Freelancer or Trader? — What Are the Differences?

In this article we explain which self-employed individuals work as freelancers or as traders, and what legal consequences the classification entails.

There is considerable confusion around the concept of the freelancer (Freiberufler). Many people confuse the liberal professions with freelance contracting, or assume that a Freiberufler is automatically a solo self-employed person. Both assumptions turn out to be incorrect on closer examination.

Freelance contracting (freie Mitarbeit) is a specific form of business and working relationship — those involved can equally be freelancers (Freiberufler) or traders (Gewerbetreibende). Solo self-employment likewise exists in both categories; at the same time, many freelancers join together to form partnerships.

German legislation contains no clear and exhaustive definition of the liberal professions or of commercial activities. In individual cases, courts have determined whether an activity falls within the liberal professions.

However, the legislator lists so-called catalogue professions (Katalogberufe) for freelancers in § 18 of the Income Tax Act (EStG) — these definitions are precise and leave no room for interpretation. If you practise one of the listed professions, you are working as a freelancer.

In addition, you can use the following indicators of a freelance activity as a guide:

• You offer services at a higher level.
• You possess specialist professional knowledge or creative talent.
• You organise your work independently and with professional autonomy.
• Your work serves the interests of the client and, to a certain extent, the general public.

If you do not meet these criteria, you are automatically operating as a trader. This applies, for example, to the entire retail, industrial and craft sectors.

In the Income Tax Act (EStG), the legislator lists catalogue professions and notes that similar professions may also fall under this definition. This explicitly acknowledges that the list of liberal professions is not exhaustive.

The freelance activities listed include, among others:

• Healthcare professions
• Lawyers and notaries
• Tax advisers and management consultants
• Journalists and academics
• Artists and writers

Your profession is not among the catalogue professions? But you suspect it may be a freelance activity? Then contact us — your tax advisers will assess whether you can work as a freelancer.

Freelancer or trader? The answer to this question has significant legal and, above all, tax consequences. As a freelancer you benefit from considerable advantages — both in terms of administrative burden and the amount of tax you pay.

Freelancers belong to a privileged group: if there is any uncertainty about your professional status, you should urgently check whether you can secure the benefits of freelance activity.

When you become self-employed, you must notify your locally responsible tax office. On the registration form you also indicate whether you wish to use the small-business (Kleinunternehmer) scheme. Whether you are working as a freelancer or a trader makes no difference here.

Traders, however, have an additional step: they must register their trade (Gewerbe) with the local authority. The applications are received by the trade office (Gewerbeamt); depending on the municipality and federal state, other offices such as the public order office (Ordnungsamt) may be responsible.

Applying for a trade licence (Gewerbeschein) involves a small fee. You may also be required to meet certain conditions under trade regulations — for example, submitting a police clearance certificate or demonstrating your professional qualification.

The state provides two forms of bookkeeping for self-employed individuals: simplified bookkeeping in the form of the cash-basis income statement (EÜR), and double-entry bookkeeping including the preparation of a balance sheet.

Simplified bookkeeping saves a great deal of effort: as a freelancer you may choose this form regardless of your turnover and profit.

Many traders, on the other hand, are required by law to use double-entry bookkeeping and to prepare a balance sheet. However, there is an exception for sole traders whose annual profit is below 60,000 euros or annual turnover below 600,000 euros.

In principle, all income earned by freelancers and traders constitutes income from self-employment.

Depending on the business structure, the state levies tax on profit — sole traders pay income tax, for example. Other legal forms are subject to corporation tax.

There is, however, one significant difference: traders additionally pay trade tax. This is a local tax that also depends on the level of profit. Local authorities set the trade tax multiplier (Hebesatz) independently. Freelancers avoid this additional tax burden!

If you want to earn money as a self-employed individual, your precise status — whether freelancer or trader — plays an important role.

This is already relevant when registering your business; the question is particularly important for bookkeeping and tax returns. Our expert tax practice provides comprehensive advice and handles all tax law challenges for both freelancers and traders!