Freelancers and Tax: What You Need to Know

Unlike employees, whose employer deducts tax and social security contributions with each monthly salary payment, freelancers must take care of their own tax affairs. There is a great deal to bear in mind here — especially for those who have just started out on their own.

When registering as self-employed, the tax office decides whether the activity in question falls into the category of "freelance work" (Freiberuflichkeit). The basis for this decision is a catalogue of so-called "liberal professions" (freie Berufe).

These include above all artistic, scientific, educational, or literary fields of work. Journalists, translators, graphic designers, teachers, doctors, midwives, therapists, experts, and musicians can therefore all be freelancers.

For many people starting out in business, freelance status is an attractive alternative to other business structures: registration in the commercial register and double-entry bookkeeping are not required. The tax office treats freelancers differently from traders (Gewerbetreibende), for example.

Like employees, freelancers must pay income tax (Einkommensteuer). This is based on the level of income — more precisely, on turnover less costs. Income corresponds to the profit that remains once business expenses (Betriebsausgaben) are deducted from business receipts. Freelancers, like employees, declare the income they have earned in their income tax return.

The higher the profit achieved, the higher the income tax payable. The rule is: up to a taxable income of 10,347 euros, no tax is payable for a calendar year. Above 10,347 euros, the tax rate rises from 14 to up to 42 per cent. The 42 per cent rate applies to income between 58,597 euros and 277,826 euros, and 45 per cent applies from an annual income of 277,826 euros.

Many freelancers — especially at the start of their self-employment — are primarily concerned with the question of how much money will remain after all taxes are deducted. After all, it is ultimately the profit that determines whether a business is viable for the future.

The most widely used method for calculating the profit from a freelance activity is the so-called cash-basis income statement (Einnahmen-Überschuss-Rechnung, EUER). This involves calculating the business profit over the course of a calendar year.

Together with the income tax return, you submit the result to the tax office in the form of an EUER schedule (Anlage EÜR). Alternatively, you can engage a tax adviser to prepare the EUER. Guhr Steuerberatung is happy to take on this task for you and supports you with all other matters relating to freelancing and tax.

To safeguard the liquidity of the public finances and to spare you from a large tax payment in arrears, you as a freelancer must make advance tax payments (Steuervorauszahlungen) to the tax office. If you have only recently started your freelance activity, the competent tax office will determine the amount of the advance payment on the basis of the information provided in the tax registration.

If you have been self-employed for some time, the amount is based on previous calendar years. In the annual income tax return, the tax office calculates the difference between the advance payment and the actual tax liability — you will either receive a refund or be asked to make a further payment.

The second tax relevant to freelancers is value added tax (Umsatzsteuer, VAT). Almost all services and goods in Germany are taxed at 19 per cent VAT. Exception: food and books, among others, are subject to the reduced rate of 7 per cent. What does this tax mean for freelancers? For all supplies you make within Germany, you add VAT on top. This amount must be remitted directly to the tax office.

In practice, VAT is a kind of "pass-through item": as a freelancer you add this tax to your fee invoice — ultimately it is your client who pays the VAT.

Freelancers who are self-employed must prepare advance VAT returns (Umsatzsteuervoranmeldungen) at regular intervals. This allows the state to receive its tax revenues promptly. In return, freelancers do not have to pay all the VAT in one lump sum — which improves planning certainty. In addition, sole traders receive a refund of VAT paid on business purchases more quickly.

The frequency of the advance VAT return depends on how much VAT you remitted to the tax office in the previous year. If this so-called "VAT liability" (Umsatzsteuerzahllast) exceeds 7,500 euros per year, a monthly return is required. If the VAT liability is between 1,000 and 7,500 euros, a quarterly return suffices. An extension of one month is possible.

The submission and payment deadline for monthly returns is the 10th of the following month. For quarterly returns, the deadline is the 10th of the month following the end of the quarter.

Please note: Advance VAT returns can only be submitted online via the ELSTER portal of the tax authorities! If you as a freelancer hand your tax affairs over to an experienced firm such as Guhr Steuerberatung, you save time and effort — allowing you to focus entirely on your business.

In the context of freelancers and tax, input tax (Vorsteuer) is the counterpart to output VAT. It refers to the tax charged to you by other businesses — for example, on business purchases such as office equipment or working materials.

Freelancers may offset this tax against the VAT they have collected. You or your tax adviser will remit the difference to the tax office.

Free initial consultation

Taxes not your thing? Then they're ours.

Guhr Steuerberatung handles your bookkeeping, tax returns and tax planning – so you can focus on your business.

Request a consultation

• Header image: Source baranq - de.depositphotos.com