Branching out alone in Germany? Discover what you’ll need to pay with our expert guide to taxes for freelancers and self-employed in Germany.
Self-employed tax in Germany can seem complicated – and it’s true, there’s a lot of bureaucracy you’ll have to deal with to register and complete your tax obligations. But this guide can give you all of the information you need, making the whole process that bit easier.
Whether you’re an entrepreneur, freelancer, or run your own business in Germany, you’ll need to make sure you know the various laws and rules around tax for self-employed workers in Germany.
This guide covers the following topics:
- Self-employed tax system in Germany
- Self-employed income tax in Germany
- Registering for self-employed tax in Germany
- Self-employed tax deductions and credits in Germany
- Corporate tax in Germany
- How to file self-employed tax in Germany
- VAT in Germany for self-employed people
- Social security for self-employed workers in Germany
- Combining freelance work and paid employment in Germany
- Associations for entrepreneurs in Germany
- How to find an accountant or financial adviser in Germany
- Useful resources
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Self-employed tax system in Germany
To get into the German tax system, most self-employed workers need to get a tax number from the local tax office and complete annual returns.
Tax liabilities work slightly differently depending on whether you run a business, you’re self-employed or you’re a freelancer.
The types of taxes you pay also depend on what kind of business or service you’re offering; for instance, businesses providing goods must pay trade tax, while those offering professional services don’t.
While many self-employed workers are exempt from making German social security contributions, it’s the law to have health insurance in Germany. This means you’ll have to make alternative arrangements.
Some self-employed people have to pay contributions to Germany’s state pension fund; others choose to do so even if they don’t have to.
Self-employed income tax in Germany
Both expats and natives have to pay income tax. You pay income tax on your domestic and worldwide income and assets.
If you’re not a German resident, you’ll only pay income tax on the income you earn in Germany; otherwise, you’ll pay on your worldwide income.
Taxable income includes earnings from any of the following categories:
- self-employed income;
- capital investment;
- business income;
- immovable property and certain tangible movable property;
- gains from private transactions, alimony or annuities.
It’s compulsory for self-employed workers to submit an annual tax declaration, which must be submitted to your local tax office.
Tax for self-employed sole traders and freelancers in Germany
Freelancers in Germany have to apply for quarterly installment payments at the German tax office when first starting their business.
The installments are paid during the year before submitting a tax return. What you’ve already paid is credited against the amount of income tax you owe, which is calculated after you submit your annual return.
As a result, many people receive tax refunds – but you may have to pay extra if you owe more tax than you’ve already paid.
You just need to show income in a simple profit-and-loss assessment.
Freelancers don’t have to pay trade tax or contribute to the German social security system – however, they should consider making their own arrangements, particularly for things like:
- 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, which is an option to supplement retirement income.
That being said, freelance journalists and artists must contribute to the social insurance system, which covers pensions, contributions to health insurance and care insurance for old age nursing care.
Tax for partnerships in Germany
In cases where two or more freelancers work together, they can form a partnership company. Only those in ‘liberal professions’, such as doctors, writers, accountants or tax consultants can form partnership companies.
Partnerships are not liable to pay trade tax, regardless of their turnover. However, income tax is deducted from the profits of each shareholder, and VAT must also be paid.
If the partnership employs any staff, it must pay payroll tax, too.
Tax on limited partnerships in Germany
Limited partnerships in Germany are when two or more entrepreneurs or companies team up to run a company together.
Usually, there is always at least one fully liable partner and at least one limited partner. The limited partner provides investment but doesn’t take part in managing the company.
Despite being a business, income tax is calculated on the profits earned by the shareholders and must be paid directly by them. The general partner can offset any losses against other sources of income on their tax return.
Limited partnerships may also have to pay trade tax if the company provides goods – unless they qualify as a small business.
Trade tax has a 3.5% base rate throughout Germany, and then each municipality adds its own multiplier so that it generally ranges between 7%-17.5%.
