Freelancing as an Engineer: What You Need to Know

In general, you should carefully weigh up the move into self-employment. The advantages include entrepreneurial freedom and attractive earning potential. Following a line manager's instructions? As a freelance engineer, that belongs to the past. Set against this are disadvantages such as fluctuating income and commercial risk. Everyone must decide for themselves whether self-employment suits their personality.

The Income Tax Act (EStG) lists so-called catalogue professions in § 18 EStG. These are occupations that the legislator classifies as liberal professions. The act explicitly mentions the engineering profession: almost all engineers may carry on their self-employed activity as a freelance liberal profession.

There are, however, exceptions to this rule. Being listed as a catalogue profession does not automatically mean that the tax office and trade office will accept freelance status. One important condition is that your business activity has a direct connection to your engineering training. For example, you offer services in the following areas:

• Research and development
• Testing and inspection
• Design and construction
• Installation and customer service
• Technical administration

Your offering may also be advisory in nature. For classification purposes, what matters is whether your advisory services are directly linked to the core areas of the engineering profession. If, as a freelance engineer, you focus on business management aspects, you put your freelance status at risk. In theory, you could in that case act as a freelance business consultant, but that presupposes the appropriate qualifications. As a trained engineer, you would need to demonstrate an additional qualification in business management.

The specific nature of your business activity also plays a central role. Agency or brokerage activities of any kind lead the tax office or trade office to assume the existence of a trade. If, for example, you broker software for technical administration on a commission basis, this falls within the category of trade. In certain circumstances it may be worthwhile to separate different areas of business activity — operating simultaneously as a freelancer and as a trader. This requires you to record the income and expenses of both segments separately.

Why is classification as a freelance engineer so important? Compared with traders, freelancers benefit from a range of advantages:

• You are not required to register a trade.
• Freelancers do not pay trade tax.
• Regardless of turnover, you may prepare a cash-basis income statement (EUER). A balance sheet is not required.

It is therefore advisable, in borderline cases, to work towards classification as a freelancer. Your Guhr Steuerberatung can help with this.

Have you decided to take the step into self-employment as an engineer? Start your preparations straight away. Draw up a business plan, for instance — this is necessary if you want to finance your start-up with grants or a bank loan. Your contact partners will require a concisely written business plan, including financial projections.

During this preparation phase, consider all relevant aspects. The scope of these deliberations depends on your business concept. Some engineers work as sole self-employed practitioners from a home office; others want to employ staff and rent office space. It is clear that the second option involves considerably greater organisational and financial effort. Also address topics such as the choice of legal form during the planning stage: this is particularly important if you are setting up a joint practice with other engineers. Attend to tax-related matters too, such as freelance allowances, the Kleinunternehmer scheme, and depreciation rules.

A key advantage of freelance status is that the administrative burden is lower than for a trade business. You will appreciate this benefit from the outset, at the registration stage. Whilst traders must approach both the tax office and the trade office, freelancers need only notify the tax office.

Complete the tax registration questionnaire and submit it electronically. Indicate in the form whether you wish to apply the Kleinunternehmer scheme.

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The tax rules for self-employed individuals are complex. Whilst the legislator provides many opportunities for tax optimisation, many laypersons are unaware of these options. There is therefore a strong case for working with an established tax advisory firm as a freelance engineer.