Income tax – 3 options

The 2 basic ways of calculating income tax for self-employed people have already been described on the blog, along with a practical guide to keeping your own income (and expense) records. The advantage is that you can always decide how to claim expenses when you file your tax return. This means that, if you are starting out and do not know how high your expenses will be, collect all receipts and record them in a simple expense register. After the year ends, you can easily add up what proportion of your income the expenses represent. If the proportion is higher than the statutory lump-sum expense percentage, claiming actual expenses will be worthwhile.

The third alternative is the new flat-rate tax. This is one single payment covering not only tax but, above all, social and health insurance contributions. I have already discussed its rules and conditions. But make sure you meet the conditions for using it: experience has already shown me that joining the flat-rate tax scheme is not as simple as it may seem. 🙂 If you meet the flat-rate tax conditions, you can stop reading here. You do not file a tax return or health and social insurance statements.

Tax relief

If you receive income from several activities – employment, business, rentals, shares, etc.—these credits and deductions are always applied only to the combined total of all income and profits.

Deductions (deducted from total income and profits, so they save you 15% in tax):
  • charitable donations: up to 30% of the tax base
  • blood donations: CZK 3,000/donation
  • bone marrow donations: CZK 20,000/donation
  • mortgage interest paid on your own home: up to CZK 300,000
  • supplementary pension insurance: up to CZK 24,000 (amounts paid above CZK 1,000/month count)
  • life insurance: up to CZK 24,000
Credits (deducted from the tax already calculated):
  • basic taxpayer credit: CZK 27,840
  • spouse credit: CZK 24,840 (the partner’s income must be below CZK 68,000, and you must live in the same household and be married or registered partners)
  • dependent child tax relief 
  • studies: CZK 4,020
  • disability: from CZK 2,520 to CZK 16,140 (depending on the degree of disability)
  • relief for preschool fees paid: up to CZK 14,600
  • introduction of electronic sales reporting (EET): up to CZK 5,000

It is important to check whether you meet the conditions. For supplementary pension insurance and life insurance, you must ensure that your insurer’s particular product meets the statutory conditions for claiming a tax deduction. Supporting confirmation must be attached to the return for each deduction and credit claimed.

Tax return and insurance statements

Essentially, you state how much you earned and what your expenses were. Calculations then produce the final tax and contributions. In simple terms, tax is 15% of profit, with the amount most often affected by the deductions and credits mentioned above. Although everyone fears taxes, experience tells me the hardest payment is social insurance. Mainly because no deductions or credits affect it, so it is always paid in full. Health insurance is a little better.

To process everything correctly, you need to have the right documents ready. To complete the statements, you will then receive an account reconciliation by post or in your data mailbox, in which your health and social insurance authorities tell you what advance payments they expected and what they have recorded as paid.

You give all this to your accountant, who prepares the return and statements based on these documents. If you feel confident, you can prepare everything yourself. You can submit everything either on paper at the relevant branches or electronically through your business data mailbox.

All in all, you will end up with either overpayments or balances due at the institutions. Your actual income then affects the advances you pay the following year. I discussed health and social insurance advances in a similar way last time. As for income tax advances, you pay these twice a year if your tax exceeded CZK 30,000.

If you met the flat-rate tax conditions throughout the year, none of the above applies to you. You do not need to file a return or any statements. The flat-rate tax advances you paid are considered sufficient. 🙂

Perhaps this whole series has worried you a little, but I can assure you it is nothing terrible. If you do not feel confident tackling it, do not hesitate to get in touch and we can look at it together. 🙂