Employees & Czech Tax Returns - 9 Cases When You Must File
In most cases of full-time employment, the employer is responsible for filing the annual tax return of the employee. However, in the Czech Republic, there are certain cases when the employee must file their own tax return. In other cases, it can even be advantageous to voluntarily report your taxable income.
This is due to employers applying only the standard taxpayer discount when filing annual tax returns for their employees. The employer does not take into account any possible tax discounts, tax bonuses, or tax relief employees might be able to receive. Take for example tax discounts for unemployed spouses, or tax bonuses for having children. The employer will not declare these write-offs, even though it’s possible for you to reduce your tax burden.
If an employee does file their own taxable income report, they need “confirmation of taxable income from dependent activity.” The confirmation must cover the entire taxable calendar year, and report all employment over that time. If there is other taxable income according to § 7 to § 10 of the Income Tax Act, it must be reported if it is higher than CZK 6 000 per year.
Read on as we cover 9 cases when employees are obligated to file their own Czech taxable income report. We’ll also share why employees voluntarily file taxes to reduce their tax burden thanks to bonuses, discounts, and relief.
But first: Czech Payroll Tax vs Employee Income Tax
A common misunderstanding among employees and employers is the difference between Czech payroll tax and employee income tax.
Payroll tax is what an employer takes out of an employee’s monthly salary. This includes mandatory contributions to social security and health insurance, and income tax on the employee’s earnings. These amounts come out of gross salary every month, leaving the employee with their net salary afterwards.
Currently, Czech payroll tax is 15% or 23% of gross employee salary, depending on the amount of annual earnings. The rate of 23% applies to gross annual salaries over CZK 1,582,812, while the 15% is for earnings below this threshold.
Further, employee payroll tax includes:
- Employee health insurance at 4.5 % of gross salary
- Employee social security tax at 7.1 % of gross salary starting from 1.1.2024. Both 6.5 % for pension contribution and 0.6 % for Sickness Insurance are paid as one social security tax
The employer also pays on top of the employee’s gross salary 24.8% into employer social security tax, and 9% into employer health insurance.
On the other hand, an employee’s income tax report is not related to payroll taxes. Employee income tax takes into account an individual’s total income (including from other earnings, gifts, or inheritance). This also includes any tax relief, discounts, or bonuses they are eligible to claim. These, the employer is not responsible to file. Thus, employees often file the employee tax return voluntarily, or for example when earning side income that they must report, or for inheritance.
Now, how about those reasons when you should file an employee tax report?
1 - Working for two employers at once
If working for two employers in one month, you must file a tax return if both employers deduct advanced income tax from your wages. For income only from dependent activities, it is possible to use a two-page tax form. However, in certain cases, you will not need to file, such as earning additional income under CZK 10,000 on a work performance agreement (DPP).
For example, say you agree to a DPP contract for one month’s work performance at CZK 9,000. This is additional income to your main employment relationship. But, because withholding tax is already paid under the DPP agreement, you are not obligated to file a personal tax report as the remuneration is CZK 10,000 or less.
Now, keep in mind, you might still be entitled to a tax return, even with a DPP of 10,000 or less. This is when you might consider the advantages of voluntarily filing.
2 - Earning above-standard income
In 2023, the Czech Republic has two brackets for income tax. The first is 15%, and applies to ‘standard’ income. The higher rate of 23% applies to ‘above-standard’ income.
23% income tax on earnings above CZK 1,582,812 annual gross (CZK 131,901 monthly)
15% income tax on earnings below CZK 1,582,812 annual gross (CZK 131,901 monthly)
These two brackets have replaced the Czech Solidarity Tax. Previously, this obligated employees to file personal tax returns if their income increased due to a solidarity tax increase.
Now, there are income limits to determine standard versus above-standard income, and which percentage (15% or 23%) each entails.
3 - Making side income from self-employment
If you have an employer but also earn income from self-employed activities, it’s necessary to file your own tax return. However, you report any activities on a trade licence (“zivno”) as secondary income, even if you make more from this “side job”. This is because your main employer already contributes to your monthly social and health insurance advances.
After the end of the first year, you will have to request an annual statement from your main employer. Here, you might need to settle any balance remaining. The balance will depend on your income from employment combined with the tax base from your trade license activities.
You declare income tax from employment together with that of your side business in one tax report. Any tax discounts, tax bonuses, or tax relief then applies to this merged income tax of the full previous tax year. As a trade licence holder, you can also still use the 60-40 tax reporting method if you meet certain conditions.
4 - Listing capital income
In many financial products, such as current bank accounts or savings accounts, interest is already subject to withholding tax. Taxation here is final, and thus not obligatory to include in a personal tax return.
If an employee lists capital income, according to § 8 of the Income Tax Act the employee must file a tax return. Examples of capital income include:
Shares of profit from a business corporation or a silent partner
Interest or other income generated from a granted loan or loans
Benefits for supplementary pension insurance, insurance and pension savings with contributions from the state
Private life insurance payments, or other income from insurance which does not terminate the contract
Income from a one-time deposit
Interest from holding securities
Income from a settlement, winnings, or other income
Interest from funds in a personal account unrelated to your business activities
Profits from a family foundation or trust fund
In most cases, the examples above fall under capital assets. However, if the income derives from dependent activity (employment, service, membership), it is not considered a capital asset. The same is true if the income is for a member of a cooperative, a partner in an S.R.O., a limited partner in a limited partnership, or from a legal entity.
