5 things freelancers and self-employed expats need to know about their taxes
Germany is famous for its bureaucracy. And - guess what - the burden for freelancers is even bigger. But don’t panic! Melchior Neumann from the freelance tax app Kontist lays down what you need to know about doing your taxes as a self-employed expat in Germany.
Whether you are new to the freelancing game in Germany, or if your business is already up and running, here are five things you should know about your taxes.
1. The difference between self-employed and employee taxes
Employers deduct taxes from employees' gross salaries. But since you're a freelancer, you must submit a tax declaration and pay taxes yourself. If you don’t do this, you risk a fine and even imprisonment. This means you need to keep a good overview of your finances. If not, you risk spending more money than you make and putting your business at financial risk.
You can avoid this by keeping your business payments separate from your personal account and making sure you set aside an amount each month to pay your taxes.
2. How to get set up if you’ve recently moved to Germany
There are a few administrative issues involved with becoming a freelancer in Germany.
Once you have your resident permit you should register with the tax office (Finanzamt). To get set up as a freelancer, you will need to complete a “Fragebogen zur steuerlichen Erfassung” (tax registration questionnaire) and submit it to your local tax office. This helps clarify a number of things, including whether you’re classified as a freelancer (Freiberufler) or a tradesperson (Gewerbetreibende), the kind of accounting you have to do, and whether you need to charge VAT (more on that below).
Unfortunately, the form is only available in German, but a tax advisor can help you fill this out if you are having difficulties.
3. VAT and income tax
Like anyone who works in Germany, you’ll need to pay income taxes on any income you may have from freelance or self-employed work. Income tax rates increase depending on your yearly income and are as follows in 2022.
- Less than 9.984 euros: You are exempt from income tax
- 9.985 to 5.596 euros: 14 to 42 percent
- 58.597 euros to 277.825 euros: 42 percent
- More than 277.826 euros: 45 percent
You can use an income tax calculator for self-employed people to work out how much your tax bill is likely to be at the end of the year.
You might also have to deal with VAT. All goods and service providers in Germany have to charge their customers VAT (Umsatzsteuer). Unfortunately, you can’t keep the VAT for yourself. You need to pay it to the tax office via advance VAT returns, which you submit either monthly or quarterly, depending on what the tax office decides. A tax consultant can help you do this.
If you don’t want the hassle of charging and paying VAT, the good news is that there’s an option for small business owners to avoid it. If you make less than 22.000 euros in your first year of business and less than 50.000 euros in your second year, you can apply for the status of a “small business” (Kleinunternehmer). This means you don’t have to charge VAT and can save yourself the complex VAT return process.
4. How and when do you pay income tax in Germany as a freelancer?
The financial year in Germany starts on January 1 and ends on December 31. You then have until July 31 of the following year to hand over your tax declaration.
First year of freelancing
If this is your first year of working in a self-employed capacity in Germany then things are a little tricker. The tax office needs to assess your earnings and then calculate your final tax liability. This means that you might end up with a big tax bill almost a year after actually earning the money. This is why we recommend putting money aside to prepare for this eventuality.
If this isn't your first rodeo, then great. The tax office will assess your income and set you a monthly income forecast. They’ll then ask you to pay this amount upfront, either monthly or quarterly. If your income exceeds or falls short of the forecast, you can expect either a (small) tax bill or tax refund at the end of the year after you’ve completed your tax return.
5. You can reduce your tax by deducting business expenses
Enough about how much you owe. Let's talk about how to decrease your tax liability by deducting business expenses. This is worth knowing: every year, self-employed people pay thousands of extra euros to the tax people because they don’t make full use of business expense deductions. This is where it pays to get an expert on board!
Did you know that you can deduct costs like:
- Business dinners with potential partners (up to 70 percent)
- New bike (if you use it to go to work)
- Company car
- Laptops and office equipment
- Gifts to clients
A tax advisor will help you optimise your taxes with deductions like these, so you pay the least amount possible.
Germany takes tax seriously. You should too.
If you don’t want to deal with all the deadlines, monthly bookkeeping, monthly VAT declarations, yearly income tax declarations, or communications with the tax office, you can hand these tasks over to a tax advisor experienced in the tax affairs of freelancers and self-employed expats.
Kontist offers all the financial services you need to enjoy stress-free freelance life. From the initial registration as a freelancer with the tax office and preparing your tax declarations, to opening a business bank account and keeping your bookkeeping in order - Kontist’s got you covered!