New! Flat tax for self-employed in 2021

New flat tax for self-employed 

From the upcoming year self-employed would be able to fulfill all three obligations with one form and one payment – health and social insurance and income tax all in one. Entrepreneurs could apply for a flat tax voluntarily, thus simplifying their administration and saving time that they would otherwise spend on paperwork. The flat tax for self-employed, which for 2021 amounts to CZK 5.740 per month, includes:

• health insurance  – CZK 2.514,
• social security contributions (increased from the minimum advance by 15%) – CZK 3.126,
• income tax in the symbolic amount of CZK 100, which compensates for the higher social security contribution.

In the upcoming years, the amount will naturally increase according to the results of the state’s economy. The development of the flat tax will be influenced by inflation, GDP and unemployment rates. You can read more on current contributions here.

Flat tax is mostly suitable for small incomes

Entrepreneurs with an annual turnover of up to CZK 800.000 can apply for the flat tax. But that is not the only condition.

According to the amendment to the law, which is still being debated in the Parliament, an entrepreneur can apply for the flat tax, if he/she

• is not a VAT payer and has no registration obligation for it,
• does not perform the partner function in a publicly traded company or a limited partnership,
• is not a debtor against whom the authorities would open insolvency proceedings,
• has no income from employment with the exception of income from part time employment (dohoda o provedení práce).

Less administrative tasks VS. tax breaks

With a single payment, self-employed could get rid of communication with three state authorities. He/she simply sets a standing order for CZK 5.740 and solves all the obligations in advance. With a flat tax, they even have no obligation to file a tax return or insurance report.

Applying for a flat tax also has its disadvantages. Entrepreneurs would not have the opportunity to use major tax discounts and reliefs. Without more complicated calculations, flat tax is beneficial to childless and single entrepreneurs with annual incomes well below the limit of CZK 800.000.

Is the flat tax worth it or is it better to keep the old ways?

According to calculations by experts from the Ministry of Finance, flat tax will be worth it to approximately 120 000 Czech entrepreneurs. But everyone will benefit differently. The calculation of the tax depends on the amount of income, the method of expenses calculations and existence any tax discounts.

Example

Entrepreneur with annual revenues of 800.000 CZK, that uses a 40% lump sum expense calculation would benefit from this tax, not only being childless, but also as a parent, who would theoretically apply a discount for two children. In the first case monthly savings are CZK 7.001.

The flat tax pays off mainly with a low expense rate. In this case, with an income of 800.000 CZK per a year and 40% of the expenses. On the contrary, small entrepreneurs with a higher lump sum expense rate would not benefit, but quite the opposite. 

For a small entrepreneur with an annual income of 400.000 CZK and an 80% expense rate (ex. farmer), flat tax will not pay off with or without children. As a result a childless entrepreneur would pay CZK 6,876 more per year than they would have to. Ministry of finance has created a calculator, where you can check your specific case.

Flat tax: a measure that reduces differences in retirement

The state perceives the flat tax as a measure that will reduce the differences between the retirement contributions of employees and self-employed persons. Most self-employed people pay only minimum social insurance contributions. Thanks to the concept of a flat tax, entrepreneurs will pay only CZK 100 in taxes, but they will pay extra to the retirement system, which will also increase their pensions.

The state hopes to strengthen the pension pillar from the flat tax. At the same time, it maintains a voluntary contribution to a supplementary pension insurance.

How to apply for the flat tax

Using the Ministry of Finance special form, the so-called Notification of entry into the flat tax regimen.

It is to be sent to the local tax office, but no later than 10 days after the beginning of the period for which a flat tax would be paid. If the start with the flat tax is from January 1st 2021, the notification should be submitted no later than January10th 2021.

Data mailbox can also be used to register for the flat tax. 

The notification will include mandatory information such as:

• identification and contact details,
• information on entering the flat tax regime (date, annual turnover for the previous relevant period, etc.),
• details of social insurance,
• and information on the self-employed person’s health insurance.