The flat-rate allowance is convenient. However, anyone using it cannot claim either the tax allowance for a dependent spouse or the child allowance. Furthermore, this may result in a higher assessment base for insurance contributions.
Mr Richard Zámečník has been self-employed as a locksmith for two years. In his first year of self-employment, he bought tools, set up his workshop and ran advertising campaigns. He recorded all his income and expenditure and found that his business had made little profit so far – he recorded a loss of CZK 105,000.
The year 2015 was more promising for him. He received several lucrative contracts, and his total income amounted to CZK 980,000. He now faces the decision of whether to continue claiming actual expenses or to claim a flat-rate allowance of 80%.
In addition to pure income and expenditure, the following factors also play a role in the calculation:
- Richard is married; his wife is on parental leave with their younger child, Robert, who was born on 30 November 2015. Their older son, Radim, is three years old and does not yet attend nursery.
- The family lives in a house where Richard also has his workshop.
- They financed the house with a mortgage; in 2015, Richard paid 80,000 crowns in interest and has a corresponding confirmation from the bank.
- Richard also has life insurance, for which he pays CZK 12,000 annually, as well as a voluntary pension scheme with annual contributions of CZK 24,000.
- From his first marriage, Richard has a son, Rudolf, who lives with his mother. Richard pays CZK 3,000 a month in maintenance for him.
Option 1 – Richard sticks to his actual expenses
Richard is certain about his income, but it is necessary to organise all verifiable expenses. Their total amount is CZK 294,000:
ENERGY IN THE WORKSHOP: The workshop has its own electricity meter. It is therefore straightforward to declare the expenses. Richard pays CZK 2,000 per month.
WATER AND SEWAGE CHARGES: In the municipality where the family lives, water and sewage charges amount to CZK 1,000 per person per year. Business owners pay an additional CZK 10,000 per year. Richard can claim these CZK 10,000 as a business expense.
INTERNET: Although working online is not the basis of Richard’s business, he does carry out some research online. He pays CZK 500 per month for the connection. As the ratio of private to business use is actually 90:10, he has decided not to complicate matters and not to declare this expense.
If you calculate the tax at CZK 13,800 and the tax-free allowance for the taxpayer is CZK 24,840, this does not mean that the state will pay you money. In this case, the tax is zero.
TELEPHONE: Richard needs to be reachable and knows that his clients appreciate it when he contacts them himself rather than just calling them back. That is why he has taken out a plan with unlimited calls for CZK 750. As he also uses the phone for personal purposes, he has decided to claim CZK 500 per month as a business expense, calculated on a pro rata basis according to his business use.
CAR: Richard owns a car which he uses for both business and private purposes. He would claim a flat-rate allowance for running costs – CZK 4,000 per month (details on page 10). To do this, he must pay road tax. In his case, this amounts to CZK 3,000.
MATERIALS AND SMALL TOOLS: Richard has proof of all the materials he needs for his work – receipts or invoices from suppliers. In total, these amount to 203,000 kroner.
EXPENSES NOT INCLUDED IN THE TAX CALCULATION: Health and social security contributions paid, as these are not business expenses.
LOSS: Richard can claim the loss from previous years (up to 5 years retroactively) amounting to 105,000 kroner.
Richard then adds up the DEDUCTIBLE ITEMS, totalling CZK 104,000:
- Money paid towards a mortgage: CZK 80,000
- Life insurance (policy taken out until the age of 60): CZK 12,000
- Supplementary pension provision (formerly supplementary pension insurance) – Richard pays CZK 24,000 per year; he receives a state subsidy on the first CZK 12,000, and he can claim the remaining 12,000 kroner against tax. After deducting all expenses, losses and allowable items, Richard’s taxable income amounts to CZK 477,000, from which he calculates a tax liability of CZK 71,550.
Tax benefits:
When applying actual expenses, Richard can claim not only the tax allowance for the taxpayer (i.e., himself) but also the allowance for his dependent wife (who earned no more than CZK 68,000 in 2015) and the child allowance entitlement in the following amounts: Four-month-old Robert is declared as the ‘second child’, specifically for the months of November (month of birth) and December. Whilst the general rule is that the allowance can be claimed for the months in which the child was supported, there is an exception allowing the child’s month of birth to be included (2 × 1,317 = 2,634). Three-year-old Radim would be listed as the “first child” on the tax return – for him, the tax-free allowance applies for the whole year (12 months). Richard considered that the total deduction would be higher if he declared him as the “second child”. However, this is not possible – if a child is born during the course of the year, the higher allowance must be claimed specifically for that child (12 × 1,117 = 13,404). Eight-year-old Rudolf – he pays maintenance for this son, but this has no tax implications. He cannot claim either the child allowance or any other tax relief for children for him, as they do not live in the same household.
The tax bonus can only be obtained if the child allowance causes your tax liability to become negative.
Summary – Actual expenses
| Income | CZK 980,000 |
| Actual expenditure | CZK – 294,000 |
| Loss carried forward | CZK – 105,000 |
| Deduction for mortgage, insurance and pension | CZK – 104,000 |
| Taxable income after deductions | CZK 477,000 |
| Tax calculated | CZK 71,550 |
| Tax allowances / deductions | |
| Taxpayer (Richard) | CZK 24,840 |
| dependent spouse | CZK 24,840 |
| 1st child (12 months) | CZK 13,404 |
| 2nd child (2 months) | CZK 2,634 |
| Total tax | CZK 5,832 |
| Health insurance | CZK 46,305 |
| National insurance | CZK 100,156 |
Option 2 – Richard switches to flat-rate expenses
As a tradesperson, Richard can claim 80% of his income as a flat-rate expense. However, if he does so, he cannot claim either the tax-free allowance for his dependent wife or the child tax credit.
Summary – Lump-sum allowance
| Income | CZK 980,000 |
| Expenses 80% | CZK – 784,000 |
| Total tax base | CZK 196,000 |
| Taxable income after deduction for mortgage, insurance and pension contributions | CZK 92,000 |
| Tax calculated | CZK 13,800 |
| Tax allowance for the taxpayer (Richard) | CZK 24,840 |
| Total tax | CZK 0 |
| Health insurance (statutory minimum) | CZK 21,555 |
| Social security | CZK 28,616 |
Overall summary
Even if he does not claim the allowances for his wife and children, the flat-rate deduction is more advantageous for Richard. Richard needs to check whether he should submit a amended tax return for the previous year. This would involve paying back tax on any unpaid tax claims and liabilities. As Richard had paid all his bills by the end of 2014 and no one owed him money for his work, he does not need to submit a amended tax return. Furthermore, by applying the flat-rate allowance, he will have a significantly lower tax base and will therefore pay considerably less in social security and health insurance contributions. For health insurance, the difference would amount to more than CZK 24,000; for social security, over CZK 70,000.