How to tax a work contract

What is a works contract?

A works contract is a type of contract that we enter into when we commission a specific result of an activity – i.e. a ‘work’. This can be not only an artistic painting or sculpture, but also a magazine article, a translated text, a mobile app, a new e-shop, customized software or even a complete renovation of a home.

The work contract doesn’t have to be in writing, but if it’s a more expensive or complex piece of work, it’s a good idea to have all the details in black and white. In particular, the characteristics of the work, the period of performance, the terms of payment, the advance invoices, the possibility to withdraw from the contract or terminate it (unpaid invoices or late partial performance are typical reasons for withdrawal). In the following lines, however, we will take a closer look at how the income from a works contract is taxed.

In legal terms, it is a contract in which the contractor (the one who performs the work) undertakes to carry out the work and the client (the one who ordered the work) undertakes to pay the agreed price for it.

So we enter into a contract for work whenever we order the result of a particular job – whether it is a physical work (e.g. car repair), a digital output (e.g. website translation) or a more complex project (e.g. building a house).

Such a contract can be oral, written or implied (i.e., created by the conduct of the parties). In ordinary situations (for example, when you have your suit dry-cleaned at a dry cleaners), there is no need to draw up anything complicated. A simple order or receipt will suffice.

Conversely, for more complex jobs, such as home renovations or software development, a written contract is a must. It helps to avoid misunderstandings about price, deadlines, method of execution or guarantees. In these cases, it is also advisable to negotiate a contract for a future contract – for example, if the start of work is linked to the purchase of land.

As it follows, a works contract obliges the contractor to produce a certain work for the client, who must pay him for it. But how is the subsequent income taxed?

Who is the contractor

First of all, it must be said that anyone can be a contractor, whether an entrepreneur or not. If the contractor is a non-entrepreneur, the remuneration for the performance of the work may be considered as so-called casual income – i.e. income from exceptional, irregular activities outside the business, which does not exceed CZK 50,000 per year. Such income is exempt from tax. However, if a non-businessman carries out an activity on a regular or repeated basis for remuneration, it may constitute an unauthorised business, which is prohibited and the income from it is taxable.

Do you have to tax work contracts? When is it occasional income?

If the income is occasional and does not exceed £50,000 per year, the contractor does not have to tax it. At the same time, the entrepreneur does not have to pay tax on this occasional income unless it is income from his business activity for which he has established a trade licence. However, it must in fact be only occasional income and not regular income outside his normal business.

Let us explain each situation in more detail with examples:

Occasional income for a non-businessman

If the contractor is not an entrepreneur, the income from the work contract may be exempt from tax if:

• It is not a continuous activity – the activity must be irregular, occasional, not regularly recurring.
• The total income from all occasional activities (i.e. not only from the work contract, but also e.g. from selling old furniture, mowing grass, etc.) does not exceed CZK 50,000 per year.
• It is not a hidden business – i.e. the activity is not repeated regularly and is not offered publicly or systematically.

A work contract is not considered to be casual income if:

• The income from all the occasional activities exceeds CZK 50 000 per year – even if they are different activities or a single contract.
• The activity is regular or continuous, even if without a trade licence – e.g. repeated contracting of work, offering services on the internet or social media.
• It is a ‘royalty ‘ – e.g. writing a magazine article or taking a commissioned photograph. This income is always taxable, regardless of the amount and frequency.

Examples

Jana, a student without a trade, creates a website for a friend for CZK 10,000. This is her first and only such job in a year – it is occasional income that is not taxable (she has not exceeded the limit of CZK 50,000).

During the year, Filip tutors maths (CZK 3,000), looks after a dog (CZK 1,500) and repairs a classmate’s bike (CZK 2,000). All in all, he earns CZK 6 500 – all of which falls under casual income and is not taxable.

Peter helps several neighbours with computer repairs. In a year he concludes 8 work contracts and earns 40 000 CZK. Although he has not exceeded CZK 50,000, as this is a recurring activity, the income is taxable and may also be an unjustified business.

Lucie, a student without a trade, creates a website for a friend during the summer for CZK 55 000. Although it was a one-off project, because the income exceeded the CZK 50,000 limit, she must tax it.

Eva writes an article for an online magazine and receives CZK 2 500 as a fee. This is a royalty which is always taxable, even if it is her only income for the year.

Occasional income with an entrepreneur

Even an entrepreneur (e.g. self-employed) may exceptionally have occasional income from a work contract if:

• The income does not arise in the course of his normal business – e.g. it is in another trade or activity outside the scope of the trade.
• Itis not a regular or systematic activity.
• The total income from these occasional activities does not exceed CZK 50 000 per year.

