Flexibility is strongly rooted in the IT world. The industry was the first to see the rise of full remote positions, the end of dogmatic insistence on fixed working time… And the IT world is also flexible in its forms of collaboration. Not only beginners, but also experienced IT specialists can choose at any time during their careers whether they want to work for a company as a regular employee or as an external self-employed person. Both approaches offer more than enough jobs. And it is not hard to change them depending on your life situation and what suits you. Let’s take a closer look at these two types of cooperation. Maybe we’ll help you decide.
Let’s be clear to begin with
- During main employment, the contractual relationship between you and your employer is governed by the Labour Code.
- Self-employed person (also commonly referred to as “work based on trade certificate”), working under a trade licence or through your own Ltd. In practice, it is a contractual relationship between two companies governed by the Civil Code.
The biggest differences are defined by the legislation itself:
The Labour Code, which governs the relationship between the permanent employee and the employer, defines what the relationship should look like, what the employee must follow, what they must “accept” and basically does not allow much freedom in setting up cooperation. However, it is also very thorough in protecting the rights of the employee.
For example, it contains protection against:
- unilateral extension or reduction of working time,
- sudden termination of the contract (provides for a 2-month notice period),
- termination of employment after the end of parental leave,
- bankruptcy of the employer, who would cease to pay its obligations (these can be claimed from the Labour Office up to approximately 150,000 CZK).
Civil Code, which regulates cooperation between companies and self-employed persons, allows it to be set more freely. As long as it does not conflict with the Civil Code, the parties can agree on anything that suits them. This includes any invoice due date, the possibility to set a late payment penalty or suspend cooperation without having to report it to the authorities.
The disadvantages include obligations in the form of a non-compete clause or penalties for failure to meet deadlines, claims for rectification of defects, even after the end of the cooperation.
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Non-compete clause is often added by companies to contracts for work with freelancing IT specialists. This is so that they don’t go directly to the client for whom they are currently developing the product, or to a competing company that could deliver the same software to the same client. The non-compete clause is usually valid for several months and there is a penalty if it is breached. But there is no need to be afraid of it. IT companies are springing up like mushrooms and you'll have no shortage of interesting offers as an IT specialist. Just be careful that the clause concluded with companies with a large ownership structure covers only the specific company and not, for example, the whole group or other companies in the group. |
Are you interested in the IT field and looking for job positions and opportunities in the IT industry? Whether you are a programmer, developer, tester, analyst, or software architect, contact us and we will find an IT project tailored to your needs from our IT job offers. Take a look at the current available job positions in the IT field. We will help you find new job challenges and opportunities. We look forward to collaborating with you!
Trade licence and possible flat rates
When you work as a self-employed person, as with a main employment, you are obliged to pay health insurance and social security contributions, as well as income tax.
What can a self-employed person use to their advantage?
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Fixed expenditure rate
This allows IT professionals to deduct 60% of their annual income as a flat-rate expense. There is therefore no need to keep records of receipts and documents and you will greatly simplify your accounting.
It is advisable to use this when real costs are less than 60% of income. Most of the IT specialists do not usually have such high expenses during their activities. This means that they only tax the remaining 40% of their income after deducting the fixed rate via income tax, which is 15%.
In order to be able to use this scheme, there is an income limit of up to 2 million CZK per calendar year. If this amount is exceeded, all receipts and other costs must be kept on file.
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To be or not to be a VAT payer, that is the question.
Every self-employed individual (contractor) can choose whether they want to be a VAT payer or not. However, this only applies if their income is up to 2 million crowns in the last 12 calendar months (according to the fulfillment carried out, not when it arrives in the account). If they exceed this income threshold, they become a mandatory VAT payer.
And here's a heads up: the contractor must register themselves at the tax office for VAT payment, even during the year, because the aforementioned threshold of 2 million crowns counts the income for the last 12 months (not within the calendar year). The office will warn you only at the end of the year, stating that they can calculate the VAT retrospectively to the time when the aforementioned threshold of 2 million crowns was exceeded, which is not pleasant. Invoices have already been paid by clients by this time, and raising the VAT retrospectively is not at all simple. Therefore, we recommend that contractor, who are approaching this limit, check this threshold every month.
However, it still holds true that the final taxation is lower compared to an employment contract (HPP).
Note: Sometimes VAT can be confused with income tax. Value Added Tax (VAT) is a tax that is set at 21% for IT services and is included in every invoice that the OSVČ issues to a client. Income tax is paid at the end of the year and usually depends on a person's income versus expenses, and it is also influenced by a flat rate and other discounts mentioned in this article. The income tax rate is 15%.
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Flat-rate tax
From 2021, the Ministry of Finance introduces the possibility to voluntarily register for the payment of so-called flat-rate tax. This is one amount that includes both types of mandatory insurance (health + pension) as well as income tax. The amount of taxes and insurance is therefore capped for everyone who registers for the tax lump sum and meets the conditions (see below). A great advantage is also the fact that it is not necessary to file a tax return and insurance overviews at the end of the year.
