How to run international payroll for employees in the Czech Republic [2024]
Running payroll for remote employees in the Czech Republic for the first time? Get it right to hit the ground running with your employees in this country. But if you miss a step, you could rack up thousands of dollars in penalties—or even risk legal action from the Financial Administration of the Czech Republic, which is that country’s tax authority.
Here’s a step-by-step guide to running payroll in the Czech Republic, with everything you need to get it right every time.
Step #1: Decide whether or not to create your own entity in the Czech Republic or use an employer of record (EOR)
To hire and pay employees in the Czech Republic, you need to first establish a business entity in that country. One way to do this is to create a legal entity such as a limited liability company (LLC) or a joint-stock company (JSC). Alternatively, you can simply open a branch office of your company, which would be regarded as a foreign entity in the Czech Republic.
A simpler option is to use an employer of record (EOR). An EOR is a third-party company that allows you to hire and pay employees through their own entity. They’re responsible for calculating and withholding the appropriate taxes and for paying your taxes to the Financial Administration of the Czech Republic.
When, why, and how do companies use an EOR?
When companies expand their operations to the Czech Republic—and around the world—they typically use EORs like Deel, Papaya Global, and Rippling to run payroll, issue benefits, and navigate international compliance issues.
This is because setting up a company in the Czech Republic requires a lot of paperwork, startup capital and fees, and visits to various institutions and offices, which can take weeks. It’s a significant administrative load, and most smaller companies don’t have the time or resources to spare.
When, why, and how do companies create their own entity?
If you create your own entity, that replaces the EOR as the legal entity hiring employees and running payroll. Companies typically create their own entities once the costs of an EOR outweigh the costs of creating their own entities.
Here are the steps to set up your own entity in the Czech Republic:
- First, you need to check that your chosen company name is available and acceptable. The regional justice courts maintain these public commercial registers.
- Next, you need to arrange for certificates that prove that all your company managers have a clear criminal record. For EU citizens, this would be an extract from the criminal register of their country of origin. For non-EU residents, it would be an extract of the criminal register of the country where they have spent at least three consecutive months in the past three years.
- You also need to submit real estate register clearance, which is proof of your company’s registered office.
- You need to deposit your company’s minimum share capital in the bank. In an LLC, this must be at least CZK 1 per shareholder. For a JSC, it should be a minimum total of CZK 2,000,000,000 or EUR 80,000.
- Anyone wanting to start a business in the Czech Republic must obtain a trade license. The Ministry of Industry and Trade has central registration points (CRMs), which are trade licensing offices, across the country.
- Now you need to get your company’s Articles of Association (AoA) and the company statutes verified by a public notary in the Czech Republic.
- Once you have received confirmation of trade registration, you need to apply for registration in the commercial register. You can find the necessary forms on the website of the Ministry of Justice. You can either file a registration motion with the registration court or work through a public notary. Registration for income tax happens at the same time and you’ll receive a tax identification number.
- Within eight days after your first employee starts working, you need to register for payroll tax with the Financial Administration, for social security with the Social Security Authority, with the insurance company that provides mandatory coverage against occupational accidents and diseases, and with the employee’s health insurance provider, which can be the state-owned General Health Insurance Company of the Czech Republic (VZP).
Step #2: Pick a global payroll software solution
First, it’s vital to understand the two kinds of international payroll solutions: global payroll processors and global payroll aggregators. You can learn about both in our guide.
- Global payroll processors actually process your payroll, transmit funds, and calculate and file taxes in every country through their own software. Put simply: global payroll processors allow you to pay your international employees just as easily as your local employees: together in a single pay run.
- Global payroll aggregators aggregate local payroll providers in every country and manually transmit your payroll files to them.
Step #3: Determine your workers’ employment status
Before you hire employees and start onboarding your workers, and certainly before you run payroll, it’s crucial to understand who you’re paying in the eyes of Czech labor laws and to classify them correctly: Are your workers employees or contractors?
Independent contractors are responsible for their own payroll. If they’re employees, however, you are responsible for certain payroll deductions, including income tax and social security contributions such as pension, unemployment, and sickness insurance.
Employees in the Czech Republic can have one of three types of employment contracts:
- The basic employment contract for regular employees, which is for full-time or part-time work of fixed duration
- The agreement to complete a job, which is mainly for temporary and seasonal workers who may not work for the same employer for more than 300 hours per calendar year
- The agreement to perform work, which is mainly for long-term part-time workers who may not work for the same employer for more than 20 hours a week.
All of these denote an employer-employee relationship and are subject to the Czech Labor Code.
Independent contractors sign a civil law contract rather than an employment contract. They typically provide services to multiple clients at different amounts within a working week or another time period; control where, when and how the work is done; are responsible for the expenses necessary to perform the work, such as buying tools and equipment; do not represent the company in any way; and they bear the burden and risk of performing the work.
Step #4: Capture your new hires’ Czech payroll information
Once you’ve decided whether to use an EOR or your own entity, picked a payroll solution, and ensured that your employees are correctly classified, you should be able to automatically collect (and then pay) your team in the Czech Republic.