A work contract is not considered as occasional income of the entrepreneur if:

• It relates to an activity that falls within the scope of the business – the income is automatically taxed as self-employment income, even if it was a single contract.
• Is a regular and systematic activity, even if it would fall outside the scope of the business – e.g. if a hairdresser also regularly bakes cakes.
• Total annual income from all activities exceeds CZK 50,000 – a low-income entrepreneur can only be exempt if all his taxable income (not just occasional income) does not exceed CZK 50,000.
• This is royalties – as with a non-business, they are always taxable.

Examples

A self-employed plumber once played the violin at a wedding for CZK 4,000. If he does not have any other “non-business” income, it is occasional income.

A graphic designer with a relevant trade creates a leaflet for a new client for CZK 5,000. Even if the income is a one-off, it is her business – so it is taxable self-employment income.

Alena is a freelance accountant, but she regularly bakes cakes for friends every month and earns CZK 45 000 a year. Although cake-making is not her business, it is a regular activity – the income is taxable.

Tomáš has a trade in IT services. He also makes a wooden table for a friend for CZK 8 000. He had no other casual income in the year, so this amount is not taxable.

A self-employed coach writes a blog article for a sports website and receives CZK 1 500 for it. Even though writing is not his field, it is a royalty which is always taxable.

How is a work contract taxed

However, the contractor is usually an entrepreneur who must file a tax return every year and pay tax on this income. If you enter into a works contract without an invoice, for accounting purposes only a contract stating the contractor’s remuneration will suffice. An invoice is just a document that gives a description of what is to be paid for, how much, when and how.

The amount of tax on income from a works contract in 2025 is set by law for individuals at 15% of the tax base on income from a works contract or 23% for the part of the tax base above 36 times the average wage (this year the average wage is set at 46,557 crowns).

For legal entities, 21% of the tax base applies, i.e. all income minus expenses. These costs can also be applied by sole traders on a flat-rate basis, i.e. they are calculated as a percentage of income.

In addition to income tax, entrepreneurs and VAT payers must pay value added tax to the state. A work contract with a non-VAT payer will contain the final price, these entrepreneurs simply do not deal with VAT, however, they also pay it, for example, when buying materials, it is actually an expense for them, because they buy at a price including VAT.

If you will be ordering services or making things by contract for work, or you are a business that offers such services, it is always better to consult the experts. This will prevent many of the problems that can arise from a poorly drafted works contract.

Work contract – tax return

Whether you have to file a tax return depends primarily on who the contractor is – i.e. whether they are a business (e.g. self-employed) or a non-business.

The contractor is an entrepreneur (e.g. self-employed)

Income from a work contract is considered self-employment income and must be recorded in the accounts or tax records. The contractor files a tax return every year, regardless of the amount of income (with exceptions for very low income). He can claim flat-rate expenses or actual costs.

However, if a contractor enters into a contract for work that is not part of his business, it may be casual income. The income must be one-off and not exceed CZK 50 000 in total per year. Then it is exempt from tax. If it exceeds the limit, it must be included in the tax return and taxed.

The contractor is not an entrepreneur

If it is a one-off and exceptional activity, the income may be classified as occasional. If the total annual income from these activities does not exceed CZK 50 000, no tax is payable and no return is filed.

However, if the limit is exceeded or the activity is repetitive/constant, the contractor must file a tax return and tax the income as other income under Section 10 of the ITA (or risk assessment and penalties).

Summary

A works contract is an agreement whereby the contractor undertakes to create a work for the client for an agreed price. It can be concluded orally, in writing or by implication, but for more complex contracts, the written form is recommended.

The contractor may be an entrepreneur or a non-entrepreneur. If the contractor is a non-entrepreneur, the income may be exempt from tax as occasional income if it is a one-off and irregular activity and the occasional income does not exceed CZK 50,000 per year. Otherwise, the income is taxable.

An entrepreneur (e.g. self-employed) must generally tax income from a work contract as self-employment income and file a tax return. The exception is if it is occasional income outside the business and does not exceed CZK 50,000 per year – it is not taxed.

In 2025, the tax rate for individuals is 15%, or 23% for income above 36 times the average wage. Legal entities pay tax at 21% of the tax base. VAT payers have to pay VAT in addition to income tax. Non-payers do not pay VAT, but pay it in the price of purchases.