3 Accounting methods for a Trade License
The Real Expense method, the 60/40 method and Paušální Daň.
Up to 2020, the Trade License income could be filed in 2 ways: either using the Real Expenses method, or by using the so-called 60/40 method.The Real Expenses method
is simply put your real Revenue minus your real Expenses. What is left is the Tax Base that you will pay Income Tax, Social Charges and Public Health Contributions on. Most modern professions (programmers, IT services, consultants) actually have little to no expenses, reason why the 60/40 method is a much better choice.Downsides of the Real Expense method:
- You need to track or do bookkeeping for expenses,
- Monthly or quarterly accounting almost unavoidable (instead of bringing a banana box of receipts at the end of the year),
- Best suitable for professions with a small profit margin.
The 60/40 method
is almost always used for business with little expenses. You can claim 60% 'virtual expenses' on the first 2 M CZK of your Revenue up (even if the the real percentage of expenses is much lower). So, the remaining 40% of your invoiced amount is your Tax Base. On this tax base only 15% income tax is calculated, and if applicable, tax deductions can be applied.Note: There are professions with other standard expense deductions: 80% (Farmers, Bricklayers, Carpenters etc) or only 30% or 40% (Free professions, but not Trade Licenses) - hardly ever our clients fall in those categories.
A common misconception is that the 60/40 method can not be used for Revenue over 2M CZK. Not true. It can be used. If you have a Revenue of 3.5 M CZK, on the first 2 M CZK you can apply the 60/40 method (and the remaining 1.5 M CZK gets added straight to your tax base).
Benefits of the 60/40 method:
- No need to track or do bookkeeping for expenses,
- No need for monthly or quarterly accounting (unless you are VAT registered),
- Suitable for income generated online / without invoicing / without seeing the actual customer,
- We basically see you once a year for the Income Tax Return.
| 2024 Minimums | Social | Health | 2024 Total | Percentage* |
|---|---|---|---|---|
| new TL | 3.210 | 2.968 | 74.136 | 14.8%* |
| existing TL | 3.852 | 2.968 | 81.840 | 16.3%* |
Note: % with Revenue 500.000 CZK.The real social- and health charges for the previous year will be calculated based on the Tax Return.
Reimbursements: with the 60/40 rule, any payment from the client (including reimbursements) is seen as Revene, on which Tax / Social / Hrealth is paid. You may argue that that's not fair - because you are just getting your own money back. The tax office on the other hand would say: you have no obligation to use the 60/40 method, if you want to pair the reimbursement with an expense - use the real expense method (of which we already know it is probably not beneficial). What you could do is ask the client to pay your expenses (flight, hotel etc) on your behalf. Some clients are creative by having the reimbursement sent to another (foreign) account.
The Paušální Daň method
for Revenue up to 2 M CZK (before 2023 it was 1M CZK). The idea was to pay one fixed sum per month instead of separately to Tax / Social / Health and no annual Income Tax Return or overviews for Social- and Health need to be filed.Because in 2023 the Full VAT limit increases from 1 M to 2 M CZK, as a result also the Paušální Daň limit changed. There are now 3 fixed sums, about this later.
You can not make use of the Paušální Daň method if:
- you did not announce before 10.01.2024 you want to be in it,
- your Revenue in 2023 is more than 2 M CZK / year (before 2023 it was 1 M CZK),
- you are registered for Full VAT,
- you can not be in insolvenčním řízení (clearing debts)
- you are employee,
- you have a dohoda o pracovní činnosti earning over 4.000 CZK / month,
- you have a dohoda o provedení práce earning over 10.000 CZK / month,
- you are in the board or shareholder in an sro or komanditní společnost,
- your business is EET registered (EET has been cancelled for now),
- you have other sources of income (rent, capital, investments ) over 30.000 CZK / year ,
- and most of all: if you are not in the Public Health Care.
There are now 3 THREE fixed monthly sums, meant for 3 different 'bands' (pasma). In these 'bands' various independent professions can fit (Trade Licenses with 80/20, 60/40, other free professions with 30 or 40% standard expense deduction) and for each professions the maximum allowed revenues are different.
- Band 1: Revenue 0 - 1M, but 1.5M for 60/40 TLs, and 2M for 80/20 TLs
- Band 2: Revenue 1M - 1.5M, but 2M for 60/40 TLs, not for 80/20 TLs
- Band 3: Revenue 1.5 - 2M, not for any TL
| Band | TL 60/40 Revenue | 2023 Sum/month | 2024 Sum/month | 2024 Total | Percentage |
|---|---|---|---|---|---|
| 1 | 0 - 1.5M | 6.208 | 7.498 | 89.976 | 18%* - 6% |
| 2 | 1.5 - 2M | 16.000 | 16.745 | 200.940 | 13.3 - 10% |
| 3 | 1.5 - 2M, not applicable | 26.000 | 27.139 | 325.668 | 21.7 - 16.2% |
If you have a Trade License in 2023, and want to use this system in 2024, you only have time to announce this at the Tax Office, latest 10.01.2024! If you start a Trade License after 10.01.2024, you can still be in this system but you have to announce it right at the registration of the Trade License. A form can be found here: oznámení o vstupu do paušálního režimu od zdaňovacího období and via MojeDane: Oznámení o vstupu do paušálního režimu
Downsides of the Paušální Daň method:
- If you earn (a little) more than the limit 1.5M CZK during the year you have the obligation to move to band 2 - you must announce this before it happens! And you will be forced to stay in the higher band for at least 1 year (so the 2 years combined may not be better than 60/40 Method !!
- If your Revenue is less than cca 600.000 CZK - the Paušální daň method will actually cost you more money than the 60/40 method !!!
- for foreign tax offices, banks / mortages / loans / car leases it is really necessary to be able to show a Tax Return, which you won't have with this method.
- You can not use any tax deductions (for yourself, spouse, childeren) or indirect tax reductions (mortgage interests, life insurance, donations) at all
There is no simple answer to this, because it depends on many factors:
- On how many tax benefits / tax reductions are you going to miss out?
- What will your Revenue be? Is there a risk that you have to move from band 1 to band 2? (not beneficial at all, if just a littlebit over 1.5M CZK!)
- Will you encounter factors that make staying in the Paušální Daň method impossible?
Put all possiblities in the Excel model we have developed for many years and look at the actual numbers based on your specific situation. It is just not possible to figure it out with just a few guesses. A consultation will cost 3000 CZK, choosing the wrong system may cost you 10.000s of CZK.
For more information on Accounting methods Book a Consultation by ZOOM / Skype / Whatsapp / Phone or email.