Limited partnerships also have an annual tax free trade allowance of €24,500.
Registering for self-employed tax in Germany
When initially setting up a business in Germany, you must register at the local tax office, the responsible professional association, and the associated accident insurance company.
It’s relatively easy to register with the local tax authority. You can usually send an informal letter detailing information such as your name, the name and nature of your business, and your contact details.
The tax authorities will then send you a questionnaire asking for details such as your estimated income in the current tax year, and whether you want to opt-in for VAT.
The tax authorities will then base your estimated income tax installment amounts on the estimated income you’ve provided.
You’ll pay the estimated tax during the year before your tax return is due; if you’ve earned more or less than the estimated income, you’ll either have to pay a tax top-up, or you might get a refund.
For more information on working as a self-employed person, see our guide to starting your own business in Germany.
Self-employed tax deductions and credits in Germany
Tax deductions for freelancers
Business-related costs incurred during the calendar year you’re being taxed on can be deducted from your profits, reducing your overall tax bill.
Some of the most common deductible items used by self-employed and freelance workers include:
- website costs;
- travel expenses;
- tax software;
- German telephone and internet costs;
The purchases must not be used in your non-work life, however.
In the case of telephone or internet costs – for example, where you only use your internet for work for a certain amount of time – you should calculate the proportion of your bill that’s from professional use and expense it accordingly.
The depreciation of certain assets can reduce how much tax you’re charged – but it’s not always tax-deductible.
There are three types of depreciation; conventional depreciation, a collective item or the depreciation of low-value assets (purchases at a value of up to €800).
Low-value assets can be deducted in a one-time and immediate deduction, whereas higher-value purchases are usually deducted over several years.
The German Department of Finance regularly publishes depreciation allowances that can help to determine how long the customary deduction period is for various assets.
For example, laptops can be fully depreciated after three years of use.
Deductions when you work from home
If you have a home office, you can claim tax deductions based on how much of your home is used for work, and how often.
If the room where you work is used for both professional and private purposes, and there is another room available, then you can’t make any tax deductions.
However, if you only carry out business activities from your office and don’t have another room available, you can deduct up to €1,250 annually as business costs.
You can also claim deductions for a thing like:
- building deductions or rent;
- repair costs;
- German home insurance contributions;
- renovation and maintenance;
- property tax.
Corporate tax in Germany
Self-employed workers don’t tend to have to pay corporate tax – or, at least not at corporate tax rates. Self-employed workers must register and complete annual tax returns, but the tax on their profits is generally taxed at the personal tax rate.
Corporate tax must be paid by corporations, cooperatives, mutual insurance companies, legal entities such as societies and trusts and commercial enterprises run by public legal entities.
The tax is levied on a taxpayer’s business income, with a municipal business tax charged as a lump-sum, which may be credited against income tax.
Germany’s combined corporate income tax rate is 29.8% – the third-highest among European OECD countries.
Corporate tax is set at 15% at a national level but has additional local taxes set by local municipalities.
Some freelancers – namely artists and journalists – will need to join the government’s Kuenstlersozialkasse if they don’t make arrangements to make contributions to the government’s social security system.
The contributions depend on your income; there is a ceiling on the total annual income that contributors are able to make, which changes each year.
In 2020, the total contribution rates for Kuenstlersozialkasse are:
- Pension insurance: 18.6%. The 2020 annual income ceiling is €82,800
- Health insurance: 14.6%. The 2020 annual income ceiling is €56,250.
- Care insurance: 3.05% for parents, or 3.30% for those without children. The 2020 annual income ceiling is €56,250.
How to file self-employed tax in Germany
German income tax returns are due after the end of December; this is the end of the German tax year.
You must file your return after the tax year has ended, and the normal deadline is 31 July. So, for example, your 2019 return will be due by 31 July 2020.
If your tax return is prepared by a tax professional, it will be due on 31 December.
