Tax time can often strike fear into even the most organized of self-employed people. Even if you are fluent in German, the German tax system is made up of a series of laws, rules and regulations with such complexities that leave even the most financially-savvy of us overwhelmed.
We’ve compiled a collection of the best tax tips to help you get started as a freelancer in Germany, ones that will help you to keep the bureaucracy blues to a minimum and keep your business administration running as smoothly as possible.
1. Register your freelance business with the tax office (Finanzamt)
Congratulations, you’re ready to enter the exciting world of self-employment! Whether you’ve had to secure your residency visa or you’re a European citizen, you still need to advise your local German tax authority of your intent to work self-employed. In Germany, there are two different kinds of self-employment: freelance (Freier Beruf) or trade (Gewerbe). Depending on your profession, you will fall into one of these two categories as determined by the tax authorities.
In order to start invoicing officially as a freelancer, you’ll also need a tax number (Steuernummer). Both the tax number and the type of self-employment will be issued after you register your details with the tax authorities by completing the Fragebogen zur steuerlichen Erfassung form. Please note: the tax number (Steuernummer) is a different number to your tax ID number (Steueridentifikationsnummer), the latter of which is issued to you when you first register your residence.
2. Create a tax compliant invoice
Now you’ve registered with the tax authorities and have completed your first lot of freelance work. Now comes the most exciting part: getting paid! For this, you’ll need to create a tax compliant invoice.
Officially, a tax invoice must include:
- Date of issue
- Your tax number
- A unique, sequential invoice number
- The full address of the supplier/service provider as well as client
- A description of the goods and services provided
- The number of goods or services provided (if applicable)
- The VAT number or the VAT ID number of the supplier/service provider (if applicable)
- The date of the goods supplied or services provided
- The total net value
- The total tax value (if applicable)
- The total gross value
- The rate and amount of VAT (if applicable) or;
- Details to support an export or reverse charge VAT (if applicable)
- A legal statement about VAT exemption (if applicable)
- Your bank details or preferred payment method
- Your terms of payment
3. Learn how to calculate your income tax
It is your responsibility, as a self-employed person in Germany, to lodge an income tax return which is based on your taxable income earned in the previous tax year.
Income tax is calculated by the tax authorities based on many variables: how much you earn, whether you have children and if you’re married or in a registered civil partnership, the number of jobs you have. Tax payers are assigned or can choose different tax classes and some registered partnerships may opt to file joint or separate tax returns.
Germany has a progressive tax system, so once you’ve earnt over the tax-free threshold, the amount of income tax paid can be anywhere between 14% to 42%.
You can use an online tax calculator which can help you calculate your income taxes, along with other various social insurances including health, unemployment, old age and nursing care plus other miscellaneous taxes including church (if applicable) and solidarity tax. The tax authorities will then look at your tax declaration and see whether you need to pay income taxes or you might be entitled to a refund. In some cases, the tax authorities may make a forecast calculation and ask for payments of income tax in advance, sometimes on a quarterly or monthly basis. This financial outlay can sometimes surprise many freelancers who are filing taxes for the first year of business as you may need to pay a bill for the previous year as well as taxes for the next year in advance. However, do not panic, it is sometimes possible to ask for an extension of payments. When in doubt, write a letter to the tax authorities and explain your situation.
4. Tax-deductible expenses: what can you claim?
An expense is a cost that occurs in the ordinary case of doing and running your freelance business. These expenses can be submitted and offset against your profit, by lowering your taxable income. Expenses are subtracted from the total gross revenue to calculate your taxable net income. It’s the taxable net income that will then be used to calculate your income tax, so it’s really important to keep track of all business expenses and stay on top of your business administration. No one likes to look for a missing expense when tax deadlines are looming, so being smart from the beginning about setting up a well-organised system to track your expenses is advised.
Some typical business expenses for freelancers include:
- Office equipment
- Marketing costs
- Legal costs
- Insurances including health, legal, unemployment and personal liability
- Business-related travel
- Website hosting
Some expenses have limitations:
A business meal (you can claim up to 70% of the total cost). At all business-related meals, you must request a special hospitality receipt called a Bewirtungsbeleg, which needs to be filled out with the client’s details and the purpose of the business meeting.
Some expenses are complex:
For an example, if you work from home, you may be able to claim a portion of your rent as a tax-deductible expense. However, there are several rules about what constitutes a home office, according to size and whether it’s a true workspace.
5. Taxes getting you down? Bring in the professionals
Tracking expenses can be complex and unique to your own personal and business situation which is why it’s smart to seek professional advice from a qualified accountant (Steuerberater) who is familiar with the complexities of the German tax laws and keeps up to date with any changes from the tax authorities.
As more and more people turn to freelancing, English-speaking accountants are often in high demand. Reach out to your personal, business, or freelancing network for a good recommendation and be prepared to contact quite a few. Many expats may find the accounting fees in Germany high, but they are also calculated on how much bookkeeping they need to prepare as well as a percentage of their own income. Remember: accountant fees are also tax-deductible and may save you hours of time in administration.
You can also submit your income tax return yourself via the ELSTER portal by using tax-compliant software such as WISO.
6. VAT (Value Added Taxes): let the fun begin!
Under the European Union, Value Added Tax (Umsatzsteuer) is a consumption tax that applies more or less to goods and services that are bought or sold for consumption within the European Union. In some other countries, this is also known as a sales tax or goods and services tax and the percentages vary.
As freelancers, you only need to begin to start charging VAT, once you’ve reached a certain income threshold. Before that, you are under no obligation to charge VAT, and this exemption law must be stated on your tax invoice.
Once you have met the threshold, and are eligible to start charging VAT to your clients, you’re about to enter a whole new world of complexities, deadlines and, being Germany, paperwork.
To keep it simple, this direct tax is paid to you by your client when they pay their invoice, and in turn, you pay forward the VAT to the tax authorities on a quarterly or monthly basis. VAT is collected, and then distributed, it is never your money.
If you’re a freelancer in Germany, preparation and knowledge is key to minimizing tax-time stress. And having access to freelance-friendly software (such as Lano) will support you and your business in creating and maintaining good financial health.