Flat-rate expenses

If you are self-employed, there are three ways to tax expenses on your tax return. The simplest is to use flat rate expenses. Who can use a flat rate and how much? Up to what limit?

1. A flat-rate expenses

A flat expenditure can be characterised as a form of fixed expenditure of a percentage of annual income. The amount of income for the application of a lump sum expense may not exceed CZK 2,000,000. The percentage is fixed, including the limits which constitute the so-called ceiling of the flat rate expenditure. This means that if a self-employed person applies a lump sum that is higher than the statutory ceiling, he or she can only claim in expenses the amount that constitutes the maximum for that lump sum.

It should also be said that it is not possible to choose a flat rate at will, i.e. always the highest.

Flat rate expenses are categorised according to the type of business:

• 30% - rent. This type of lump sum can be applied to:

  • renting an apartment, house, land, non-residential premises,
  • regular rental of movable property, e.g. a car, machinery.

• 40% - freelance occupations, income from copyright, business under special regulations which may not require a trade licence. The following professions can claim this type of flat rate:

  • lawyers,
  • doctors,
  • notaries,
  • architects,
  • insurance consultants,
  • artists,
  • authors.

• 60% - other trades, free, bound, licensed trades. The following professions can claim this type of flat rate:

  • geologist,
  • optician,
  • credit intermediary,
  • accountant,
  • massage therapist,
  • animal breeder,
  • lecturer,
  • financial advisor,
  • accommodation provider,
  • all those who have a trade licence but are not listed in Annex 1 of the Trade Licensing Act.

• 80% - agricultural production, forestry and water management, craft trades. The following professions can claim this type of flat rate:

  • peasant,
  • fisherman,
  • butcher,
  • baker,
  • furrier,
  • locksmith,
  • bricklayer,
  • plumber,
  • innkeeper,
  • manicurist,
  • hairdresser.

The full list can be found in Appendix 1 of the Trade Licensing Act.

Limit or ceiling

The law defines the limit for the application of flat-rate expenses according to the type of income as follows:

Flat-rate expenditure by type of activity can be used up to the ceiling set by law. This means that if an entrepreneur has an income of CZK 2,500,000 and applies a 60% flat rate, he can apply a maximum of CZK 1,200,000, although 60% of CZK 2,500,000 is CZK 1,500,000.

What are the lump sum expenses?

Flat-rate expenses include all expenses including salaries and depreciation of assets. This means that it is a finite amount that a sole trader can claim. Other business-related expenses, such as the car allowance (which can only be claimed if actual expenses are claimed), cannot be added to it.

Multiple types of income and different flat rate percentage

If a sole trader has more than one type of income, for example income from business and rental income, all income cannot be included in one flat rate. These incomes must be shown separately in the tax return. I.e. income from business to which a 60% flat rate applies (if it is a sole trade) and income from renting to which a 30% flat rate applies. Tables for each type of income (lump sum) are to be filled in Appendix 1 of the tax return.

Attention! If a sole trader has more than one type of income, he/she must apply only one type of expenses, either flat-rate expenses or actual expenses. It is not possible to combine flat-rate and actual expenses in the tax return.

Flat rate expenditure in practice

We will now look at some examples of flat-rate expenditure in practice.

Example 1

Adam is a computer programmer. He runs his business under a trade licence. He earns an income of CZK 1,750,000. His expenses were CZK 45,000.

Is it worthwhile for him to have a flat-rate expenditure?

Adam declares income of CZK 1,750,000 in his tax return and applies a 60% flat rate of CZK 1,050,000 (1,750,000 × 60%). His tax base is CZK 700,000 (1,750,000 - 1,050,000). Adam will reduce his tax base on the lump-sum expenses, so the lump-sum expenses will be paid.

Example 2

Peter is a farmer. His income in 2022 was CZK 1,750,000. His expenditure was CZK 900,000.

Is it worthwhile for him to have flat-rate expenses?

Peter declares income of CZK 1,750,000 on his tax return, he applies an 80% flat rate of CZK 1,400,000 (1,750,000 × 80%). His tax base is CZK 350,000 (1,750,000 - 1,400,000). Peter will reduce his tax base on the flat rate expenditure, so the flat rate expenditure is worthwhile.

Example 3

Anna is a pensioner. She rents an apartment and has no income other than her pension. Her rental income was CZK 360,000. Her actual expenditure was CZK 150,000.

Is it worthwhile for her to have a flat-rate expense?

Anna declares income of CZK 360,000 on her tax return and applies a 30% flat rate of CZK 108,000 (360,000 × 30%). Her tax base is CZK 252,000 (360,000 - 108,000). Anna will not reduce her tax base on the flat-rate expenses because her expenses are higher than if she had claimed the flat-rate. Anna does not benefit from the lump-sum expenses. It is more advantageous for her to claim her actual expenses. In her tax return, she receives CZK 360,000 and claims actual expenses of CZK 150,000. Her tax base will be CZK 210,000 (CZK 360,000 - CZK 150,000).

Example 4

Martha is a pensioner. She rents an apartment and has no income other than her pension. Her rental income was CZK 360,000. Her actual expenditure was CZK 50,000.

Is it worthwhile for her to have a flat-rate expense?

Martha reports income of CZK 360,000 on her tax return and applies a 30% flat rate of CZK 108,000 (360,000 × 30%). Her taxable amount is CZK 252,000 (360,000 - 108,000). Martha's taxable amount will be reduced by the flat-rate expenses, so the flat-rate expenses are worthwhile.

Example 5

Ema is a blogger. She does not have a business license and earns money by writing blog posts, articles and publishing videos as an influencer. Her income was CZK 750,000. Her expenses were a minimum of CZK 35,000.

Is it worthwhile for her to have flat-rate expenses?

Ema's tax return shows an income of CZK 750,000, she applies a 40% flat rate of CZK 300,000 (750,000 × 40%). Her tax base is CZK 450,000 (750,000 - 300,000). Ema will reduce her tax base on the flat rate expenses, so the flat rate expenses are worthwhile. Although she does not have a trade licence, she taxes her income as a sole trader using the 40% flat rate as for income from a copyright work.

2. Actual expenses

In addition to flat-rate expenses, sole traders can also claim actual or real expenses. For this type of expenditure, you need to keep records of all expenses (tax documents, invoices, receipts). This increases the cost of administration and creates more bureaucracy.

3. Accounting

Another way to claim your income is by keeping accounts.

If a self-employed person decides to enter the flat-rate tax regime, he can do so until 10 January 2023. Before entering, it is recommended to calculate the amount of income and estimate the amount of income in the next year.

Not sure if a flat tax is worth it? Contact us. We can advise you on what is better for you, whether flat tax or flat expenses.