Tax and freelancers in Germany
Becoming a freelancer or business owner in Germany can seem like a complicated process but these steps will set you up as a self-employed worker in Germany.
Setting up as a freelancer can seem like a long and complicated process. In this guide on freelancing in Germany we lay out the steps you should take for beating the bureaucracy and transforming yourself into a self-employed person.
Working as a freelancer in Germany means not only discovering how German business works but also discovering German law and bureaucracy.
The general principles
Let's start with just the general principles. For tax and professional registration purposes, self-employed people need to be divided into freelancers and tradesmen.
Income from freelance business needs to be shown in a profit-and-loss assessment
Freelancers do not have to be registered at the Commercial Registry. They are not obliged to become a member of (or contribute in anyway to) the local Chamber of Commerce.
Freelancers don't need to prepare annual financial statements for taxation purposes; a simple profit-and-loss assessment is sufficient.
And last but not least', freelancers do not have to pay trade tax.
According to German income tax law ('Einkommensteuergesetz'), a freelancer can be described as a self-employed person whose business is either in the artificial (i.e. painter, musician), scientific, authorial (professional writing), teaching or educational sector, or if their work is determined by his or her personal knowledge of particular profession. This includes physicians, dentists, journalists, translators, lawyers, business consultants, etc.
These are professions which are listed in the German income tax law as typical freelancer's professions.
But it is worth pointing out that as a result of case law other professions are accepted as freelancers, too, although not mentioned in the German tax law. This includes IT-consultants, masseurs, nurses and more.
Setting up a business
When setting up a business as a freelancer in Germany, one of the first hurdles that freelancers face is often the registration procedure.
They need to register at :
- the local tax authorities
- the responsible professional association
- the responsible accident insurance company (if they employ people).
While the registration at the professional association and the accident insurance company might require a somewhat more formal process, (i.e. completion of official forms and lodging documents setting out qualifications), registering at the local tax authorities is relatively straightforward and can be achieved with an informal letter.
Once you have registered, the tax authorities will then send you a questionnaire asking for personal details, your estimated income in the current tax year and if you want to opt for VAT (more about that later).
Based on the estimated income the tax authorities will assess income tax instalment payments.
Before registering as a freelancer you might find it worthwhile to catch up on the programmes offered by the German government and various institutions to support those seeking a career as a self-employed person. Some programmes require that the application has to be made before you officially register as self-employed.
When setting up a business, it is desirable to also create a bookkeeping system. Although a freelancer only needs to file a simple profit-and-loss-calculation for the tax authorities, bookkeeping can deliver helpful analyses (such as a management analysis or a cash flow analysis) that help you to evaluate the first period that your business has been operating and project how the business might pan out over longer periods.
Unlike normal employees, freelancers are in general not liable to the German social security system.
Therefore, freelancers do not need to contribute to the governmental healthcare, unemployment and pension insurances. However, they should consider making their own arrangements. In particular, this includes for:
- Private health insurance
- Health insurance which also covers the risk of illness and the loss of income should you become sick
- Disability insurance to cover the risk of monetary loss if you are unable to continue working due to illness
- Life insurance is also an option to supplement the retirement income
Please note that since 2009 it is mandatory for any individual living in Germany to have a health insurance.
While freelancers are in general not required to make contributions to the German social security system, one group of freelancers - artists and journalists – are required to contribute to the government-backed social insurance system, covering pensions, a contribution to health insurance and so-called care insurance for old age nursing care.
Under a law called the Social Law for Artists ('Kuenstlersozialversicherungsgesetz'), freelancers working in Germany as artists or journalists and who are not contributing to their social insurance, such as a pension scheme, are required to join the government's 'Kuenstlersozialkasse'.
The contributions are based on income. There is also a ceiling on the total annual income that those contributing to the 'Kuenstlersozialkasse' are able to make.
The ceiling is amended each year. Like employees, freelancers need to pay 50 percent of the total contribution. In 2012, the total contribution rates for 'Kuenstlersozialkasse' members are:
- Pension insurance: 19.6 percent. The 2012 annual income ceiling is: EUR 67,200 (2011: EUR 66,000)
- Health insurance: 15.5 percent. The 2012 annual income ceiling is EUR 45,900 (2011: EUR 44,550)
- Care insurance: 1.95 percent (for parents) or 2.20 percent (for childless individuals). The 2012 annual income ceiling is EUR 45,900 (2011: EUR 45,550)
However, it should be pointed out that there are exemptions for artists and journalists, so they don’t have to join a social insurance scheme.
