Self-employed as secondary activity: how to deal with taxes and levies
A side business is an ideal option for anyone who wants to earn extra money to supplement their studies or employment. Compared to your main occupation, it brings a number of advantages - you pay lower taxes and often you are not even subject to monthly insurance premiums. What are the other specifics of self-employed secondary activities?
CONDITIONS OF TRADE FOR ANCILLARY ACTIVITIES
You can run your business in the Czech Republic as a main or secondary self-employed activity (SVČ). In the case of a main activity, the business is usually the dominant source of income, while a secondary self-employment activity serves more as a supplementary income. They differ mainly in terms of the conditions for compulsory contributions, which are discussed later in this article.
How to determine whether a business is a secondary trade? According to the law, a trade or business is considered secondary if:
- you are an employee (and your employer pays your insurance premiums for you);
- you're a student under the age of 26;
- you are entitled to maternity leave or parental allowance, or you care for someone who depends on others for care;
- you receive an old-age or invalidity pension;
- you are performing military service in the armed forces of the Czech Republic.
If your business meets any of the conditions, you can run your business as a secondary activity and the rules below apply to you.
INCIDENTAL ACTIVITIES AND TAX OBLIGATIONS
You are required to pay taxes and file a tax return annually while you are engaged in a secondary business. As with your main business, you are only taxed on the difference between your income and expenses at a rate of 15%. You have the choice of using your actual expenses to calculate your tax base or opting for a flat rate.
In addition to these two options, you may also encounter a flat-rate tax, which you cannot use as a self-employed person for a secondary activity - it is only for entrepreneurs for their main activity.
For a flat-rate expense, expenses are calculated as a percentage of your income for tax purposes. It does not depend on the amount of your actual expenses. The percentage depends on the type of business, as a self-employed person the following rates apply to you:
- 80% of income is applied to craft trades, agriculture and forestry;
- 60% of the income of other trades (free, tied and licensed);
- 40% of income from activities for which you do not have a trade licence (e.g. income from copyright or freelance work and business under special regulations - lawyer, notary, tax adviser, etc.).
The second option is to claim actual expenditure. This is particularly useful in situations where your actual expenditure exceeds the lump sum (this often happens, for example, when goods are resold). However, when using this option, the law also requires you to keep tax records, which are not required for flat-rate expenses.
SECONDARY ACTIVITY AND SOCIAL INSURANCE
When running a business as a sideline, you have a relatively easy situation in this area. You will only be covered by social security if your income is higher. Every self-employed person, regardless of the amount of income, must also submit an annual income and expenditure report to the Social Insurance Institution.
What are the specific conditions?
- In the first year of business, you do not make any advance payments - you pay the insurance to the Social Security Agency in one lump sum.
- You don't have to pay social insurance from a secondary trade if your annual income is less than the threshold amount (CZK 93,387 in 2022). On the contrary, it is compulsory for you if you exceed this limit.
- If your income exceeds the threshold amount, you will start making monthly payments of a minimum of CZK 1 137. The difference will be settled on the basis of annual premium statements (you will either pay the insurance at the beginning of the next year or the CSSA will refund the overpayment).
- You can also volunteer to participate in social security.
SECONDARY ACTIVITIES AND HEALTH INSURANCE
Unlike social security, you always have to pay for health insurance, even if you earn little. You also need to file an income and expense report with your health insurance company every year. Other obligations then depend on whether you are a state insured person or an employed business.
HEALTH INSURANCE FOR STATE INSURED PERSONS
If you run your business while you are studying, on maternity leave or retired, you don't pay any advance payments in the first year of your business. You submit a statement of income and expenses to your insurer at the beginning of the following year and pay the amount of the insurance in one lump sum. Based on the statement, the insurance company will calculate the amount of the advance for the following year. The amount is based on the income you actually earn and does not apply to the minimum levies that apply to your main occupation.
HEALTH INSURANCE FOR EMPLOYEES WHO RUN A BUSINESS
If you run your own business and your employer pays the minimum health insurance contributions for you, you don't have to pay monthly contributions at all. You only have to report your income and expenses to your health insurance company once a year and pay the premiums at once according to your actual income.
IN A NUTSHELL: WHAT AND HOW IN THE SECONDARY ACTIVITY OF THE OSVČ
Running a business on the side is a great way to supplement your studies, employment or parental leave. Unlike a sole trader, you don't have to pay mandatory minimum deposits (except for high incomes) and you only pay contributions based on your earnings. In addition, if you earn a low income, you are not obliged to pay social insurance on the income from the SVČ.
What to remember in the first year of business?
- Notify the tax office, the health insurance company and the Social Security Agency of the start of your business (however, this is usually arranged by the Trade Licensing Office on the basis of the submission of a single registration form when setting up a trade).
- You don't have to pay advance payments for social security and health insurance - you pay the insurance in one lump sum based on your income and expenditure statements.
- At the beginning of the following year, submit your tax return and income and expenditure statements to the health insurance company and the Social Security Agency.
SET UP A BUSINESS WITHOUT WORRIES
Have you decided to go into business and need help setting up your business? Contact us - we will be happy to advise you and sort out all the paperwork.