Self-employed: How to keep income (and expense) records

What should I record?

It depends on how you claim expenses; there are essentially two options: lump-sum or actual expenses.

Lump-sum expenses

These are worthwhile for most business owners, especially if you sell services and therefore have relatively low expenses. In simple terms, if your annual business income is, say, CZK 800,000 and you operate under a trade licence, the state says: we will not make life difficult for you; we have an arrangement that earning those CZK 800,000 cost you 60% in expenses, so the profit we want to tax is just 40% of your income… 🙂 So the taxable amount is CZK 800,000 * 0.4 = CZK 320,000. Unfortunately, not everyone can claim such a high lump-sum rate. The statutory options are:

1. 80% of income – agricultural production and craft trades (up to CZK 1,600,000),
2. 60% of income – trade-licensed business activities (up to CZK 1,200,000),
3. 40% of income – other income from independent activities, i.e. doctors, lawyers, tax advisers, physiotherapists, etc. (up to CZK 800,000),
4. 30% of income – rental income (up to CZK 600,000).

If you decide to use lump-sum expenses, you only need to keep income records.

Actual expenses

These are particularly beneficial for those with high costs, typically if you manufacture your own products or sell goods. They are also often worthwhile for self-employed people in the 30% and 40% lump-sum expense categories, as their actual expenses tend to be higher. In this case, you need to keep records of both income and expenses. 

How should I keep the records? 

A simple Excel spreadsheet in which you enter the necessary information is perfectly adequate. Your records must include the invoice number, issue date, what you are invoicing for/buying, to/from whom, the amount and the payment date. The payment date is extremely important: you do not pay tax on income until your client/customer has paid you, and you cannot say something is an expense until you have paid for it. I also often note whether payment was made in cash or by bank transfer.

Tables with sample entries: 

Records must be kept in CZK; if you invoice in a foreign currency (EUR, USD…), the approach depends on which account the money was received in:

• a Czech koruna account: enter the exact amount received in your account in the amount column (e.g. CZK 8,659.65),
• a foreign currency account: temporarily enter the foreign currency amount in the column (e.g. EUR 200) and, after the end of the year, decide whether to convert it to korunas using the daily rate (published daily by the Czech National Bank) or the uniform exchange rate (after the end of the year, the General Financial Directorate publishes one rate for the entire preceding year). Naturally, choose whichever is more favourable for you. 

If you also keep records of expenses and pay supplier invoices in foreign currencies, the procedure is similar. If you send money from a koruna account, enter the exact amount debited from your account in the records. If you send money from a foreign currency account, record the foreign currency amount and decide on the more favourable conversion rate after the end of the year. 

It is important to remember that you cannot combine daily and uniform exchange rates within a single year. Whichever you choose, that rate method will be used to convert all your foreign transactions (income, expenses and other income, such as foreign savings account interest, dividends, etc.).

When should I prepare the records, and what are the benefits?

It is best to keep the records up to date as you go. For example, whenever you issue an invoice, enter it in your spreadsheet straight away, and record when the customer pays it too. These records can also provide a simple, clear way to check that customers have paid everything they owe.  And if you also keep expense records, you can check that you have no outstanding debts. I have also had excellent experience with affordable invoicing software such as Fakturoid, where you can record all issued and received invoices and export your income and expense records to PDF or Excel in an instant. 

Above all, keeping your records neatly like this will make filing your tax return easier, faster and cheaper! 🙂

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If you are unsure what to do, please get in touch and we can look at it together. 🙂