Employment income

What it means

Employment income covers everything a person receives for work carried out for someone else on their instructions: wages under an employment contract, pay under the work agreements, a director’s or board member’s remuneration, and the income of a shareholder working for their own company.

What decides is how the work is done, not what the contract is called. An invoice from a trader who sits in the client’s team, follows its instructions and has no other customers is disguised dependent activity, not business income. Benefits in kind belong here too, a car also used privately among them.

Not everything an employer provides is taxable pay. Travel allowances at the statutory rates are not the employee’s income, and the meal contribution or the recreation allowance are tax-exempt under the conditions of the law, even though the employee receives them with the salary and sees them on the payslip.

How it works in practice

The tax is not paid by the employee but by the employer as the payer of tax: it withholds the monthly payroll tax advances, remits them to the tax office and files the statement of advances withheld. Once the year ends it sends the annual tax settlement report covering all its staff.

The employee signs the employee tax declaration so that the employer applies the tax-free allowance and the child bonus in the monthly pay already. After the year they ask for the annual reconciliation, or file a return themselves if they had several kinds of income or income from abroad.

Where the managing director of an s. r. o. is paid for the office, we run the remuneration through payroll as employment income: with the tax advance, health insurance and, depending on whether it is regular, social insurance. It must rest on a service contract or a general meeting resolution, so the payment has a legal basis.

What to watch out for

Disguised dependent activity is the expensive one. When an audit reclassifies a long-standing contractor’s invoices as wages, the company pays back tax and both the employee’s and the employer’s social and health levies, with penalties on top, while the trader is meanwhile claiming back the levies paid as self-employed.

The second trap is a benefit in kind payroll never hears about: a company phone or car used privately, a course paid for that has nothing to do with the job. If it is not taxed in the month provided, an inspection adds it later and the employer, as the tax payer, pays the tax and contributions with a penalty.