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How to tax a work contract

As the name implies, a work contract is an undertaking by a contractor to produce a particular work for a client, who must pay them for it. But how is the subsequent income taxed?

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Chapters of the article

A works contract doesn’t need to be in writing, but if it is some more expensive or complex work, it is advisable 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 or terminate the contract (unpaid invoices or late partial performance are typical reasons for withdrawal). However, in the following lines we will take a closer look at how income from a work contract is taxed.

Who is the contractor and when is the income not taxable

First of all, it must be said that anyone can be a contractor, whether a business or not. If the income is “occasional” and does not exceed CZK 30,000 per year, the contractor does not have to pay any tax on it. At the same time, the entrepreneur does not have to pay tax on such occasional income unless it is income from his business activity for which he has a trade license.

For example, a butcher who can also play the violin will play at a birthday party for a fee. However, it must be only occasional income and not regular income outside his normal business.

However, if the butcher was ill for 11 months and earned CZK 20,000 from a butchery in December, then he must tax his income.

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How does a contract for work get taxed

However, the contractor is usually a business and must file a tax return each 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 income tax on a works contract in 2023 is set by law at 15% for individuals and 19% of the tax base for corporations, i.e. all income less expenses. These costs can also be applied by sole traders on a flat-rate basis, i.e. 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 offering 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. It is also advisable to seek advice when paying income tax, preferably by having a tax return prepared. Tax regulations are very complex and change frequently. The penalties for any mistakes can be high.

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Author of the article

JUDr. Ondřej Preuss, Ph.D.

Ondřej is the attorney who came up with the idea of providing legal services online. He's been earning his living through legal services for more than 10 years. He especially likes to help clients who may have given up hope in solving their legal issues at work, for example with real estate transfers or copyright licenses.

Education
  • Law, Ph.D, Pf UK in Prague
  • Law, L’université Nancy-II, Nancy
  • Law, Master’s degree (Mgr.), Pf UK in Prague
  • International Territorial Studies (Bc.), FSV UK in Prague

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