To enter into a valid employment contract in the Czech Republic, you need to collect at least the following from the new employee:
- First name, last name, maiden name if applicable
- Date and place of birth
- National identification number
- Permanent or mailing address
- Citizenship
- Bank account number for depositing their salary
- Health insurance provider, which in the Czech Republic is most often the state-owned VZP
- Information about enforcement against the employee’s assets or if there are insolvency proceedings against the employee
- A record of employment, which comes in the form of an employment certificate from the previous employer
- Confirmation of taxable income to prepare a tax return
- Proof of education and professional qualifications
The employment contract should also explain the probation period, if there is one. In the Czech Republic, this is a maximum of three months for regular employees and may not be longer than one-half of the agreed period of employment, and must be agreed to in writing.
In addition, you need to explain the notice period, which is usually two months. In the case of redundancy, the employee is entitled to severance pay based on how long you’ve employed them. This ranges from one month’s salary if they’ve been in your employ for less than a year to three months’ average salary if they’ve been with your company for more than two years.
To run payroll, you’ll need to provide the following:
- Employment contract, including amendments
- Record of working hours
- Absence documents such as annual leave, incapacity to work or sick leave, unpaid leave, maternity leave, paternity leave, parental leave
- Information about extraordinary pay and bonuses
- Information about payroll deductions
- Changes in information such as bank account, address, or health insurance provider.
Step #5: Pay in Czech koruna (CZK)
According to Czech law, you have to pay employees in the Czech Republic in legal tender, which is Czech koruna or crown (CZK). The only exception is when the employee does work for you outside of the Czech Republic, has given their consent and the Czech National Bank has established a legal exchange rate with that currency.
There are challenges for companies based outside the Czech Republic that need to pay Czech-based employees in CZK: The exchange rate between your local currency and CZK can vary (see exchange rates here). If the rate is unfavorable, you’ll end up paying more USD to cover your employees’ salaries. You may also need to account for fluctuations in the exchange rate when calculating your financial statements, which can create accounting complexities.
Step #6: Run payroll
You have an entity (either your own or via an EOR), you’ve set up your global payroll system, and you’ve ensured your employees are correctly classified under Czech law. Time to run payroll!
Here’s a preview of how Rippling’s global payroll system works:
Frequently asked questions about running payroll in the Czech Republic
What are the employer costs or payroll taxes for full-time employees in the Czech Republic?
Employers are responsible for deducting the following from their full-time employees’ gross salary when running payroll:
Deduction
Amount
Social security (sickness insurance, pension insurance, and state employment policy)
24.8% (capped at CZK 2,110,416)
Employment income tax
15% tax rate for the part of the tax base up to an average salary multiplied by 48 (capped at CZK 2,110,416). Progressive tax rate of 23% for any amount exceeding CZK 2,110,416
Health insurance
9% of gross income
Rippling can automatically sync tax deductions to payroll, and handles your tax and compliance work for you.
What is the average salary for employees in the Czech Republic?
The average monthly salary for full-time employees in the Czech Republic was CZK 43,412 , according to 2023 data from the Czech Statistical Office. Of course, salaries vary by industry and occupation.
What are the minimum wages in the Czech Republic?
Minimum wage in the Czech Republic is set at CZK 18,900 per month for 2024.
How much does it cost to run payroll in the Czech Republic?
Most payroll software is priced on a per-employee basis, or per pay run. Payroll service pricing varies according to:
- Payroll frequency, which in the Czech Republic is generally monthly.
- The number of employees on your payroll.
- How often you add and remove payees.
- Any additional services you need, such as year-end processing or mailing out pay stubs.
Can I manually run payroll for workers in the Czech Republic?
Some small business owners choose to run payroll themselves, using a payroll calculator and making a direct deposit to employee accounts, in an attempt to cut costs. But running payroll can be a time-consuming process, especially as your business grows. If you go this route, there are potential risks to keep in mind:
- Compliance: Running payroll manually in the Czech Republic, without using native global payroll software, puts you at risk of manual errors and omissions. Rippling handles your compliance work for you—enforcing Czech minimum wages and overtime rules, which can save you from heavy fines.
- Security: Processing payroll manually can pose security risks, especially if you are using spreadsheets or paper records. This increases the risk of sensitive employee information being lost, stolen, or misused.
What are the late tax filing penalties in the Czech Republic?
- Late filing of tax return: If you’re late in filing your tax return in the Czech Republic, you’ll be charged a penalty of 10% of the amount due.
- Filing an incorrect tax return: If you file a tax return incorrectly and the tax authority increases your liability or reduces your deductions, you need to pay a penalty of 20% of the difference. If the reported tax loss is decreased, you need to pay a penalty of 1% of the difference.
- Late tax payment: If you’re late in paying your employer taxes, you need to pay an interest penalty at a rate of 8% plus the Czech National Bank’s repo rate on the first day of the relevant calendar half-year. This penalty may be applied for up to five years.
- Late payments of social security contributions: You need to pay your and your employee’s social security contributions by the 20th of the next calendar month. If you’re late in doing so, or if you’re paying less than you’re supposed to, you’ll need to pay a penalty of 0.05% of the outstanding amount for every calendar day that you’re overdue.
Disclaimer: Rippling and its affiliates do not provide tax, accounting, or legal advice. This material has been prepared for informational purposes only, and is not intended to provide or be relied on for tax, accounting, or legal advice. You should consult your own tax, accounting, and legal advisors before engaging in any related activities or transactions.
