Bogus Self-Employment for Freelancers: Criteria & Checklist

In both cases, the consequences are severe. Clients must pay backdated social security contributions, and tax-related complications also arise. Contractors, too, face a range of adverse repercussions.

But does this issue actually affect freelancers? Many people associate the problem of bogus self-employment exclusively with traders. This is a misconception:

Bogus self-employment is a potential risk for all self-employed individuals! For freelancers and traders alike, what matters is the specific way work is carried out and factors such as the number of clients. There are no blanket assessments — each case requires individual examination. It is best to seek advice from experienced tax professionals!

In employment relationships subject to social security contributions, employers and employees jointly bear social security contributions — covering pension, health, long-term care, and unemployment insurance. This obligation does not apply to relationships between clients and self-employed individuals. Freelancers, for example, do not receive a salary; instead, they agree a fee for their services.

They record the respective amount as income — they pay tax only if they show a profit at the end of the financial year. Regardless of this, they must independently arrange their own protection against illness, old-age poverty, and other risks.

Social security contributions for employees represent a significant financial burden for all parties involved — and this can tempt some into bogus self-employment. Companies do not take on staff as employees but instead award contracts to self-employed individuals. In this way, they avoid paying social security contributions.

This is generally permissible, provided the contractors truly act as self-employed individuals. That is frequently not the case: instead, bogus self-employment exists. Those who are ostensibly self-employed work in the same manner as employees.

The social security authorities have a strong interest in preventing these forms of bogus self-employment. For understandable reasons, they wish to maximise their revenue: fictitious self-employment undermines their financial basis.

But under what circumstances does prohibited bogus self-employment exist? This question is not easy to answer. There are no hard-and-fast criteria; instead, an assessment of each individual case is made on the basis of various indicators. The following aspects play a role:

- Freedom of decision versus instruction-dependency: self-employed individuals work largely on their own responsibility, whereas employees follow instructions.

- Business organisation: freelancers use their own tools and equipment and organise their working day independently. Bogus self-employed individuals, by contrast, use their client's equipment and are largely integrated into the client's organisational structure.

- Degree of dependency: if self-employed individuals generate at least five-sixths of their turnover on a sustained basis from a single client, the pension insurance authority presumes bogus self-employment.

The pension insurance authority investigates possible bogus self-employment in the course of payroll audits. If it identifies bogus self-employment, it issues a demand for the backdated social security contributions. This demand is directed against the client. As the jointly liable debtor, the client must pay both the employer and the employee contributions in arrears. This typically amounts to a considerable sum. If you, as a freelancer, have engaged bogus self-employed individuals, this back-payment demand can lead to insolvency.

Have you been working as a freelance contractor? The good news is that you will generally not be required to pay the social security contributions yourself. You may in fact benefit from this retrospective reclassification as an employee, since it gives rise to pension entitlements. Nevertheless, viewed in the round, you should seek to avoid this situation. A variety of difficulties may arise:

- According to a ruling of the Federal Labour Court (26.06.2019, 5 AZR 178/18), clients may seek to reclaim part of the fees already paid. As a bogus self-employed individual, you are only entitled to a salary, not to the usually higher contractual fee. You must reimburse the difference.

- The tax office may potentially revise the tax assessments of recent years. This results in considerable administrative effort and potentially additional costs.

- You may lose your self-employed and freelance status: this affects your entire business and working model.

Whether you are starting out or already established as a self-employed professional: at every stage of your self-employment, you should check whether you are exposing yourself to the risk of bogus self-employment.

In your capacity as a contractor, you should observe the following checklist:

- Multiple clients: ideally, acquire several clients. This way you avoid the risk of dependency.

- Organisation of work: ensure that you genuinely work independently. This means that you make most of the decisions yourself when completing assignments.

- Use of capital and equipment: bring your own resources to the table!

- Marketing: advertise publicly for clients through websites, brochures, and similar means! This demonstrates that, as a self-employed individual, you are actively seeking further clients.

- Status determination: if in doubt, the Deutsche Rentenversicherung's status determination procedure (Statusfeststellungsverfahren) offers a means of establishing legal certainty. The pension insurance authority provides a binding assessment as to whether bogus self-employment exists. By means of this procedure, you avoid all the adverse consequences that threaten when bogus self-employment is established retrospectively.

If the pension insurance authority intervenes on grounds of bogus self-employment, this creates an awkward situation for all parties involved. Prevent this proactively: your specialists at Guhr Steuerberatung will analyse the individual circumstances and show you how to rule out allegations of bogus self-employment in advance.