Sole trader taxes in Czechia: flat-rate tax vs actual expenses

Taxation is one of a sole trader's main decisions — and unlike an employee, they largely decide it themselves. The difference between the options is not small: the wrong choice can mean unnecessarily high tax or unnecessary administration. The good news is that there are only three options and they are easy to compare.

Let's go through expense allowances, actual expenses and the flat-rate tax, and say who each one suits.

Expense allowances

An expense allowance means that instead of documenting actual costs you claim expenses as a fixed percentage of income. The rate depends on the type of activity: 80 % for craft and agricultural trades, 60 % for unqualified trades, 40 % for liberal professions and 30 % for rental income (with an annual cap). You need not keep receipts or complex accounting — a record of income is enough. For sole traders with low real costs, this is usually the most advantageous option.

Allowances also have a capped maximum amount of deductible expenses, so at very high income the given percentage may no longer cover the whole real cost. Even so, it is the simplest way to claim expenses.

Actual expenses

The second option is to claim actual expenses — that is, really incurred costs supported by documents. It pays off when actual costs are higher than an allowance would cover — typically for activities with high inputs, purchases of materials or goods. Only the real profit is then taxed, in exchange for the obligation to keep provable records of costs. Before choosing, it therefore pays to calculate both options.

The flat-rate tax

The flat-rate tax goes even further: it combines income tax and social and health insurance contributions into a single monthly payment and frees the sole trader of most administration and of filing a return. It has three bands according to the amount and type of income. Only someone who is not a VAT payer, has income up to CZK 2,000,000 and meets further conditions can enter it; you must register by 10 January of the given year. For many sole traders it is the simplest regime of all.

Switching between regimes is possible only from the start of a new taxable period, not mid-year, so the choice is worth thinking through in advance. With the flat-rate tax, moreover, if you stop meeting the conditions during the year — for example by becoming a VAT payer — you drop out of the regime and pay tax and contributions in the ordinary way.

How to choose

What decides is the ratio of actual costs to income and the overall turnover. Someone with low real costs usually gains on an allowance or the flat-rate tax; someone with high costs saves on actual expenses. It pays to calculate the options, ideally with an accountant, because the difference in tax paid and in time spent on administration can be considerable over a year. The basic personal income tax rate, meanwhile, is 15 %, and 23 % for high income above 36 times the average wage.

Conclusion

A sole trader chooses between expense allowances, actual expenses and the flat-rate tax — and what decides is the level of real costs and turnover. Allowances and the flat-rate tax lead at low costs and for simplicity, actual expenses at high costs. How and when the return is filed is covered in the article tax returns in Czechia.

Frequently asked questions