With the Czech Republic's diverse and talented workforce, it's no wonder so many global companies choose to hire contractors in the Czech Republic (also known as Czechia). But when it’s time to pay them, what steps do you need to take to comply with all of the Czech Republic's dauntingly complex labor and tax laws?
Before you receive your first invoice, read our step-by-step guide to learn what you need to know to correctly classify contractors, onboard them, and pay them according to the Czech Republic's labor laws.
Step #1: Classify your workers
Classifying Czech workers correctly is crucial. Misclassifying employees as contractors can result in fines, back taxes, and other harsh penalties. Under Czech and European Union law and labor codes, certain criteria can help distinguish between dependent work and business cooperation (self-employed work). The following situations indicate that your workers are employees:
- The employer assigns tasks, provides direction and supervision, and assumes responsibility for the work (subject to instructions).
- The worker has a position that is comparable to an employee in their relationship with the employer.
- Pay is determined based on the length of work or in a similar manner as in a standard employment relationship (employees’ salaries).
- The employer provides the necessary materials, facilities, machines, and other equipment required for the work.
- The legal relationship between the employer and the employee is permanent, or the work is exclusively performed for the employee (including working hours, job, vacation, probation period, etc.).
Recently, there has been an increase in sanctions imposed by Czech authorities for false self-employment. The State Labour Inspection Office oversees disguised employment, which is regulated by labor law. Those falsely self-employed face fines of up to CZK 100,000 (approx. $4,700), and firms that employ falsely self-employed individuals face fines ranging from CZK 250,000 (approx. $11,700) to CZK 10,000,000 (approx. $468,000). Misclassification can result in the same fines and penalties when you hire employees as part of your global team.
Step #2: Determine the best way to pay your contractors
The first thing to do before you can pay contractors in the Czech Republic (whether in Czech koruna or another currency) is to determine how you'll pay them. With the rise of global workforces and remote work, employers now have more choices than ever for making international payments to contractors. Here are some options:
- Bank wires. You can open a Czech bank account and use it to deposit funds into Czech contractors' accounts or use your bank to send a global wire transfer to pay a Czech contractor
- International money orders. This long-standing payment method can be slow—especially because the employer needs to physically purchase the money order, and the contractor needs to physically deposit it upon receipt. Money orders can also come with fees and bad exchange rates.
- Digital wallets or payment platforms. Note that not all digital payment platforms are available in the Czech Republic (for example, Venmo only works within the US) though some employers use platforms like Wise to transfer money across borders. Remember that exchange rates can change from day to day, making it difficult to predict your outgoings.
- Global payroll services. Typically, contractors aren't included in payroll, since they aren't subject to the same withholdings as employees—instead, they invoice for their services, which goes through accounts payable for many companies.
Step #3: Use global payroll software to process payments
As you saw in Step #2, there are multiple ways to pay contractors in the Czech Republic. But the fastest and simplest way is to streamline paying contractors through global payroll software.
With Rippling, you can pay contractors across the world. Here’s a preview of how Rippling’s global payroll system works:
Step #4: Calculate and file your tax forms
While employers aren’t required to withhold and pay taxes for contractors in the Czech Republic, the IRS requires you to report any money you pay to foreign independent contractors.
FAQs about paying contractors in the Czech Republic
Do you need to withhold taxes when paying contractors in the Czech Republic?
No, foreign companies don't have to withhold payroll taxes or cover social security and health insurance contributions when paying contractors in the Czech Republic. Contractors are required to pay all of their own taxes, including income tax.
Does Czech minimum wage apply to independent contractors in the Czech Republic?
No, minimum wage laws don't apply to independent contractors in the Czech Republic.
Do Czech contractors get benefits?
No, according to employment laws, independent contractors (classified as entrepreneurs) in the Czech Republic are not entitled to benefits (time off, sick leave, public holidays, parental leave, paternity leave, maternity leave, severance pay, notice periods, and other entitlements) in the same way as employees. Offering benefits to independent contractors can even increase the risk that the courts will consider the contractors to have been misclassified. Exercise caution when setting up a local employment contract.
Can you pay contractors in the Czech Republic in your home currency?
While you should try to pay international contractors in their local currency (CZK), you can pay contractors in the Czech Republic in another currency if they agree to it in writing.
Can you manually pay contractors in the Czech Republic?
Yes, and it's common for small business owners to manually process contractor payments in an attempt to cut costs. But this can be time-consuming, especially as your business grows and if you work with multiple contractors in the Czech Republic or across borders.
It's also important to note that manually processing payments comes with some risks:
- Compliance. Running payroll manually means assuming the risk of human error and omission. Protect yourself and your business with Rippling, which automatically enforces compliance with any applicable local laws—no matter where your contractors live.
- Security. Manual payroll processing also poses security risks, especially if you use spreadsheets or paper records. Sensitive employee information can be lost, stolen, or misused.
How do you turn a contractor into an employee in the Czech Republic?
While hiring independent contractors over full-time employees can come with financial benefits, sometimes you do need a full-time employee. The challenge is making sure all the legal requirements are in order. The Czech Republic's labor laws require payroll deductions and benefits (like social security contributions) for employees that you don't have to worry about for contractors.
Effortlessly manage contractors, no matter where they are
You can pay international contractors directly through Rippling, meaning you need just one system to pay all types of employees—wherever they are.
Rippling and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any related activities or transactions.