the 20% on wages. For a firm with thin margins, this is a strong incentive to hire informally, or to call workers “family helpers”.

Argument 2: Thresholds encourage under-reporting

Turnover thresholds create incentives to stay just below them. Social partners consulted by the ILO reported that preferential tax regimes increase firms’ incentives to under-report their activities, and the World Bank found evidence that firms are aware of the thresholds and strategically report their revenues (Pignatti, 2026). Under-reported turnover usually goes together with under-reported employment.

Argument 3: No bookkeeping, no visibility

The ILO paper also notes that the absence of bookkeeping or accounting requirements can contribute to informality (Pignatti, 2026). Where a business keeps no records, neither the tax authority nor the labour inspectorate can easily see how many people work there or on what terms.

Counter-argument: the regimes brought businesses into the system

Supporters of the regimes argue that they have drawn many people into registration who would otherwise operate entirely outside the tax system, and that low, simple taxes are the best way to formalise very small businesses. This is a strong argument, and GILS does not propose abolishing the regimes. The problem is not that the owner’s taxation is light, but that the regimes were designed around the owner and say nothing about the workers the owner employs.

Counter-argument: income tax is paid by the employee, not the employer

Formally, the 20% income tax is the employee’s tax, withheld by the employer. In practice, in a labour market with low wages and weak bargaining power, a worker and employer negotiating an informal arrangement can share the 20% saving between them. Who legally pays the tax matters less than the fact that a formal contract costs both parties more than an informal one.

5. Limitations

This analysis describes incentives created by the tax rules; it does not estimate their causal effect on informal employment, which would require firm-level data. Tax rules are summarised from secondary sources and may be subject to exclusions and conditions not covered here. Social contributions to the funded pension scheme are not analysed.

6. Conclusion

Georgia’s simplified tax regimes have made it easy to start a business. But they have not made it easy to employ someone formally. By taxing the owner at 0–1% of turnover while leaving formally hired labour at 20%, and by prohibiting employees under micro status altogether, the system creates a cliff at precisely the point where most informal employment occurs. Reforming the regimes to support the first formal hire would address one of the institutional drivers of informality without raising taxes on small entrepreneurs.

GILS analyses are prepared with AI-assisted drafting. All figures and claims are verified against the cited primary sources and reviewed under the responsibility of the Editor.