How is social insurance calculated for the self-employed
The government is considering increasing the social security levy for the self-employed. One of the reasons for the considered changes is the reduction of the difference in taxation of the self-employed and employees. Currently, social insurance for independent activities is calculated from 50% of the assessment base, that is, from 50% of the difference between income and expenses. Although the social insurance rate is 29.2% (28% is pension insurance, 1.2% is a contribution to the state employment policy), at the same time, the self-employed must pay a minimum insurance premium, regardless of the amount of income.
The minimum basis for social insurance is calculated as 25% of the average salary, which for 2023 means a minimum deposit of 2,994 CZK for the main self-employed (and 1,178 CZK for the secondary self-employed, where the minimum basis for assessment is 10% of the average salary). In the case of social security, the upper limit still applies, where the maximum assessment base is 1,935,552 kroner.
However, not all secondary self-employed persons have to pay advance payments and even insurance premiums themselves. In the first year of business, self-employed persons do not have to pay any advance payments, and if their income does not reach a certain amount, they do not pay insurance premiums at all. For 2023, the decisive amount is 96,778 crowns.
Who are secondary self-employed persons?
Let us recall who are the secondary self-employed. From the point of view of pension insurance, secondary self-employment is considered if a self-employed person in a calendar year:
- she was busy.
- was entitled to the payment of a disability pension or was granted an old-age pension.
- had the right to parental allowance or financial assistance during maternity leave or sick leave due to pregnancy and childbirth, if these benefits belong to employees’ health insurance, or personally took care of a person under the age of 10 who was dependent on the care of another person in degree I (mild dependency) , or about a person who is dependent on the care of another person in degree II (moderately severe dependence), or degree III (severe dependence), or degree IV (complete dependence), if the person who is dependent on someone else’s care is a relative, or lives with a self-employed person in the same household, if he is not a relative.
- served military service in the armed forces of the Czech Republic, unless it is a professional soldier or civil service.
- she was a neglected child.
How social security for employees is calculated
For employees, social insurance is calculated from the gross salary in the amount of 31.3%, but 2.3% of this rate is voluntary health insurance for the self-employed. The rate of pension insurance and contributions for the state employment policy is thus 29.2% for employees and self-employed. Social insurance is formally divided into contributions for employees and employers, hereinafter employee contributions (= contributions paid by employers for employees) means both together.
How many employees and self-employed persons paid insurance premiums
Server Podnikatel.cz has prepared a comparison of how much the self-employed and employees pay on average for social insurance. The comparison is based on data from 2019, that is, the last year before covid. In 2020 and 2021, various reliefs are in effect (e.g. insurance premiums for self-employed persons in the amount of minimum half-yearly advance payments have been abolished) and support related to the pandemic. Data for 2022 is not yet available.
At first glance, the difference looks dramatic, employees paid a total of 468 billion kroner for pension insurance and contributions to the state employment policy in 2019, while the self-employed paid only less than 32 billion kroner (6.8% of paid employees). In reality, however, the difference is not so dramatic, as there are significantly fewer self-employed.
Employees paid an average of 101,256 CZK
According to data provided by the CSSS to the Podnikatel.cz server, employees paid over 468 billion crowns (468,421,803,400 CZK) in 2019. At the same time, they CSSA was registered at the end of 2019 4,626,110 On average, one employee paid 101,256 CZK.
The situation is more complex for the self-employed, there are no accurate data for the main self-employed
In 2019, the self-employed paid a total of slightly less than 32 billion crowns (31,636,916,989 CZK). However, the number of self-employed persons was significantly lower than the number of employees. In addition, the comparison complicates which self-employed people you will count. Not all registered self-employed persons are active and, for example, only a quarter of secondary self-employed persons make advance payments. In addition, the secondary self-employed often only earn additional income from business and thus have a significantly lower profit (and therefore pay significantly less tax) than the main self-employed. However, CSSS does not record data on total duties only for self-employed persons.
If we take the number of all self-employed persons operating at the end of 2019 (1,031,365), one self-employed paid an average of 30,675 crowns, or 30% of what an employee paid. However, this number also includes self-employed persons who do not pay social insurance at all, because they do not perform any activity or perform only a marginal activity.
On the other hand, if only self-employed persons (598,086) are counted, the average would be CZK 52,897, or 52%. The number of self-employed persons, however, lacks secondary self-employed who also pay social insurance.
The last option is to take into account self-employed persons who pay in advance (705,627). In this case, the average reaches 44,835 CZK (44%). But even this number is not completely accurate, because this number also lacks some self-employed, that is, those who do not pay advance payments, but subsequently pay additional insurance premiums.
Lower premiums are not fully transferred to pensions
Lower contributions for the self-employed are indeed reflected in lower pensions, but not completely evenly. In fact, 100% of the assessment base counts towards the first reduction limit (44% of average pay), where many self-employed people fit into their assessment base. Above the 1st reduction limit (up to the 2nd reduction limit), income inclusion is reduced to 26%. Although employee contributions grow in direct proportion, pensions grow significantly less than a certain threshold, and never more than another. In addition, benefits can compensate for a low pension.
What would be the effects of the changes on the self-employed
The proposal for changes to the social security of the self-employed, which is currently being dealt with by the Government, in the first version envisages a gradual increase in the minimum for social security from the current 25% of the average salary to 40%. With the current average salary, this would mean an increase of the minimum social insurance to 4,709 CZK. All self-employed persons, regardless of their earnings, would thus have to pay a minimum of 4,709 CZK for social insurance. This change would thus mainly affect the self-employed with minimum deposits, which according to the estimates of the Czech Social Security Administration is 30 to 40%, and for whom the insurance premium would increase by 60%. On the other hand, the adjustment would not affect the self-employed with higher profits, who already pay an advance payment of more than 4,709 CZK.
How calculated by Podnikatel.cz serverfor the self-employed with minimum deposits, the change would mean an annual increase of the levy by 21,180 kroner.
Another option is to increase the basis for the calculation of social security, which is now calculated as 50% of the profit. According to the proposal, it should increase to 70%. Unlike the first variant, this change would not affect the least self-employed, as they would still pay minimum deposits. On the contrary, from a certain threshold it would apply to all self-employed people, while e.g. for the self-employed with a profit of 500,000 crowns, this meant an increase in social insurance by 29,200 crowns per year, and for self-employed persons with a profit of 1,000,000 crowns, then 58,400 crowns per year.
Should social security for the self-employed be increased?