You’ll receive a tax assessment from the tax office two to six months after submitting your return, detailing whether you should expect a refund or owe extra tax.
You can complete your tax declaration on paper, or online using the Federal Central Tax Office’s software. You’ll need to fill out a general tax form (Mantelbogen); depending on your individual circumstances, there may be a number of other forms you need to fill out, too.
VAT in Germany for self-employed people
In Germany, revenue generated by freelance work is generally taxable for VAT (Mehrwertsteuer or MwSt), unless it’s for services such as medical or dental services.
You’ll either pay 19% or a reduced 7% VAT, depending on the kind of service that’s been provided. You must show the VAT on the invoice.
Freelancers with new businesses must prepare their VAT declarations monthly for the first two years. After that, how often you need to declare VAT will depend on how much you earned in the first two years.
If your VAT the previous year was less than €1,000, you don’t need to prepare VAT declarations in the future, but you need to declare all revenue in your annual VAT return (umsatzsteuererklärung).
For VAT declarations less than €7,500, you’ll need to prepare quarterly declarations. If you paid more than €7,500 you must continue to prepare monthly VAT declarations.
You can deduct the VAT you were invoiced from the VAT you were charged; the difference has to be paid to the tax authorities as an installment payment.
Social security for self-employed workers in Germany
Germany has a social security system that many workers must make contributions to. Freelancers, in general, aren’t liable to the German social security system.
They do not need to contribute to the governmental healthcare, unemployment, and pension insurances – but it is recommended that they make their own arrangements instead.
This is particularly important for:
- health insurance, which also covers the risk of illness and the loss of income if you get ill;
- 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 retirement income.
Freelancers aren’t generally required to make contributions to the German social security system – with the exception of artists and journalists.
These freelancer groups have to contribute to a government-backed social insurance system, which covers pensions, health insurance and care insurance for old age nursing care.
If they don’t, they must join the government’s Kuenstlersozialkasse.
Combining freelance work and paid employment in Germany
German tax rules do enable employed workers to carry out extra freelance work, but there is an added tax burden and you must make sure you’re honest about any extra income you’re receiving.
Complicating your tax affairs in this way might mean it’s a good idea to get some professional tax advice.
As an expat, you must make sure your German residence permit allows you to carry out freelance work, as some are restricted to just employment.
Additionally, you’ll also need to register for self-employment, and may need to submit a tax return.
While your employment income will be subject to a wage tax, which is held by your employer, income from your freelance work will need to be taxed separately. It is your responsibility to pay this tax.
The German tax office will estimate your tax for the current year, and you’ll have to make income tax prepayments four times a year.
Then, when it’s time to file your tax return, you’ll have to detail the income from your employment as well as freelance income.
Wage tax that’s been withheld and provisional tax payments are deducted from your total tax liability. This will mean you’ll either get a tax refund or a bill asking for an extra payment.
Associations for entrepreneurs in Germany
There are a number of associations for entrepreneurs in Germany, which can be a great way of gaining help and advice.
A few such associations include:
- The German Association for Small and Medium-sized Businesses – a politically independent association catering for small and medium-sized businesses.
- The Entrepreneurs’ Organization Berlin – a global peer-to-peer network of more than 14,000 influential business owners, with 219 business members in Berlin.
- Wegate – campaigning for female entrepreneurship.
- European Confederation of Young Entrepreneurs – aims to connect young entrepreneurs in Europe.
How to find an accountant or financial advisor in Germany
If your circumstances are more complicated, or you’re not sure where you stand in the German tax system, it can be worth getting professional advice.
Consider joining a Lohnsteuerhilfeverein – a non-profit organization that can help with your taxes for a small membership fee. You can find your local center online.
A tax consultant can also advise on issues around tax law and business management, but it can be expensive. To find a professional near you, check the German Federal Chamber of Tax Consultants and the German Association of Tax Advisers.
American expats living in Germany can get help meeting their US tax filing obligations with Taxes for Expats.