Have you signed up for a flat tax? What can you expect from it?

Chapters of the article

• What are the flat tax bands?
• What makes the flat tax option conditional?
• What are the benefits of a flat tax?
• What are the disadvantages of a flat tax?

From 2021, the flat-rate tax in the Czech Republic is a simplified tax regime designed for self-employed persons (self-employed persons), which allows them to pay taxes and insurance premiums through a simple lump sum instead of a complex calculation of income and expenses. This system was designed and introduced several years ago to reduce the administrative burden and make it easier to do business, especially for small entrepreneurs and freelancers.

The flat tax is applied according to set income thresholds, which can vary depending on tax laws and economic conditions. There are three bands for the flat tax. Each band has its own fixed amount of tax, which includes both income tax and compulsory social and health insurance contributions in one payment. This system is particularly advantageous for those seeking simplicity and predictability in their tax and insurance liabilities.

What are the flat tax bands?

The amount of flat tax for 2024 varies according to 3 bands depending on the income and expenditure of the taxpayer.

• Band I applies to all self-employed persons with annual income of up to CZK 1 million, then self-employed persons with income of up to CZK 2 million with an 80% flat-rate expenditure and self-employed persons with annual income of up to CZK 1.5 million with an applicable 60% or 80% flat-rate expenditure. The lump sum payment is set here at CZK 6208.
• Thesecond band is intended mainly for self-employed persons with annual income up to CZK 1.5 million, who did not fit into the first band due to the 40% expenditure lump sum, and also for self-employed persons with annual income up to CZK 2 million with an applicable 60% expenditure lump sum. The lump sum payment is CZK 16,000.
• Band III is intended for other self-employed persons with annual incomes up to CZK 2 million who did not fit into the lower band due to the applicable 40% expenditure flat rate. The lump sum payment is CZK 26,000.

If the entrepreneur expected to receive income in a particular band and then found out after the end of the tax year that he did not fit into it, he must pay the tax in addition. However, the reverse is also true, so that if the income falls into a lower band, part of the tax and insurance premiums so paid will be refunded to the entrepreneur.

Advances on the flat-rate tax are always due by the 20th day of the month. The tax is usually paid monthly, but it is possible to prepay for example for a quarter or a whole year in advance.

However, registration for the flat-rate tax was only possible until 10 January this year. Those interested in this form of tax will have to wait almost a full year. Further registration will be possible again from October until 10 January of the following year. You don’t have to go to the tax offices, just download the electronic form on the MY Taxes portal and send it in via your mailbox.

What makes the flat-rate tax option conditional?

Any self-employed person(self-employed) in the Czech Republic who meets specific conditions can apply for the flat-rate tax. In addition to not being subject to VAT and not being in insolvency proceedings, it is important that their annual income does not exceed a specified limit. This limit depends on the specific income bracket into which the self-employed person falls. To apply for the flat-rate tax, you must complete and submit an application form via the MY Tax Portal.

What are the benefits of the flat tax?

The advantages of the flat tax are mainly simplification of administration and predictability of costs. This system allows the self-employed to pay a fixed monthly amount that covers both income tax and compulsory social and health insurance contributions. The flat-rate tax is particularly worthwhile for those entrepreneurs who have a stable but not very high income and want to avoid complicated bookkeeping and tax returns. It is suitable, for example, for start-up entrepreneurs who want to focus on developing their business or for sole traders who are looking for simplicity and efficiency in tax administration.

Example of use

Typically, a flat-rate tax can be advantageous for a small entrepreneur whose income is close to one million crowns and who applies, for example, a 40% flat-rate tax. In addition, if he is a single, childless individual without a mortgage and other potential tax deductibles, then the situation is ideal for him. Under the normal tax regime, he would pay income tax, social security and health insurance based on his actual income and expenses. Under a flat tax, he pays a fixed monthly amount that is significantly lower than the potential total tax and levies under the conventional regime. This can save up to tens of thousands a year.

What are the disadvantages of a flat tax?

The disadvantages of the flat tax in the Czech Republic include several aspects. First of all, there is the limited possibility of claiming expenses, which can be crucial for entrepreneurs with significant operating costs. In this case, the traditional tax regime with deductibility of expenses may be more advantageous. Furthermore, for self-employed workers with higher incomes, a fixed amount of flat-rate tax may be less favourable than a tax calculated on real income. If the specified income threshold is exceeded, the difference in tax must be made up, which may lead to unexpected financial liabilities.

The flat tax also does not allow for tax credits and deductions such as deductions for spouses, children or other dependents. For entrepreneurs with family obligations or specific financial situations, such a disadvantage can be significant. In addition, this system is not suitable for entrepreneurs who are planning significant investments in their business, as the cost of these investments cannot be claimed as tax deductible expenses.

Finally, the flat-rate tax requires compliance with certain conditions throughout its application, including keeping income below a certain threshold. This can be limiting for fast-growing businesses or for entrepreneurs who expect to increase their income in the near future. A flat tax also introduces a degree of uncertainty, as the terms and amounts of lump sum payments may change as tax laws or economic conditions change.