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What payments and levies do self-employed persons have to take into account?

Self-employment involves a certain degree of administrative burden in the form of levies, payments and tax returns. What does all this entail and when is a flat-rate tax paid instead? What will all change for the self-employed in 2023? That’s what we look at in our article.

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Main and secondary gainful activities

As a self-employed person, you can work as a main or secondary earner. In the case of a main activity, this is de facto “full-time” work, similar to employment. If you set up your business in this way, you must pay at least the minimum social security and health insurance contributions from the first month of your business. However, if you expect an income of tens of thousands or hundreds of thousands, it is worth paying higher amounts right from the start, or at least putting money aside so that you are not surprised by high arrears later.

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If we evaluate the business purely from the point of view of paying taxes, it is worthwhile to have the business as a secondary activity, i.e. rather as a supplementary income. According to the law, self-employment is considered secondary if:

  • you are an employee (and your employer pays the insurance premiums for you). It is not necessary to be employed full-time,
  • you are a student under the age of 26,
  • you are entitled to maternity leave or parental allowance, or you are caring for someone who is dependent on the care of others,
  • receive an old-age or invalidity pension,
  • you are performing military service in the armed forces of the Czech Republic.

If you have set up your business as a secondary activity, the mandatory advance payments will be reduced quite significantly, or you can avoid paying them altogether.

Tip: Do you want to become more independent at work and adapt your work pace to your needs? Are you planning to work in an industry where employment is almost impossible? Are you looking for some extra income? In all these cases, a trade licence may be useful. In our guide, you’ll find out how to set up a trade in five easy steps.

Tax obligations

As a self-employed person, you are required to pay taxes on your income and file a tax return each year. However, you don’t pay everything that lands in your account, only the difference between your income and expenses. The income tax rate is 15%. As for expenses, you can either keep all receipts and invoices and claim the actual expenses, or the law offers you the option of choosing a flat-rate expense.

Another option for those who run their main business is to apply the so-called flat-rate tax, which we will look at in more detail below.

Income from:

  • the exercise of an independent profession,
  • rental of property,
  • sole proprietorship,
  • agricultural production, forestry and water management,
  • the use or grant of copyright,
  • any other business with entrepreneurial authorisation.

Expenditure flat rate

Lump-sum expenses are sometimes confused with a flat tax, but this is quite different. A flat-rate expense will replace the complicated listing and counting of individual actual expenses (which, on the other hand, will pay off if the actual expenses exceed the flat-rate ones, for example, when goods are resold). Instead of collecting receipts, you can choose one of the following rates depending on the type of business:

  • 80% of income applies to craft trades, agriculture and forestry;
  • 60% of income for other trades (free, tied and licensed);
  • 40 % of income from activities for which you do not have a trade licence (for example, income from copyright or freelance activities and businesses under special legislation).

If your expenditure exceeds your income, this is a loss, by which the tax base is then reduced in future tax periods.

Flat-rate tax

The flat-rate tax can be applied by businesses from 2021. It is mainly sought by those who want to simplify their lives with administration and get rid of tax returns. It is worthwhile for people who do not usually deal much with deductible items such as mortgage interest, gifts or pension contributions in their tax return, do not claim tax credits for children and so on.

The flat-rate scheme involves registering by 10 January of the relevant year and then paying the same tax payment each month as set by the state. You do not have to fill in tax returns, insurance and social security statements the following year and you cannot incur any annual arrears. Does this sound like an ideal situation? There are some disadvantages, after all. You must keep an eye on your income, as you must not exceed an annual income of CZK 2,000,000. But not everyone can do that. A bigger complication arises when you have to prove your income, for example, for the purposes of a mortgage or other loan. Normally, entrepreneurs do this through a tax return, but you do not file it in the flat-rate regime. So you may not get along with some banks at all, while with others you may have to find alternative ways of proving your income.

From 2023, self-employed persons with income up to CZK 2,000,000 who are not VAT payers will be able to enter the flat-rate regime. Three flat-rate tax bands will be newly introduced, namely CZK 6,208 per month (CZK 214 more than in 2022), CZK 16,000 per month and CZK 26,000 per month. The amount is then payable by the 20th day of the calendar month for which the advance is paid.

Advances on health insurance in 2023

For health insurance, the minimum advance payment in 2023 increases to CZK 2,722 (this is an increase of CZK 41 compared to 2022). The amount changes as soon as the payment for January is made, so you need to amend your standing orders in this respect (specifically by 8 February, when the payment for January must be received at the latest). However, if you pay more than the legal minimum, you don’t need to worry about anything until your tax return. If you forget to change your minimum deposit amount at the bank, health insurance staff will usually notify you of the underpayment.

Self-employed people who work as a sideline do not pay the minimum health insurance advance. Simply submit an income and expenditure statement to your health insurance company once a year and then, if necessary, pay the premium at once according to your actual income.

Social security contributions in 2023

Social insurance contributions for 2023 are set at a minimum of CZK 2,944 (i.e. CZK 103 more than for 2022). For social insurance, the advance payments change in the month in which you submit your 2022 statement, usually in April. Either you set your new minimum advance payments higher or those calculated on the basis of the income and expenditure statement you submitted last year. As with health insurance, if you are already paying more than the minimum, you don’t have to worry.

For self-employed persons who carry out secondary activities, the minimum advance payment for social insurance will rise to CZK 1,178 in 2023. However, if they are starting a business, they will pay no advance for the first year.

Tip: Considering whether to choose a trade or a job? How about trying both? What are the advantages of such a combination and what can stand in your way of doing business? That’s what we discuss in our article.

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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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