Advance tax: what it is and why it exists

In practice, people often mean two different (albeit related) things by the same name “advance tax”. To be clear about this, let’s distinguish them at the outset. First, they are advance payments of income tax – that is, ongoing payments to the tax office during the year based on the last known tax liability (typically for self-employed people and companies). Second, the term advance income tax is used for employees – this is the tax that the employer deducts from the employee’s wages each month as an advance on the employee’s annual tax.

Both mechanisms have a common goal: the state does not wait until after the end of the year to make one big payment, but collects the tax gradually. For you, this means mainly two practical things: in business, you keep an eye on the deadlines and the amount of the advance payments, and in employment, you keep an eye on whether your employer is applying the rebates correctly and whether your annual tax bill is paid.

Income tax advances (self-employed and companies)

An advance payment of income tax for self-employed people and companies is essentially a ‘prepayment’ of part of your future annual tax. During the year, you send advances to the tax office, and only when the tax year ends do you calculate the actual tax on your tax return. The advance income tax payments you have already made are then added to the resulting tax – you either get an underpayment or an overpayment.

Who is affected and who does not pay the advance payments

The obligation to pay advance income tax applies most often to self-employed persons and other individuals who file tax returns (for example, because of income from self-employment, rent or investments) and to legal persons – i.e. companies and other entities (typically Ltd., Inc., but also some associations).

Conversely, advance payments of income tax are generally not payable if the last known tax liability did not exceed CZK 30,000. At the same time, there are other typical exceptions (e.g. for some public taxpayers or in specific situations addressed by tax regulations).

The combination of business and employment deserves special attention. If a significant part of your total tax base consists of income from employment, where tax is paid on an ongoing basis in the form of monthly advances, your obligations for business advances may be limited – in practice, this is mainly based on the share of employment in the total tax base (often either advances are not incurred at all or are paid in a lower amount).

Advance period: when to “switch” to advance mode

Advances are paid in the so-called advance period. This starts on the day after the last day of the deadline for filing the tax return for the previous period and ends on the last day of the deadline for filing the return in the following period. In practical terms: once you have filed your last tax return, the advance payment system will be set up according to the information on that return – i.e. your last known tax liability.

Last known tax liability: what exactly does it mean

The last known tax liability is the amount of tax based on the last relevant tax return (and in some situations, a supplementary return). It’s a key concept, as it will determine whether you’ll be making any advance payments at all, or how much you’ll be paying. In layman’s terms: it’s the last officially known result of your tax, which will be used to determine your advance payments for the next period.

Calculating your advance tax: when you pay, how often and how much

The calculation of your advance tax payment is based on your last known tax liability. The logic is simple: the higher your last tax bill was, the more often and in aggregate you will pay advances.

If the last known tax liability is no more than CZK 30,000 inclusive, no advance income tax is payable.

If it is more than CZK 30,000 but not more than CZK 150,000, you will go into the half-yearly advance payment scheme. In this case, you pay twice a year, always 40% of the last known tax. The due dates are the 15th day of the 6th month and the 15th day of the 12th month of the tax year.

Once the last known tax liability exceeds CZK 150,000, you pay the advances quarterly. Each advance payment corresponds to one quarter of the last known tax and is due on the 15th day of the 3rd, 6th, 9th and 12th month of the tax year.

Payment of advance income tax

The payment of the advance payment of income tax is sent to the account of the tax office held with the Czech National Bank (bank code 0710). The correct account number according to the type of tax is essential for the correct routing of the payment, for example:

• 721 for income tax for individuals filing returns (typically self-employed persons),
• 7704 for corporate income tax,
• 713 for personal income tax from employment (paid by the employer),
• 7720 for personal income tax withheld.

The account number is in the form of a prefix-matrix/0710, with the ‘matrix’ varying according to the local jurisdiction of the tax office.

As important as the account is the identification of the payment. In practice, the variable symbol is often used, for example, the TIN or the birth number (depending on what you have and how you enter the payment). This is where it pays to be careful: a wrong identification can disconnect the payment from your personal tax account, and you end up dealing with arrears unnecessarily, even if you actually sent the money on time.

Forgiving income tax advances and remission of advances: what can realistically be done

In common parlance, there is often talk of income tax advance remission. In practice, however, it is typically not a remission in the sense that the tax is completely waived. The more common and legally more accurate approach is to ask the tax authorities to make a different determination of the advance payments – that is, to reduce, adjust or even cancel the obligation to advance if you have serious and documentable reasons for doing so.

