Freelancing as a Side Activity: Registration, Tax & Earnings

But what rules apply when you set yourself up as a freelancer on the side? Three areas deserve your attention:

• Employment law
• Tax law
• Social insurance law

The following sections cover everything you need to know about taking up a freelance side activity. Individual circumstances often make all the difference, however, so it is advisable to contact a tax adviser beforehand.

The first question is whether self-employment on the side is permissible under employment law. The answer is positive: there are generally no obstacles. As an employee, you must inform your employer, but you do not need explicit permission.

Employers may prohibit a freelance activity only for good cause:

• Your performance in your main job suffers as a result of the side activity.
• The freelance activity is in direct competition with the employer's business.
• The employee uses their employer's data or resources for their side work.

An example illustrates this: an employed copywriter invests so much time in their freelance side work that they regularly arrive at the office exhausted. That is a valid reason to prohibit the side activity. The employee might also poach clients from their employer using the company's client list — in that case they are using proprietary business information whilst simultaneously competing directly with their employer, giving the employer two grounds to ban the side job.

In most cases, however, there is nothing to prevent a freelance side activity. The situation is different for civil servants. They are subject to a special employment relationship in which strict conditions apply to side work. Civil servants must obtain permission — a mere notification is not sufficient. Furthermore, the legislator limits the scope of side earnings:

• They may take up no more than one fifth of the civil servant's working hours.
• Income from self-employed work may not exceed 40% of the annual basic salary.

If you make a profit from your freelance side work, income tax is due. You declare your income in your income tax return under Annex S (income from self-employed work) and in the cash-basis income statement (EUER) form.

Have you not filed an income tax return until now? For employees this is possible, as the tax office withholds wage tax directly from salary. Once you take up a freelance side activity, you are obliged to file a tax return in future. The tax office requires comprehensive information about all your income.

Do you already submit an annual tax return, or leave this task to your tax adviser? In that case, only the scope of the return increases. The tax authority requires Annex S and Annex EUER.

In the following paragraphs we address registration with the tax office and the details of income tax and VAT.

As a new business, you must notify the locally responsible tax office of the commencement of your activity. It makes no difference whether this is a side activity or a main occupation. Use the tax registration form and submit it electronically.

In this document you provide details about yourself and your future business. Please also indicate in this form whether you intend to apply the small-business (Kleinunternehmer) scheme.

You must fulfil this notification obligation no later than one month after starting your business. The good news: the task takes very little time and incurs no costs. No further steps are required for a freelance activity. Unlike traders, you do not need to register a trade with your local authority — one of several advantages of freelance status.

When calculating income tax, the tax office adds together all your employment income. In practice, this means: if you make a profit from your freelance side activity, your tax liability increases. For the tax assessment for your first financial year, expect a supplementary payment. Ideally, set money aside as a precaution so that you can meet the additional payment without difficulty. Your tax advisers can provide a corresponding forecast during the financial year.

A freelance activity can generate losses: in that case, the tax office offsets your loss against your income from your main job. The tax liability is reduced and you may receive a refund. Note that you are not permitted to declare losses indefinitely. Otherwise the tax authority will intervene. Self-employed activities require an intention to make a profit. If you declare losses over several years, the tax inspector will question whether you are able or willing to generate a profit.

Self-employed individuals are subject to VAT: this applies equally to freelancers and traders. If you pursue your self-employment on the side, however, there is a good chance that you will not need to charge or remit VAT. You may benefit from the small-business (Kleinunternehmer) scheme.

Is your turnover no more than 22,000 euros in the year you start out, and no more than 50,000 euros in the following year? If you meet these conditions, you may apply the Kleinunternehmer scheme. Please indicate this on the tax registration form. As a new business, you may estimate these figures. What matters is that the estimate is based on a plausible foundation.

If in subsequent years your turnover exceeds the 22,000-euro threshold, you must charge VAT and remit it to the tax office in the following financial year. Keep a close eye on your turnover figures.

Bear in mind that the Kleinunternehmer scheme has both advantages and disadvantages. In most cases it is worthwhile to apply it, as it reduces your administrative burden. However, if you have high business expenses, the scheme can be disadvantageous because you cannot reclaim input tax. If in doubt, seek advice from your Guhr tax experts.

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Before taking up a freelance side activity, you should consider the social insurance implications. In the worst case, you would no longer be covered under your main employment and would have to take out your own health and long-term care insurance. This incurs enormous costs — try to avoid this situation.

The decisive question is which activity predominates. This depends on working hours and income. If you work 40 hours a week in your main job, little time remains for side work, so you need not worry on that score. The situation is different if you only work part-time in your current employment subject to social insurance contributions. The risk of losing mandatory statutory insurance coverage also arises if you earn an exceptionally large amount from your side work despite working few hours on it. If your income from the side activity exceeds your salary, the health insurance fund may also make additional claims against you.

Are you unsure? Apply to your health insurance fund for a status determination procedure (Statusfeststellungsverfahren).