A-Z about Taxes for Freelancers and Business Owners in Germany

This is the level of stress you will have when you start your own business. This is when you do it in a foreign country where you barely speak the language. But it goes to record highs when that country is Germany, and you must navigate the German bureaucracy and file your taxes.

Now you can't go to the Lohnsteurhilfverein because they aren't allowed to help, the private tax advisors are very expensive, and to do it yourself, there is a lack of enough resources in English. So I struggled, and I don't want you to go through that. In this blog, we will talk A-Z about taxes for a business owner or a freelancer in Germany. So let's get started.

For those new here, my name is Srijith, and in my blogs, we talk about wealth, happiness, and, sometimes, taxes. Keep in mind that I am not a tax advisor. I am just sharing what I learned from my own experience. So take all the information, but make your own decisions.

You all know how taxes work. You work, earn an income, a share of which is paid to the Government in the form of taxes.

The German tax system is based on how you earn this income and, based on that, can be divided into 4 groups.

First is the most common case. You work as an employee at a company that pays you a fixed salary as an income. In this case, you pay only the income tax. It is pretty straightforward when it comes to filing tax returns for normal employees. I have written a blog here on how to do this for free with Elster. Now, if you are not employed by anyone and carry out independent work that earns you an income, then you belong to either a Freelancer, also called Freiberufler or a sole proprietorship, also known as Einzelunternehmen.

This is where it starts to get complicated. A freelancer is someone who offers a service in an area where they are trained to do so. And these areas are well-defined in German law. These are professions such as doctors, dentists, legal, tax, and financial consultants, copywriters, teachers, etc.

You are a Gewerbetreibender or a trader when you run a business. This means, for example, selling goods in a retail store or in an online shop. Your business could be a one-person business, called an Einzelunternehmen, or a registered commercial business. The laws and complexity are different for both. The main difference comes in terms of liability.

In a solo proprietorship, you are solely responsible for any losses or damages you cause to others with your business. Now the next category is a Kleinunternehmen or a small business. Your business will qualify as a small business if your total turnover in the foundation year is not expected to exceed 22,000 euros and 50,000 euros in the following year.

As a trader or business owner, you are legally required to register your company with the responsible trade office or Gewerbeamt. Also every business or service, even one that falls under the small business regulation, must present sales and profits to the tax office and file a tax return. And to file a return, we need to know what taxes we must pay.

Einkommensteuer or Income Tax

Everyone who earns an income of more than 10,908 euros in Germany has to pay income tax. And as a self-employed person, you are also required to submit an income tax return annually. If you work as an employee in addition to your self-employment, your income will be added together. You must show the tax office what income and expenses you had with your business relationship.

So that they can tax your profit, i.e., your income minus your expenses. If your profit as an entrepreneur is less than €60,000 per year and your turnover does not exceed the limit of €600,000, you do not need to submit a detailed balance sheet. You can declare your profit with a simple income surplus form or Einnahmen-Überschuss-Rechnung (EÜR), which we will discuss later.

Umsatzstuer or VAT

Umsatzstuer or Value Added Tax is basically the sales tax to be paid on every product and service sold in Germany, irrespective of whether you are a freelancer, single business owner or corporation . The standard rate is 19%, but there is also a reduced rate of 7% for certain goods and services. If you are a small business owner, you don't have to collect or pay VAT on the goods and services you sell. so you can price your products at a competitive rate compared to big companies. But then you must explicitly declare this to the tax office in writing.

You also have the option to skip this and charge a VAT for your goods and services. This makes sense if you have expenses of a large scale at the beginning of your business activity, the VAT on which you can get back.

Gewergbestuer or Trade Tax

When your small business grows and stops being small, it's time for the Gewerbesteuer or trade tax. This is a local tax on business income collected by municipalities and the rate varies depending on the municipality. Whether or not you have to pay a trade tax depends on your annual profit. Anything above 24,500 euros annually is the time to pay the trade tax. Freelancers are generally exempt from the trade tax.

Forms to Fill

Once you register the business at the Gewerbeamt, you will soon receive a welcome letter from the tax office. You will be asked to fill out a questionnaire called Fragebogen zur steuerlichen Erfassung and submit within 3 to 4 weeks using the online software called Elster. You can find a detailed tutorial video here. Since freelancers do not register a business at the Gewerbeamt, they will not receive a letter from the tax office. Instead, they can directly fill out and submit the questionnaire through ELSTER. Now there are some other forms to be submitted when you file your return as a freelancer or business owner.

Hauptvorduck

This is the main Form and must always be completed. It has your personal and bank details, and if you want to communicate some information to the tax office along with your declaration, you can do this here.

Form S:

This is a 2-page form to be filled out for freelancers. All profits from freelance activity must be recorded in this Form. These include

• the profit calculated by accounting or income statement

• Profit shares from freelance partnerships

• Capital gains

• Profits from part-time activities

• Losses

Form G:

This is the Form-S for business owners. Those with a trade license must enter the profits from their commercial activity in Form G.

EÜR - Income Surplus Account

Forms S and G only record your profits and losses but not how you came up with those values. If you are a small business owner or a freelancer, simple accounting with details of income and expenses would be enough. This could be done and submitted to tax office with an income surplus form or Einnahmen-Überschuss-Rechnung or EUR Form. In the EÜR, you break down all sales from your small business and also record all your business costs and other operating expenses. You can do this easily with an accounting tool such as SevDesk, which automatically executes this revenue surplus calculation. Then you can take over the results to the EÜR" and transfer them to the tax office via Elster.

Form N

If you only operate your small business on the side and have income from an employment relationship, you must also fill out Form N.

You can find blogs on how to fill out each Form on this blog site. So do check them out.

A crucial factor that reduces your taxes is the expenses you enter into these forms as a small business owner or a freelancer. To know which expenses you can deduct, answer the question, "Do I need this expense to earn money for the business?". Some common expenses you can deduct are travel costs, office supplies, training costs, consulting fees, insurance, etc.

A detailed checklist can be found in the description that you can download for free. Even though you don't have to submit the proof for your expenses along with your returns, you are legally required to store incoming and outgoing invoices as well as other proof of payments for ten years.

Now when it comes to the deadline for filing your return, you have time until the 31st of July of the coming year. For example, for the declaration of the financial year 2021, 31.07.2022 is the deadline. If you have your tax return carried out by a tax consultant, the submission deadline is extended by seven months to the last day of February the following year.

Now I know I haven't covered every single aspect of starting a small business in Germany. If you are someone who is on their freelance or solo business journey in Germany, then you can find some more useful blogs on this blog site. Also if you got some value from this blog, please consider coming back for more. Until I see you with another blog, take care and have a wonderful rest of the day.

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Disclaimer: The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. It is important to do your own analysis before making any investment.