Typical situations in which a request makes sense: a significant drop in profits, interruption or cessation of business, a major emergency that changes the expected annual tax. It is important that you do not just write “it is too much”, but explain why the existing advances no longer reflect reality, ideally backed up by figures (for example, current financial performance, income and expenditure forecasts or other relevant documents).

Advance income tax for employees: what your employer withholds

The second meaning of advance income tax relates to employees. The employer, as the taxpayer, calculates the tax on your wages each month and withholds it as an advance payment. If you have signed a “Taxpayer Declaration“, your employer applies tax credits and other benefits during the year, which are reflected in the calculation.

The employer then remits the withheld advances to the tax authorities, typically on a monthly basis (one month’s pay is usually remitted in the following month). At the end of the year, you either make an annual settlement with your employer (if you qualify and request one) or you file a tax return, where the advances paid are added to the resulting annual tax.

However, in addition to the advance tax, you may also face withholding tax on some earnings. Unlike an advance payment, this is usually treated as final taxation – the employer (or other payer) withholds and pays the tax, and the tax liability on that particular income is usually settled. In practice, you’ll often see withholding tax on some remuneration from agreements, for example (typically when you don’t have a signed Taxpayer Declaration and are in a regime where the law provides for withholding for that type and amount of income).

It’s important to know that advance tax is normally accounted for at the end of the year (in the annual return or in the tax return), whereas withholding tax is usually not dealt with any further – although in some situations it may make sense to take it into account on your tax return (for example, if you get a payout because of rebates or other income).

Accounting for income tax advances

You’ll encounter income tax accounting mainly in businesses. Let’s explain the most common situations so that they make sense to the layman:

A company pays advance payments of corporation tax

When a company pays corporate income tax advances, it most often accounts for the payment as MD 341 / D 221. You can think of the 341 account as a suspense account for the relationship with the income tax authorities: it records how much you have to pay to the government and how much you have already paid.

At the end of the period, when the actual income tax for the year is determined, the tax is then usually accounted for as MD 591 / D 341. The point is simple: first you send in advances during the year (thus changing the balance on the 341), and then you post the actual tax when the year closes. The result will show whether you have underpaid or overpaid.

Employer withholds advance tax from employees

For advance employment tax, the liability to the tax office is typically tracked in account 342. When withholding tax from wages, MD 331 / D 342 (i.e. a reduction in the amount you pay to the employee and a liability to the tax office) is often charged. The payment to the tax office is then usually followed by MD 342 / D 221.

Income tax advance calculator: how to check quickly

In practice, the advance income tax is calculated differently for self-employed persons and companies, and the advance tax for employees, which is deducted from wages by the employer each month.

With self-employed and business advances, you often don’t need a complicated calculator. The basis is the last known tax liability from your last tax return. You just determine the scheme and calculate the amount: either you pay 40% twice a year (half-yearly advances), or 1/4 a year ( quarterly advances), or you don’t pay any advances at all. To do this, you just need to check the correct due dates so that the payment goes out on time.

For employees, on the other hand, calculating the monthly advance tax is more complicated. It depends not only on the gross salary, but also on whether you have signed a declaration, what tax credits you claim, whether you take tax benefits, or other parameters that affect the payroll calculation. This is where it makes sense to use a payroll calculator – precisely because it can take into account several variables at once and avoid errors.

Summary

In practice, advance tax means that you don’t pay income tax all at once after the end of the year, but on an ongoing basis. However, two different things are often hidden under the same term: advance income tax (typically self-employed people and companies who send payments to the tax office during the year based on their last known tax liability) and advance payroll tax (deducted by employees each month as an advance on their annual tax bill). The common logic is the same: the government doesn’t want to wait until the end of the year, so the money flows in gradually – for you, this then means either keeping an eye on the dates and amounts of the advances, or checking that your employer is claiming the correct allowances and that you’re getting your annual settlement.

For self-employed persons and companies, the advance payment scheme is set after the tax return is filed and is based on the amount of the last known tax liability: up to CZK 30,000 no advance payment is made, between CZK 30,001-150,000 40% is paid twice a year (usually due on the 15th day of the 6th and 12th month), above CZK 150,000 1/4 is paid quarterly (on the 15th day of the 3rd, 6th, 9th and 12th month). Payments are directed to the account of the tax office at the CNB (0710) with the correct prefix according to the type of tax and, most importantly, with the correct identification to be assigned to your personal tax account. If the advances no longer correspond to reality (drop in profits, discontinuation of activities, etc.), you can submit a request for a different determination of the advances (reduction/adjustment/cancellation), supported by specific reasons and figures. For employees, the advance tax is normally accounted for during the year (in the annual return or in the return), while withholding tax is often final – although sometimes it may be worth including it in the return for discounts.