Running payroll in the Czech Republic

Czech payroll is not among the most complex in Europe, but foreign companies looking to set up local payroll should be aware of the regulatory requirements regarding compliance and more. Several steps need to be taken before a company can start processing payroll in the Czech Republic and once everything is set up, the local taxation rules must be strictly followed. 

The Czech Republic may only count two tax rates, but the different tax credits that are available for employees require employers to be familiar with the Czech tax system in order to avoid fines.  

Foreign companies that want to process payroll in the Czech Republic first have to register with a number of different bodies and authorities as well as (in most cases) set up a local branch or establish a legal entity in order to hire local employees. Payroll-related registrations include: 

• Registration for payroll tax, which must be done electronically within 8 days after the company’s first employee starts working. The institution administering taxes is the Financial Administration of the Czech Republic.

• Registration for social security purposes, which also must be completed within 8 days after the company’s first employee starts working. The competent authority is the Czech Social Security Authority. After registration, employers receive a special ID which is needed for any transactions related to social security. 

• Registration with the health insurance company by which the individual employee is covered - this means that employers may have to register with several health funds. Both electronic and paper form registration are possible. The health insurance provider issues a separate employer ID for payments etc. 

• Registration with an insurance company providing coverage against occupational accidents and diseases - this is mandatory 

New hires must be declared to the responsible health insurance fund as well as to the Social Security Authority. The deadline for filing the hiring declaration is also the 8th day after the employee’s first day at work. Companies setting up a legal entity in the Czech Republic will receive access to a government-operated digital mailbox which is used for communicating with local authorities.

There is no formal obligation to set up a local bank account for payroll purposes as payments to local authorities can also be issued from a foreign account.

Social security coverage is mandatory for employees in the Czech Republic and includes health insurance, pension insurance, unemployment insurance and sickness benefits insurance. The system is funded by contributions made by employees and employers. Contributions are calculated as part of the monthly payroll process along with the amount of income tax owed by the employee which is deducted at source.  

Tax considerations

The Czech income tax system operates with 2 tax rates. The basic rate is 15% while the top rate is fixed at 23%. The threshold separating the tax rates is currently (as of 2022) set at CZK 1,867,728. 

The employee’s taxable income comprises the basic salary (or wages) as well as any other payments (like bonuses) or benefits in kind they receive from their employer - exceptions apply to certain cash allowances. Employment expenses are not deductible from the employee’s taxable income, but supplementary pension contributions and premiums paid for life insurance are - up to CZK 24,000 per year. There are several tax credits available, including an annual basic tax relief of CZK 30,840 (valid for 2022 tax year) and a tax allowance for dependent children. 

Czech tax residents are taxed on their worldwide income - certain exceptions apply to work carried out in another country - while non-residents only pay tax on income they earned in the Czech Republic. Tax residency is determined via 2 different criteria:

• Permanent home or place of living in the Czech Republic

• 183 days spent in the Czech Republic within any given calendar year

A special rule applies to non-resident employees temporarily (i.e. not more than 183 days per calendar year) working in the Czech Republic for a foreign employer. Income from such working arrangements is exempt from Czech income tax - except if the employee is working for a local permanent establishment of the foreign company. 

Tax withholding and reporting 

Under Czech law, employers are responsible for withholding income tax from their employees’ salaries and wages. Payments to the local authorities are due no later than the 20th of the following month. 

A monthly payroll report is not required. Instead, employers must prepare and file an annual tax declaration in which they detail the amount of income tax paid on behalf of all their employees throughout the tax year. The annual report is due on 20 March of the year following the tax period to which it relates. 

Employees must file an individual tax return which is due on 1 April - 1 May if filed electronically. For this purpose, they may ask their employer to provide them with an annual income certificate. The tax year is the calendar year.

Social security contributions

Employees and employers both have to contribute to the social security system. Monthly contributions for employees are set at 11% and go to pension and health insurance. There are several officially recognised health insurance providers from which employees may choose. 

Employers also contribute to the health insurance fund on behalf of the employee. The employer rate is 9%. Furthermore, employers are required to pay a 24.8% contribution which is distributed among the different social security funds which respectively cover unemployment, pension and sickness (as well as other social) benefits.

The total employer share thus amounts to 33.8% of the employee’s gross monthly salary. Contributions to the health insurance fund are uncapped, but payments to other social funds are only levied on the part of the employee’s income which does not exceed CZK 1,867,728 (in 2022). 

It is the employer’s obligation to calculate both their own and the employee’s social security contributions during the monthly payroll run and pay them to Social Security. The due date for social security payments is the same as for the monthly income tax remittance, i.e. the 20th of the month following the pay period. A separate social security declaration also has to be filed on a monthly basis. 

Although health insurance contributions are paid to a different body (i.e. the insurance company chosen by the employee), they have to be calculated as part of the payroll process. The due date for the respective payments is the same as for the other social security contributions. Monthly reports must be filed with each of the health funds under which the company’s employees are covered.

The mandatory occupational accident and disease insurance must be paid by the employer on a quarterly basis. Payments are due on the last day of the month following the respective quarter - i.e. payments for the first quarter of the year are due by 30 April. Contribution levels vary depending on the sector and the employee’s occupation.

Employees in the Czech Republic are entitled to various benefits. These include:

• Annual leave and public holidays: 4 weeks of paid annual leave, plus 13 public holidays 

• Maternity leave: 28 weeks (extendable to 37 weeks in case of multiple births), paid by Social Security

• Paternity leave: 14 days, paid by Social Security 

• Parental leave: can be taken until the child turns 4, fixed amount paid by Social Security 

• Sick leave: 14 days paid by the employer; thereafter, the employee receives sickness benefits from Social Security

For more information on employee benefits and other employment requirements in the Czech Republic (including severance pay and termination procedures), check out our Global Hiring Guide.

On 1 January 2022, the national minimum wage rose from CZK 15,200 to CZK 16,200 per month. Overtime must be paid at a rate of 125% of the employee’s usual wages - but is limited to 8 hours per week and 150 hours per year. Usual wages are to be calculated by the employer as the employee’s average earnings. There is no legal requirement to offer a 13th month bonus to employees. 

Payroll in the Czech Republic must be processed (at least) once a month. Bank transfer is the most common method for paying employees. Employees must receive a payslip for each pay period which details the different components of their salary as well as the tax and social security deductions which have been made on their behalf. Both digital and paper payslips are accepted.

Furthermore, employers have to keep and regularly update an annual wage list which shows the wage details (earnings as well as tax deductions made) for every employee working for the company. There are different laws and regulations regarding record keeping in payroll. Depending on the document in question, records must be kept for up to 30 years.