Self-employed tax: 4 ways to tax business income

Are you starting a business and hesitating how to tax your income? In the Czech Republic, there are several methods - tax registration, accounting or lump sums for self-employed persons. We have a complete overview to help you choose the best one for you, so you don't pay more in taxes than you have to!

Ways of taxing the income of self-employed persons

As a sole trader, you pay social security, health insurance and income tax on the income of self-employed individuals. The amounts depend on how much you earn. The tax rate is always 15%, but you can record your income and expenses in different ways. This will affect how much you are taxed and how much you pay, so you should think carefully about which method of recording you choose.

We will now look at all of these in more detail - from the simplest to the most complex option.

Flat tax

You send one amount to the tax office once a month. The flat-rate tax has three bands and the amount you pay varies from year to year. In 2024, for example, you will pay CZK 7,498 in the lowest band. This amount includes social security and health insurance contributions as well as income tax.

If you meet the conditions listed below, you do not have to do anything else, you do not file a tax return or reports to the health insurance company and the Social Security Agency. If you want to take advantage of the flat-rate tax, you need to sign up for it - see below for instructions.

Conditions for using the flat-rate tax

• Your annual income from business has not exceeded CZK 2 million.
• You are not a VAT payer, you are not employed and you are running your business as your main activity.
• Your income outside your business is max CZK 50,000 (from capital assets, rent or other income).
• You are not a debtor in insolvency proceedings, a partner in a public company or a general partner in a limited partnership.

Disadvantages and what to watch out for

Although you don't file a tax return, you must keep a record of your income - to make sure you're registered in the right bracket, don't earn more than £2 million, and in case of an inspection from the tax office. How you record your income is up to you, you can keep track of it in an invoicing system or in an excel spreadsheet.

The downside is that by filing for a single flat tax , you lose the ability to claim tax credits (for a spouse, children, disability, and more). You also won't deduct mortgage interest or pension and life insurance contributions on your tax return. You could save money on your taxes by using these deductions.

The flat-rate tax is therefore only suitable for some entrepreneurs - especially those whose annual income exceeds about CZK 700,000 (it applies to sole traders with activities that can benefit from a 60% flat-rate, for craftsmen the threshold of advantageousness moves up to about CZK 1.3 million) and do not have many tax discounts. With lower incomes, it is more likely to be worthwhile to opt for flat-rate expenses. Use the self-employed flat tax calculator for comparison.

How do I sign up for a flat-rate tax for self-employed people?

• You can sign up by 10 January each year. For example: if you want to take advantage of the flat-rate tax in 2024, you must sign up by 10 January 2024. If you don't make it in time, you won't have a chance again until a year later.
• The only time you can become a flat-rate taxpayer during the year is if you are just starting your business. You should submit your notice of entry into the flat-rate scheme at the same time as you set up your business.
• The flat-rate scheme is permanent until you opt out or break the conditions.

Flat-rate expenses

You only keep track of your income; you claim expenses on your tax return as a percentage of your income (you don't have to prove it or keep receipts). This is a very simple and often the most advantageous way - you will get expenses even much higher than in reality, thus reducing your tax base.

You pay monthly advances on social security and health insurance, and once a year you file tax returns and reports for the insurance company and the Social Insurance Institution (ČSSZ), on the basis of which advances are determined for the next tax year.

Percentages for flat-rate expenses

Advantages and disadvantages

The advantage of lump sum expenses is almost zero administration during the year and relatively simple income tax return for self-employed persons. The disadvantage is that you can only apply the lump sum to income of no more than CZK 2 million.

When making your decision, take into account that you will not claim any further expenses on top of the percentage. If your actual expenditure exceeds the percentage flat rate, you should opt for tax registration, otherwise you will pay more in tax unnecessarily.

Tax records

You keep a record of all your income and actual expenses and calculate the tax on your tax return. It is worthwhile if you have high business-related expenses - the higher they are, the lower your tax base will be and with it your income tax. As with flat-rate expenses, you pay monthly social security and health insurance contributions and file a tax return and reports once a year for the insurance company and the Social Security Agency.

Advantages and disadvantages

• Tax records are more administratively demanding than lump sums - you keep track of all cash and non-cash transactions, income and expenses, inventory of tangible and intangible assets, liabilities, receivables and information about the stock at the end of the year.
• On the other hand, you can claim whatever you need for your work as expenses (of course, you have to justify the claim in case of an audit from the tax office).

How to keep tax records

The method of keeping records to calculate the tax base of a self-employed person is up to you. You can use accounting software, online tools, an excel spreadsheet or hire professionals to take care of your tax records.

Accounting

You keep track of costs, revenues and all financial flows in your business. You pay monthly social security and health insurance contributions. Once a year you file tax returns and reports for the insurance company and the Social Security Agency.

When is it compulsory for a sole trader to keep accounts?

• His/her income from business exceeded CZK 25 million in the previous calendar year.
• He/she is registered in the Commercial Register (normally self-employed persons are registered only in the Trade Register).
• He/she is obliged to do so by a specific legal regulation.
• He/she is a partner in a company where at least one of the partners keeps accounts.

Advantages and disadvantages

Bookkeeping is the most administratively demanding of the four options mentioned, but it gives you a detailed picture of your financial situation. As a rule, you cannot do without an accountant. You can opt for bookkeeping voluntarily, but most self-employed people do not find it worthwhile - if you have higher expenses, opt for tax records instead.

Although at first glance it may seem that tax records and bookkeeping are the same, this is not the case. Bookkeeping doesn't just work on a cash flow basis - instead of income and expenses, it is expenses and income that are used to determine the tax base. It is always the time of income or expense that is relevant, not the time of payment, as is the case with tax accounting.

Comparison: which method of taxation to choose?

In the table below, we have compared the basic parameters of the different methods of tax registration for self-employed workers. Once you select one method, it applies to your entire business (Section 7 in the tax return). You can't calculate some expenses as a flat rate and others as a fact - you apply them all in the same way.

The situation gets a bit more complicated if some of your income comes from activities carried out abroad. Read more in the case study on tax residency for athletes.

Can't decide?

In practice, we most often see taxation using flat-rate expenses - they are simple and convenient for most sole traders. But be sure to calculate your own business situation. You may find that you have higher expenses than what you get out in the self-employed flat rate.

If you need help comparing what pays more, or are looking for an accountant to keep your tax records or prepare your tax return, don't hesitate to contact us.