Becoming Self-Employed on the Side: Tax Considerations to Bear in Mind

The high number is easily explained: for many people, secondary self-employment is an attractive option. As a rule, they earn a secure salary from their main employment, which enormously reduces the financial risk compared with full-time self-employment. Even if their business idea does not work out, no financial difficulties loom.

The large number of secondary business start-ups might suggest that this step is straightforward. Is that really so? What bureaucratic hurdles must you overcome? What impact does secondary employment have on taxes and social insurance? This guide gives you a concise overview of the relevant aspects.

As a founder, you will encounter the distinction between secondary occupation and main occupation in various contexts. The obvious question is why this classification matters.

This cannot be answered in general terms. For some points, the classification into secondary and full-time self-employment is irrelevant — tax law in particular deserves mention here, as this distinction is immaterial when it comes to calculating profit. In other areas, such as social insurance law, the distinction is of considerable importance.

Germany has a distinctive system in the form of statutory health insurance: for employment subject to social insurance contributions, employees and employers share the costs, which are calculated as a percentage of gross pay.

Fully self-employed individuals, by contrast, have the choice of whether to insure themselves voluntarily through the statutory scheme or through private insurance. In both cases, they must bear the entire insurance costs themselves.

From this considerable difference, you can appreciate why the classification into main and secondary occupation has far-reaching consequences. If you are in employment subject to social insurance contributions in your main job, your employer bears half the costs.

For your secondary self-employment, on the other hand, no health or long-term care insurance contributions are payable. If the health insurance fund assumes that you are primarily self-employed, you must insure yourself — which means significantly higher contributions.

In case of doubt, health insurance funds conduct an individual-case assessment. They examine the following criteria:

• Distribution of weekly working hours
• Level of both incomes
• Legal form of your business
• Sole self-employed or employer with staff

If you employ staff, you should expect to be classified as primarily self-employed. Your working hours and income then play a secondary role for the insurance fund. If you have any problems, contact your tax adviser or a specialist lawyer in social insurance law.

Whether secondary or full-time self-employment: you are subject to tax. Unlike health insurance funds, the tax authorities are not concerned with whether you have a secondary or primary income — their concern is that you properly declare and pay tax on your income from all sources.

If you carry on your self-employed secondary activity as a sole trader, your profit is subject to income tax. The tax office combines income from employed and self-employed work for this purpose. The profit from your secondary activity is calculated as business receipts less business expenses.

Particularly in your first year of trading, you should expect a tax back-payment. The same applies if profits increase considerably in subsequent years. Once profits — and the resulting tax liability — reach a certain level, the tax authority will set advance payments.

The good news: up to an annual profit of 410 euros from your secondary self-employment, no tax whatsoever is payable.

For businesses with modest turnover, the legislature provides the option of waiving VAT collection. As a self-employed person with a secondary activity, you benefit from a reduction in bureaucracy. Note the turnover thresholds: in the preceding year, turnover must not have exceeded 22,000 euros, and in the current tax year, 50,000 euros. For a new start-up, these two figures apply to the year of formation and the following year — and you are permitted to estimate them.

If you wish to work on a self-employed basis on the side, the social insurance rules in particular deserve careful attention. You should also ensure that you are correctly declaring and paying tax on your profit. Your Guhr Steuerberatung will complete your tax returns and provide you with valuable tips on tax optimisation.

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• Image source: Pexels.com - Andrea Piacquadio