The Czech Republic assesses social insurance tax on income from wages and self-employment earned in the Czech Republic. The primary sources of authority for taxation are the Law on social insurance tax and the many international treaties on the totalization of social security to which the Czech Republic is a signatory.
EmploymentSocial security, consisting of pension, disability and unemployment fund insurance, totaling 26.0% is paid by employers as a percentage of gross wages. Social security is withheld from employee wages at a rate of 6.5% of “super gross” wages. Both employer and employee taxes max out at 1,781,280 CZK of taxable compensation.
Company EmployeeSocial security insurance tax and withholding: 26.0% 6.5%- Pension insurance 21.5%- Disability insurance 3.3%- Unemployment fund insurance 1.2%
Czech employers are also obligated to pay 3.3% disability insurance on behalf of seconded foreign (expat) employees. Seconded employees are usually foreigners that are transferred to a Czech affiliate or subsidiary for a short period of time not exceeding 5 years. This requirement is not negated by obtaining a certificate of coverage (osvedčení o registraci) – see below.
Self-employmentSocial security for self-employed consists of pension fund insurance at 14.6% of taxable income. Disability insurance of 2.3% is optional. Maternity benefits require payment into a disability insurance program. Social insurance taxes max out at 1,781,280 CZK of taxable income. Self-employed taxable income is generally revenues minus deductible expenses, or, if the payer is using the percentage of revenue method of calculating tax, 40% of revenues, resulting in an effective tax rate of 6%.
Sole proprietors must pay monthly advances on social insurance, which are netted against the annual liability due in April. The Regulator provides a summary of advances received to the payer each February. In the first year of business, the advance will be set to the minimum amount; in subsequent years, to the amount of tax paid in the prior year. The amount of social insurance advances paid depends on whether self-employment is your main or secondary source of earned income.
2011 minimum monthly advance: 1,807 CZK (main); 723 CZK(secondary)
You might not have to pay advances if you are not subject to the trade license law (eg., a journalist) or if you are covered by a certificate of coverage under a foreign program. For example, American citizens who are self-employed are permitted to continue to pay into the US system, even if they work in the Czech Republic, for up to 5 years.
Certificates of CoverageSocial insurance is levied on earned income, that is, income from employment and self-employment carried out in the Czech Republic. Employees sent to the Czech Republic and paid by their foreign employers must obtain certificates of social insurance coverage from their home country to avoid penalties.
Czech employees sent abroad and for self-employed that spend time working abroad – usually on short-term contracts of 6 months to a year, but not exceeding 5 years – need a certificate from the Czech Social Insurance Regulator. Interestingly, the U.S.-Czech treaty permits self-employed Americans to be taxed on social security in the U.S. for up to 5 years. In order to avoid paying Czech social security, they need to obtain a certificate from the U.S. Social Security Administration. That said, Czech social security is likely to be lots less than U.S. social security for Americans using the percentage of revenue method of taxation.
This is but a brief summary of social insurance for individuals. International taxpayers, especially those that need to file a tax return in their home countries, should contact an accounting professional with competency in the tax jurisdictions of both their home country and of the Czech Republic.
