Insurance premiums and members of Czech governing bodies
Taxation of income of managing directors and other members of governing bodies as well is currently a widely discussed topic, both by the expert public and others. In this article we would like to look at not only taxation, but also mandatory levies on income of managing directors and other board members – such as social security insurance and health insurance – which have undergone a few changes in 2019.
According to Act No. 586/1992 Coll. on Income Taxes in the amended version in force (further only Act on Income Taxes), the income of directors and other members of governing bodies is considered income from employment. That means that for the purposes of taxation it is similar to the income of employees.
We would like to add that income from work of the associates of a private limited company is listed in the Act on Income Taxes as taxable and may be also categorized as income from employment.
The remuneration is taxed based on its amount. The amendment to the Act on Income Taxes which came into effect 1 April 2019 introduced a change which states: if income from employment by one employer does not total for one calendar month the amount decisive for employee (i.e. also board members’) participation on premiums for sickness insurance, then the income is not liable to advance income tax from employment but to final withholding tax. However, this is applicable only if the member of the governing body has not signed the taxpayer’s declaration (the so called pink form). Until the amendment came into force, the legislation effective during 2018 and 2019 stated that the income was liable to withholding tax, unless it exceeded the total amount of CZK 2 500 per month. Again, this was only applicable if the taxpayer hadn’t signed the declaration. A remuneration higher than that is liable to advance tax regardless of whether the declaration form was signed or not.
The board member is not required to state the income which is liable to final withholding tax in his or her tax return or annual tax calculation; similarly as with interest income accumulated in a Czech bank account, for example, which is also liable to withholding tax. In the case of remuneration for performance of duties, the board member may however decide to state this income in the tax return and include the withheld tax as a part of his or her total tax chargeable. Thus, board members must asses their situation and evaluate whether this step is the right one for them with regard to the total amount of tax.
The calculation of a board member’s remuneration falling into the category of income from employment is based on super-gross wage, similarly as with standard employees. Simply put, the super-gross wage is defined as gross wage from employment plus statutory levies for social security and health insurance paid by the employer. Due to that, one must assess in which cases is the board member’s remuneration subject to contributions towards these types of insurance premiums.
It follows from the Act on Public Health Insurance that members of governing bodies are, same as employees, obliged to partake in the health insurance system. In the case of members of governing bodies there is no minimum threshold laid down for the purposes of health insurance which would determine that the board member shall pay the health insurance levies, such as the case for people working on the basis of a contract for work or a contract for work activity. There is also no maximum amount of a contribution calculation basis, which would be the top limit for how much can be deducted toward health insurance.
By contrast, the level of the board member’s income determines whether he or she is obliged to pay social security premiums or not. When speaking about social security premiums we might say that remuneration which members of the governing body receive is liable to social security levies only if the income from performance of duties is at least CZK 3 000 per month (effective for 2019), or at least the amount decisive for employee participation towards sickness insurance. In other words, if the income of a board member is lower than CZK 3 000, the premium payments for sickness or social security insurance are not levied. It is the same case as with standard employees or workers with a contract for work activity.
For the purposes of social security there is a top limit of obligatory amount of premiums to be paid by both the employer and employee, which means also a member of a governing body. The maximum contribution basis for the calculation of social security premiums is determined at CZK 1 569 552 for 2019 (in 2018 it was CZK 1 438 992).
In relation to social security premiums we would like to draw your attention to the fact that from 1 July 2019 the premium rate which the employer is obliged to pay decreased from 25 % to 24,8 %. This was due to the abolishment of the waiting period and as a compensation for it the employer’s contribution to sickness insurance fell from 2,3 % to 2,1 %.
If you are more interested in this topic, or are seeking a consultation, please do not hesitate to contact us.
Veronika Džalavjan & Šárka Veselá