Becoming a Freelancer: What You Need to Consider from a Tax Perspective!

When you receive a salary as an employee, your employer automatically deducts payroll tax at source. For freelancers, it is different. You must deal comprehensively with all aspects of income tax and other types of tax such as VAT. Given the complexity of German tax law, this is no easy task. If you wish to become a freelancer, it is best to engage a reputable tax advisory firm! Tax specialists can also provide you with sound start-up advice, addressing the tax aspects amongst other matters.

Freelancers and taxes? Many questions depend on the individual case. You will need individual advice and support. This article therefore limits itself to general guidance intended to provide an initial orientation!

The term 'freelancer' is widely used, especially in digitally oriented professions. But what does this designation actually mean? Many use the term without being able to define it precisely. In tax law terms, freelancers may be classified, for example, as members of the liberal professions (Freiberufler) or as traders (Gewerbetreibende). It is therefore not appropriate to use the two terms 'freelancer' and 'Freiberufler' as synonyms — though this is frequently observed in practice.

As a general rule, freelancers are self-employed individuals who typically take on the role of an independent contractor. They work for companies without being directly integrated into those companies' organisational structures.

From a tax perspective, it matters whether you act as a member of the liberal professions (Freiberufler) or as a trader (Gewerbetreibender). If you qualify as a member of the liberal professions, you benefit from several advantages:

- You do not need to register a trade (Gewerbebetrieb).

- You do not pay trade tax (Gewerbesteuer).

- Regardless of your turnover and profit, you may prepare a cash-basis income statement (EUER).

How do you determine whether you qualify as a member of the liberal professions (Freiberufler) or as a trader (Gewerbetreibender)? The first step is to consider whether your activity belongs to the catalogue of liberal professions (Katalogberufe der freien Berufe). Typical examples are doctors, solicitors, management consultants, and journalists. The second step involves your qualifications and the precise way in which you carry out your activity. Even if you belong to one of the liberal professions, you may still be classified as a trader in certain circumstances. If you are unsure, contact your Guhr Steuerberatung advisers and have your individual case reviewed!

If you wish to generate income as a freelancer, a systematic approach is recommended:

- Preparation: plan your move into self-employment!

- Execution: in particular, bear in mind your administrative obligations!

Self-employment is a risk — this is especially true if you wish to move from a permanent employment relationship to the role of a freelancer. For this step, thorough preparation is recommended, during which you should weigh up all the advantages and disadvantages of self-employed work.

Even at the start of your career, working as a freelancer carries risk. Unlike employees, you do not receive a regular monthly salary. Weigh this decision carefully and take all facets into consideration.

Ideally, you should prepare a detailed business plan. In the first part, describe your business model; in the second part, draw up a well-founded financial plan. In the process of drafting this business plan, you will identify possible weaknesses and gaps. Experience shows that this systematic approach increases the chances of a successful business launch!

As a freelancer, you must fulfil the same obligations as any other self-employed individual: the first priority is to register your newly established business with your local tax office. To do this, complete the questionnaire for tax registration (Fragebogen zur steuerlichen Erfassung) — you may also entrust this task to your tax adviser. The questionnaire must be submitted no later than one month after you commence business activity.

Are you classified as a trader (Gewerbetreibender)? In that case, you must also register with the local trade authority (Gewerbeamt). A separate form is required for this, and a fee is payable. Registration with the tax office, on the other hand, is free of charge!

On the tax registration questionnaire, you indicate whether you wish to make use of the small-business (Kleinunternehmer) scheme. This scheme relates to VAT. As a recognised small-business owner (Kleinunternehmer), you avoid the administrative burden of calculating VAT and remitting it to the tax office.

The following requirements apply for new businesses:

- Turnover in the year of establishment must not exceed 22,000 euros.

- In the following year, it must not exceed 50,000 euros.

Those starting a new business may use estimated figures for both amounts. Ask your tax specialists for advice on the advantages and disadvantages of the small-business (Kleinunternehmer) scheme!