Paying Tax as a Freelancer: What You Need to Know

Your Guhr Steuerberatung advisers are on hand to assist you competently with all tax questions. The complexity of German tax law makes it impossible to give blanket statements about the level of tax — each case depends on its individual circumstances. At the same time, there are naturally rules and tips that apply to all freelancers. You will find valuable guidance in the article below!

Tax law provides for two forms of profit tax: income tax and corporation tax. The type of tax depends on the legal form of your business: many freelancers operate as sole traders and pay income tax.

Have you joined forces with other freelancers and, for example, established a civil-law partnership (GbR, Gesellschaft des bürgerlichen Rechts)? In that case, the state does not levy tax directly on the company's profit; instead, it taxes the profit distributions to the partners. Here too, you pay income tax on your share of the profits.

Corporation tax is only relevant for legal forms such as public limited companies and co-operatives. In theory, freelancers can jointly establish such corporate structures, but in practice they are rarely encountered.

In almost all cases, freelancers are confronted with income tax on their profit. Many self-employed individuals must also deal with the issue of VAT. The good news: freelancers are exempt from trade tax!

As a freelancer, you do not pay tax on your income but on your profit. In your income tax return, the two relevant schedules for this are the EUER and Schedule S. In the EUER (Einnahmenüberschussrechnung — cash-basis income statement), the tax office requests the data for the profit calculation; Schedule S is specifically designated for freelancers.

After you submit your tax return, the tax authority calculates the income tax on your income. However, this is not done in isolation — you do not pay a special income tax specifically on your freelance activity! The tax office takes your total income into account. This includes in particular:

- Income from self-employed or trading activity

- Income as an employee

- Rental income

- Investment income

In concrete terms, this means: if, for example, you earn money both as a freelancer and through a part-time employed position, the authority adds both types of income together. This is relevant because income tax in Germany is a progressive tax. The higher the income, the higher the tax rate. This aspect is also significant in relation to the basic personal allowance.

In 2023, every taxpayer benefits from a basic personal allowance (Grundfreibetrag) of 10,908 euros per year. Up to this amount, you do not pay income tax. Your profit as a freelancer may be lower than this, but if you simultaneously receive income from other sources, your total income may be higher — and you may pay income tax despite a low profit.

Compared with traders, freelancers enjoy a significant advantage: they calculate their profit using a cash-basis income statement (Einnahmenüberschussrechnung — EUER). Unlike many traders, they avoid the complexities of double-entry bookkeeping and the preparation of a balance sheet.

The basic principle of the EUER is as follows:

- You calculate your business income.

- You set your business expenses against this income.

- The calculation of business income minus business expenses gives you your profit.

This profit forms the basis for the tax calculation.

Self-employed individuals are generally subject to VAT obligations: this applies equally to freelancers and traders. This represents primarily an administrative challenge. As a business owner, you charge VAT to your clients and remit it to the tax office.

The legislature has created an exception for business owners with low turnover. The small-business (Kleinunternehmer) scheme serves to reduce the administrative burden. You may take advantage of it if you meet the following requirements:

- In the previous year, your annual turnover did not exceed 22,000 euros.

- For the current year, you expect turnover of no more than 50,000 euros.

For those starting a new business, these thresholds are applied to the year of establishment and the following year; in both cases you may use estimated figures.

The small-business (Kleinunternehmer) scheme is optional. Seek advice from tax professionals! They will explain whether this scheme is beneficial in your circumstances.

As a freelancer, you face a variety of tax challenges. It is best to contact an established tax advisory firm! Tax specialists will firstly ensure that you submit correct tax returns. Secondly, they will show you all the available tax optimisation opportunities!