How to calculate personal income tax?
As a business, you file a tax return every year. This tells you how much money you pay to the government in income tax. We will advise you on how to correctly determine the tax base and the tax itself.
How is income tax calculated?
Personal income tax is calculated as 15% of your tax base. Taxpayers with high earnings then apply a rate of 23%. This increased rate will affect people whose tax base exceeds three times the annual average wage - the amount of CZK 1,582,812 (until 2023 it was four times, namely CZK 1,935,552).
According to Section 5 of the Income Tax Act (ITA), the tax base is considered to be the total difference between your income and the expenses "incurred in securing, achieving and maintaining it".
The tax base consists of several sub-bases. Why? Many people have several types of income that need to be distinguished on their tax return. The so-called partial tax bases are therefore calculated separately for each type of income. They are then added together to form the total tax base from which you calculate your tax.
You can have a total of 5 types of income. Each of them is governed by a different section of the Income Tax Act, so different rules apply. These are:
- Income from employment (Section 6 of the Income Tax Act),
- income from self-employment (§ 7 of the ITA),
- income from capital assets (§ 8 ITA),
- rental income (§ 9 ITA),
- other income (§ 10 ITA).
We will look at them in more detail below.
Income from dependent activities
These consist of earnings from employment, both on a principal employment relationship and agreements. This category also includes income for work as a partner and member of a cooperative or remuneration for the managing director. Tax on this income is most often calculated on your gross salary and you do not claim expenses in this case.
In the tax return, income from employment is entered in Section 2 of the document. The amount of income from employment is supported by a certificate of taxable income issued by your employer.
Income from self-employment
This is your income from your business (main and secondary activities) or from your authorship. Income from self-employment can be taxed in several ways, which are described in detail in the article on self-employed taxation.
In short, you have the following options: either you record only your income and apply the so-called expenditure lump sums in your tax return, or you report your actual expenses. In this case, however, you must also keep tax records or accounts and document your expenses. Another alternative is to enter the flat-rate tax regime, but if the conditions are met, you do not file a tax return.
Tip! How to know what you can deduct from your taxes? When calculating your tax base, you can only take into account tax deductible costs (or expenses, if you keep tax records) that were demonstrably incurred in the tax year.
Income from capital assets
Income from financial assets is also taxable. These include, for example, shares in the profits of corporations, income from deposits or interest on securities. Two situations can arise here:
- The bank (or other payer) will withhold tax on some income from capital assets for you. Typically, this is interest on non-business accounts or holdings of domestic securities. You are already taxed on this income, so you don't report it on your tax return.
- You include other capital income on your tax return, except for loans (no expenses can be claimed on these).
Rental income is taxed in a similar way to business income. Either you apply a flat rate of 30% of the income or you report the actual expenses related to the rent (typically depreciation) on your tax return.
Other income includes, for example, income from the sale of shares, cars and real estate (unless exempt), as well as income from the sale of cryptocurrencies and lottery winnings. However, these are only taxable if they exceed the amounts specified in the Income Tax Act.
If the income from the sale of securities is not exempt (for example, if you do not meet the time test - 3 years for shares, 5 years for stocks), you can claim against it the expenses incurred to acquire them.
Other income also includes income from casual activities, but this is exempt from tax if its total annual amount does not exceed CZK 30,000.
Tax return made easy
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