Wednesday, April 17, 2013

Paying Czech Income Taxes

 One of the great image results, when you search for "daň z obrázku" 
or "tax image" in Czech

As I documented in the post Working as a Freelancer in the Czech Republic, I landed a contract for a user experience project in Prague. In order to complete the work, I had to get at least front-office approval and a živnostenský list (a business license).

For the front-office approval, I signed a statement pledging that I would pay Czech income taxes, and as an proud owner of a živnostenský list I needed to report my income as well. Of course I put off researching what and how to pay Czech taxes until the very last moment, but in the end it was actually less painful that some of my U.S. tax returns.

The universal image for paying taxes

After the contract work, I also landed a full-time job, so my income for 2012 included both freelance and "employee" income. Employees of organizations in the Czech Republic typically pay income taxes with every paycheck. Rumor has it that employees that pay regular taxes may not have to file an income tax report, unless they owe taxes for other reasons, but since I also had freelance income, I didn't research this further.

My experience is relative to income earned in 2012. I have seen comments on Prague expat groups that the rules may change for 2013, but hopefully my experience can serve as resource for someone with similar circumstances.

The best source of information on this subject is the population of expat freelancers (writers, actors, teachers) that live in Prague. I was lucky to meet a creative, opinionated one at my job, who had been navigating Czech law for several years. Although he had someone else report his taxes, he did tell me about the 40%/60% rule, which would have been mind boggling without explanation.

This is a common feeling when paying taxes, with Czech actors

Talking to people in my situation, searching online and the awesome expat Facebook group CrowdSauce CZ, lead me to the following:

1. Taxes are due on March 31st
2. Most individuals pay 15% income tax
3. If you have a freelance z-list, you can take a standardized deduction of 60% expenses, and then pay tax on the remaining 40%.
4. Use to prepare your taxes. It is the Czech TurboTax and you can navigate it with Google Translate open in another browser tab.
5. There are post offices open on Saturday, and the lines aren't that long in the morning.
6. If you owe taxes, you can make a direct bank transfer to the account information for your tax office. See more at How to pay taxes to Bank Accounts of the Czech Tax Offices.

Three other things to mention related to this subject:

1. The Czech Republic has a reciprocal agreement with the United States, in that if you pay social taxes here you can get credit in the U.S. This may be useful for someone making a substantial amount of money for multiple years, since you do not automatically get credit in the U.S. and it can boost your U.S. Social Security payments.

2. You still need to report the income earned in the Czech Republic on your U.S. taxes, as foreign earned income, if you are a U.S. citizen. If you make less that $80,000 U.S., you will not owe any U.S. taxes, and you can claim business expenses that will lower the net foreign earned income. So save your receipts even though you take the standard 60% deduction for Czech taxes!

3. I hopefully will remember to close my Czech živnostenský list before we leave. From my research, when having one for multiple years, self-employment fees are charged for the z-list on a quarterly basis. Since I would like to visit Prague many times after we depart post, I need to close my z-list so that I do not have a huge fine on our return!

Happy Taxing!


chayu3 said...

hi, your post is quite useful. I just started working in prague and am considering become a freelancer. Thank you for sharing this info.

Natalie Buda Smith said...

Happy to read that it is helpful. Good luck with freelancing, and have fun in Prague!

Anonymous said...

"5. There are post offices open on Saturday, and the lines aren't that long in the morning."

thank you for your informations. Why is it important for the tax that the post office is opened on Saturday?

Natalie Buda Smith said...

Hi Anonymous - just in case you are working Monday through Friday and it is challenging to get to the post office during the week. :)

Unknown said...

Hi Natalie
what a useful information you assist here :)

Just a little question
I want to register my self as a graphic design freelancer !
Am not from eu and came to Prague with a student visa

Can i do that :) ?

Natalie Buda Smith said...

Hi Mouhanad - I wish I had more information for you but I am not familiar with student visas. Possibly your school could assist? Best of luck!

ashtasht said...

Isn't the standard deduction 40% of revenue and not 60% of expenses? So for every 100 of revenue, 40 will be deducted from the taxable amount.