From 2023, the Ministry of Finance divided the tax lump sum into 3 bands according to the amount of income in a given calendar year and according to the cost lump sum that the self-employed could claim.
For IT specialists with a 60% cost lump sum, the bands are as follows:
For the first band up to 1.5 million crowns for a calendar year, the original total lump-sum tax of 7,498 CZK remains.
In the second band up to 2 million crowns for a calendar year, the amount of the total lump-sum tax will be 16,745 CZK.
The third band only includes self-employed with incomes up to 2 million CZK and a 40% applicable cost lump sum, the flat tax is 27,139 CZK.
Example of the new flat-rate tax:
If a self-employed IT specialist using the flat-rate tax has an income of 1,800,000 CZK per calendar year, they are in bracket 3 and pay a flat-rate tax of 312,000 CZK per year.
If compared with the 60% fixed expenditure rate, they will pay 105,120 CZK for social security and 48,600 CZK for health insurance. The income tax is 77,160 CZK. For the sake of simplicity, we include only the taxpayer relief, which is 30,840 CZK for the current year. In total, they will pay 230,880 CZK, which will be much more advantageous (by exactly 81,120 CZK per year).
If you are not sure whether the flat-rate tax is worth it, here is a calculator from the Ministry of Finance of the Czech Republic.
Main employment vs self-employed person: pros and cons
We’ve looked at what the legislation says, now let’s get a bit more practical.
Advantages of main employment
- greater security – see the aforementioned 2-month notice period, including payment for untaken leave
- paid vacation, sick leave, overtime and public holidays
- benefits: e.g. meal vouchers, 13th salary, pension contribution, company car, etc.
- easier mortgage or credit arrangement (after the probationary period)
- the employer deals with a large part of the paperwork with the authorities – filing, reporting new data, billing, taxes, etc.
Disadvantages of main employment
- higher levies according to the amount of the employee’s salary
- leave is approved by the employer and may be ordered on days when it may not be convenient for the employee
- probationary period when starting employment
Advantages of work based on trade certificate
- lower taxation
- lower mandatory minimum social security and health insurance contributions
- more freedom in terms of cooperation
- more flexibility in terms of working hours (you can also work on weekends/holidays and earn more in a given month)
- possibility to change projects and customers more frequently and easily
Disadvantages of work based on trade certificate
- higher level of risk: cooperation is always limited in terms of time
- administrative burden: the need to file tax returns, keep accounts, prepare invoices, deal with contracts, etc.
- you have to get your own HW and SW (business licenses also usually cost more than home use licenses)
- more difficult to arrange a mortgage or credit
- additional insurance for loss of income due to illness or injury
- supplementary pension insurance is needed if you expect to receive at least an average pension in retirement
- unpaid leave
- you should have more clients not only for the sake of security but also to avoid a false self-employment
- direct communication with the authorities – from 2023, it will be compulsory for every self-employed person to have a data box for these purposes
How does main employment and work based on trade certificate compare in terms of numbers?
Example I
IT specialist employed in a company, gross monthly salary of 50,000 CZK
- 25 days of taken leave
- 10 days on sick leave
- benefits in the form of meal vouchers and pension contribution (total of 3,000 CZK per month), fully used
- there were 10 public holidays in the year during weekdays
The IT specialist therefore worked 207 days after excluding vacation, sick leave and public holidays. The net salary is 471,840 CZK, with 36,000 CZK received from the employer in the form of non-financial benefits. The total amount earned was 507,840 CZK.
Example II
IT specialist working as a self-employed person for multiple clients, man-day rate of 3,350 CZK with 8 hours/day
- spent 25 days on unpaid leave
- sick for 10 days, no work done
- did not work during the 10 days of public holidays, which were therefore not invoiced
- paid 5,500 CZK per month for minimum mandatory social security and health insurance contributions
- did not pay for any additional scheme
The annual income of the IT specialist is 693,450 CZK. They paid 82,755 CZK in advances and tax (after deducting the taxpayer relief). The net annual income is 610,695 CZK.
And how to recalculate when you want to switch from main employment to work based on trade certificate or vice versa?
In purely gross terms, you can divide the super-gross salary paid by the employer by the number of days worked in the month and you get the man-day rate. It’s a bit more complicated in practice, of course, depending on how many days of leave and what benefits the company offers.
Is therefore one type of cooperation better than the other?
Based on what we have written above, it is probably obvious that it is impossible to determine the exact winner. Everyone can like something different. Someone prefers certainty and needs a smooth mortgage approval process, another specialist prefers independence and has no problem with a certain level of risk.
Whether you prefer one or the other, there are plenty of offers on the market for both forms of cooperation. So focus on whether you enjoy and find your work fulfilling. Fingers crossed and if you’re looking for a change, let us know about yourself, we’d love to meet you.
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