How to reduce advances for self-employed persons

Chapters of the article

• What a sole trader must pay
• Ask for a reduction in advances
• How much can the advance be reduced?
• What about overpayments or underpayments?

What a sole trader has to pay

As a self-employed person, you must pay taxes on your profits and submit a tax return each year. However, you don’t pay tax on the whole amount you receive in your account, but only on the difference between your income and expenditure. The tax rate on your income is 15%.

For expenses, you have the option of either keeping all receipts and invoices and claiming the actual costs, or you can use the flat-rate expense option, which simplifies the whole tax process. Different rates can be used for the calculation depending on the type of activity:

• 80% of income is for craft trades, agriculture and forestry;
• 60% of the income applies to other types of trades such as free, tied and licensed trades;
• 40% of income may be applied to activities for which you do not have a trade licence, such as income from copyright or activities under special legislation.

You must also pay health and social security contributions. For 2024, the minimum advance payments for social insurance are set at CZK 3,852 and for health insurance at CZK 2,968. Changes in the amount of social security contributions do not occur until the annual statement is submitted, which is typically in May. At that time, you can adjust your advance payments either to the newly set minimum amount or to the amount calculated on the basis of your income and expenditure statement from the previous year. If you are already paying more than the minimum amount, there is no need to make any changes.

For self-employed persons running a secondary activity, the minimum deposit for social insurance will increase to CZK 1,413 in 2024; health insurance is not paid in this case. In addition, new entrepreneurs starting a business do not have to pay any advance payments at all for the first year.

An important piece of information is that the amount of these advances depends on the income you earned in the previous year. The life of a sole trader can be turbulent and profits from the previous year are certainly no guarantee of future profits. So let’s now take a brief look at how to respond to a situation where your profits fall dramatically but your advances remain high because you earned a lot last year.

Ask for a reduction in advances

Have you changed jobs since the New Year or lost an important client? Has your income fallen dramatically but your social security and health insurance contributions are still due? Don’t despair, there’s a solution. But it all depends on your activity. The authorities won’t do anything on their own because they continue to assume that your income hasn’t changed. In addition, they will base their calculations on your 2023 return, which you must submit to them this year by April 2 for physical filing or May 2 for electronic filing. Then, in the case of tax advisors and attorneys, the latest deadline is July 1.

The solution is simple – ask the Czech Social Security Administration and the health insurance company to reduce the advance payments you make due to a reduction in your income. The application is made on a special form:‘Application for reduction of the monthly assessment base for self-employed persons‘ with the Czech Social Security Administration or‘Application for reduction of the advance payment for insurance premiums for self-employed persons‘ with the General Health Insurance Company.

But it doesn’t stop there. You still need to prove that your income has actually decreased. The difference in income between last year and this year must be at least one third. This is calculated as the difference between your average income last year and this year, using the last three consecutive calendar months as the basis for the calculation. We have prepared the following table to illustrate this:

The table above shows that income for the first three months of 2024 has fallen by more than ⅓ and therefore it is possible to apply to the authorities for a reduction in advances. You can do this for the first time during April.

How much can the deposit be reduced?

The Czech Social Security Administration or health insurance company decides whether to reduce the advance payment according to its internal methodology. It applies that advances cannot be reduced below the legal minimum (in 2024, the minimum advance for self-employed persons is CZK 3,852 for social insurance and CZK 2,968 for health insurance).

If you are granted a reduction in advances, it will take effect from the following month. This level of advance payments will then apply until your next tax return, when you will be assessed new advance payments on your 2024 income.

What about overpayments or underpayments?

The good news is that even if you overpay, so to speak, the authorities will refund the overpayment at the end of the year when you file your return. Alternatively, you can use the overpayment to make advances for the following year. You need to request a refund when you file your statement for the Social Security and Health Insurance Institutions. You must then be reimbursed within a maximum of 30 days. If you have incurred an overpayment of tax and wish to claim it back, you must apply for a refund.

You can apply for a refund either through the tax office’s application, by electronic submission to the Tax Administration, or via a data box. Another option is to send an email, which you must then verify by physically signing the document. The refund of the overpayment will then be made to your account or address within 30 days. It also applies that it is only refunded if it is more than 200 crowns. But of course it pays not to overpay anything unnecessarily, reduce the advance in time and use the money for business development or personal consumption.

If you have an outstanding social security or health insurance debt, you must pay it within eight days of filing your statement. The tax arrears must then be paid together with the tax return. Payment can be made at any tax office cash desk, by bank transfer or by bank transfer to the account of the relevant tax office where the income taxes belong.