This includes freelancers who receive only small income from artistic and journalistic work (less than EUR 3,900 per year; not applicable for those just starting out in their work), freelancers above retirement age (exclusion from pension insurance contributions), freelancers who are already member of the government social security scheme due to an employment contract, etc. These exemptions are necessary to avoid double insurance and undue hardship.
As a freelancer in Germany you are not subject to trade tax. This only applies to tradesmen; which is why the distinction between freelancers and tradesmen is so important. Normally the income tax ('Einkommensteuer') and value added tax ('Mehrwertsteuer') are the taxes you will find yourself having to deal with.
Firstly, let's go through the steps of drawing up income tax in Germany.
The German tax year is the calendar year.
A German tax return in general has to be filed at your tax office on 31 May of the following year at the latest. Extensions are possible, i.e. if the tax return is prepared by a tax advisor (until 31 December). As in other nations, late filing may result in a penalty and interest.
Freelancers have to apply for quarterly instalment payments at the German tax office when starting a business. These instalment payments will be credited to the annual income tax. Instalment payments will be adjusted for future years when a final income tax assessment for a prior year has been made.
The income from freelance business needs to be shown in a simple profit-and-loss assessment. However, the profit-and-loss assessment needs to be based on the German tax rules. This will determine the type and rate of depreciation, the amount of deductible gifts to business partners, etc.
After adding income from other sources and deducting special expenses, extraordinary expenses and child allowances, the result is your taxable income, on which your income tax is assessed.
Germany has a progressive income tax system. There is an annual tax free exemption of EUR 8,004. Above this amount, the tax 2012 rates start at 14 percent, rising to 45 percent.
On the assessed income tax, a solidarity surcharge of 5.5 percent is also based. This is to help to fund the rebuilding of eastern Germany.
Married couples can lodge a joint return, which in most cases will reduce the overall income tax burden.
Now let us consider value-added tax (Mehrwertsteuer or 'MwSt' in common speech).
Revenue generated by freelance work is in general taxable for 'MwSt' purposes, unless the work or activities are derived outside of Germany. Revenue can be 'MwSt' free such as medical or dental services.
Depending on the kind of service provided by the freelancer the full 'MwSt' rate of 19 percent or the reduced rate of 7 percent has to be added to the invoiced amount and has to be shown in the invoice.
If a freelancer doesn’t add 'MwSt' on the invoiced amount although he needed to, he nevertheless owes the respective 'MwSt' amount in case the tax authorities make an audit.
As a freelancer you have to prepare 'MwSt' declarations periodically, in which you declare your revenue and set out the 'MwSt' you received.
In these declarations, you can deduct the 'MwSt' you were invoiced (if the invoice meets certain requirements) from the 'MwSt' you were charged. The difference has to be paid to the tax authorities as an instalment payment.
Freelancers who establish a business in Germany need to file monthly 'MwSt' declarations for the first 2 years after opening their business. After this two years period, the period of filing 'MwSt' declarations is determined by the 'MwSt' of the prior year:
- If the 'MwSt' for the prior year was less than EUR 1,000, you don’t need to prepare 'MwSt' declarations in the future but you need to declare all revenue and 'MwSt' in your annual 'MwSt' return (umsatzsteuererklärung).
- If the 'MwSt' for the prior year was less than EUR 7,500, you need to prepare quarterly 'MwSt' declarations.
- If the 'MwSt' for the prior year exceeded EUR 7,500, you need to go on preparing monthly VAT declarations.
If you operate a small business with annual revenue below EUR 17,500 you can opt if the revenue will be subject to 'MwSt' or not.
If you decide that the revenue is not subject to 'MwSt', you are not allowed to charge 'MwSt' in your invoices (otherwise you need to pay this amount to the tax authorities) and are not allowed to claim back 'MwSt' (you were charged) in a 'MwSt' declaration.
Freelancers who receive revenues that are taxable are obliged to file an annual 'MwSt' return.
In this tax return, the annual revenues and annual VAT need to be declared. After deduction of the VAT invoiced to the freelancer and the periodical instalment payments due to VAT declarations, this will result in a final VAT payment or refund.
Martin Brune / Expatica
Martin Brune works as a tax advisor in Duisburg. For more information email: email@example.com (PH +49 (0)203 713 6878 0, Fax +49 (0)203 713 6878 9.
You can also ask Martin Brune your tax-related question via Expatica's Ask-the-expert section for Germany.
This article contains information of a general nature and should not be considered as legal advice.
Although the greatest care has been taken in drafting this article, it is possible that certain information may have become outdated or inaccurate since its publication. Martin Brune cannot be held liable for the consequences of actions or omissions based on the content of this article.
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