5 - Declaring rental income
Any income from rental properties in the Czech Republic is subject to income tax according to § 9 of the Income Tax Act. This also states that taxpayers apply a 30% flat rate to expenses for the rental property. When declaring rental income, the employee fills in Appendix 2 of the Czech tax return.
6 - For other taxable revenue
Income from the sale of real estate, other property, or securities may also be subject to personal income tax. The conditions are set by law, with some exemptions that can apply (more on these below). To report other taxable revenue, the taxpayer fills in Appendix 2 in the tax return.
7 - Earning occasional income over CZK 30 000
Receiving occasional income is only exempt from income tax when it does not exceed CZK 30,000 over the taxable year. The income also cannot derive from regular business activities, or from small “side jobs.” In those cases, you would report the income as self-employed activities. These earnings you file merged with your income from employment to report your personal taxable income.
8 - Receiving non-exempt gifts in the Czech Republic
As of 2014, gift tax as well as inheritance tax has been abolished in the Czech Republic. Both now fall under regular income tax. That is unless the donation is exempt from taxes. If it is a non-exempt gift, natural persons pay 15% income tax, and natural entities pay 19%. This is declared as gratuitous income in the personal tax report.
Common exemptions from income tax include:
Donations from a spouse or direct line of family (immediate family: children, parents, grandparents, grandchildren)
Donations from a collateral family member (siblings, nieces, nephews, uncles, aunts; the spouse of a child; a spouse’s child, etc)
Gifts received for being a caretaker of a joint household, or for once being a dependent of the beneficiary, donor, or testator for maintenance purposes
Note: Donations that do not exceed CZK 50 000 per taxable year are exempt from income tax. This stands no matter the donor.
9 - Voluntarily filing for tax relief, discounts, and bonuses
Sure, it’s easy to have your employer handle all your tax matters and your annual tax settlement. But, in some cases, it’s more advantageous for you to voluntarily file your own personal tax return. This applies to anybody who can deduct additional tax relief, tax discounts, and tax bonuses to their annual settlement.
For example, the employer only applies the general taxpayer discount to their employees’ returns. It’s not only easier for them, this is all they are responsible to do by law.
What this means is that employees are often missing out on many opportunities to reduce their tax burden. There are tax credits for parents and spouses, deductible expenses, as well as income non-exempt from taxes. All of these together can amount to significant savings on your annual settlement, which your employer will neglect to deduct.
In some cases, you might even be missing out on a significant tax return because the employer filed for you. One example is if you only worked part of the year. Let’s say it was 5 months. Now, at tax time, the basic taxpayer’s discount can apply across all 12 months of the year. Any difference remaining after taxes, you can receive back to increase your tax return, but only if you choose to file.
Tax relief
Simply put, tax relief refers to expenses deductible from your taxable income (your tax base). Take for example the 60-40 tax reporting method. The 40% is where tax relief will apply, as this is your ‘tax base’. Also note, tax relief is only available to employee freelancers whose annual income exceeds 113,400 CZK.
Deductible expenses then include:
Voluntarily donating blood, plasma, organs
Relief on mortgage interest rates
Pension and retirement funds (private, non-government pension savings with a maximum deductible of CZK 24,000)
Life insurance
Examination fees for continuing education
Implementation of public research and development
Supporting the professional education of another person
Tax discounts
A tax discount applies to the total tax amount (not the tax base). There is the general discount for all taxpayers, as well as discounts for various situations.
The general taxpayer discount for freelancers (available for everyone, regardless of how long the trade license has been active, and no matter the main source of income)
Tax discount for a spouse who is unemployed or earns under CZK 68,000 annual
Tax discount for kindergarten fees (only applicable to one of the child’s parents)
Tax bonuses
A tax bonus refers to an amount which you can claim back from the tax office due to overpayment after reductions. These include bonuses for parents of:
A first child (up to a maximum of CZK 15,204)
A second child (up to CZK 22,320)
Three or more children (up to CZK 27,840)
Note: It is not possible for both parents to claim a tax bonus for children. Also, the maximum bonus is based on the amount of months from the taxable years the parent’s trade license has been active.
Want to calculate it yourself? There’s a tool for that!
Why not try Pexpat’s free Online Employee Tax Return Calculator for the Czech Republic? Determine if you should or must file an employee tax return by simply checking the boxes that apply to your unique situation. Calculations also account for how much your employer paid, and any tax relief, discounts, or bonuses you can receive.
Get professional support for your personal tax return
If you have questions about reporting your taxable income in the Czech Republic, Pexpats has answers. Our certified accountants provide professional tax services for Czech employees, freelancers, and businesses alike. We’ll assist you in finding all tax relief, discounts, and bonuses available to reduce your tax burden, and save on taxes in the end. Just reach out for professional, worry-free tax services and consultation for whatever your Czech tax reporting needs may be.