Paying Tax as a Sole Trader: What to Expect!

The often uncomplicated bookkeeping also makes sole traderships highly popular with start-ups. The topic of "tax" for sole traders is somewhat more complex, however — which taxes a self-employed individual must pay depends on the legal form they have chosen.

The term "sole tradership" is not defined in statute. As a general rule, it encompasses all businesses founded by a single individual.

You own the business 100 per cent — no consultation with co-owners or other directors is required. That does not mean a sole trader has to go it alone, however: you can certainly employ staff.

Sole traderships differ in terms of the owner's personal liability. Various legal forms are available, each of which in turn determines which taxes the sole trader must pay.

• Small trader (Kleingewerbetreibender)
• Registered merchant (Kaufmann e.K.)
• Freelancer / member of the liberal professions (Freiberufler)

Please note: The legal form of freelancer / liberal profession is not freely available to everyone; it is reserved for certain occupational groups and fields of activity.

• Entrepreneurial company (UG — Unternehmergesellschaft)
• Single-member GmbH (Ein-Personen GmbH)

Anyone who earns a living as a self-employed individual must pay income tax, just like any employee.

For sole traders, the amount of income tax depends on the profit generated — that is, the sum remaining after you deduct your business expenses from your turnover.

On profits of up to 9,984 euros, sole traders pay no tax. Above that threshold, the income tax rate rises progressively (tax progression). Rates between 14 and 45 per cent can apply.

Good to know: For newly established sole traderships, the tax office levies income tax retrospectively with the tax return. Once it has obtained an overview of your income, income tax must be paid quarterly in advance.

Sole traders are well advised to contact a tax adviser before setting up their business. [Guhr Steuerberatung in Berlin](/) will clarify all tax law questions with you and support you in preparing your income tax return.

If you have registered a trade, you are liable for trade tax as a sole trader. No trade tax is payable on annual profit up to the exemption limit of 24,500 euros. This exemption does not apply to incorporated companies such as a GmbH or a UG.

Regardless of whether you fall below the exemption threshold, you must still file a trade tax return. Freelancers and members of the liberal professions are exempt from trade tax liability. Good to know: trade tax is creditable against income tax.

When calculating the amount of trade tax, factors in addition to profit are taken into account, including so-called add-backs and deductions to the taxable trade income.

The tax assessment rate (Steuermesszahl) and the multiplier (Hebesatz) set by the municipality in which the sole tradership is based then also come into play — there are significant regional variations and corresponding competition between local authorities.

The team at Guhr Steuerberatung is happy to assist you with the preparation of your trade tax return — freeing up a great deal of time for you to focus entirely on your business.

In Germany, VAT is levied on all goods and services. The standard VAT rate is 19 per cent, or 7 per cent for food and books.

The amount of VAT is shown on invoices and charged to customers. Once annual turnover exceeds 22,000 euros, all sole traders must remit this tax to the tax office.

Sole traders who are liable for VAT must remit it to the tax office at regular intervals. This process allows the state to ensure it receives its tax revenues promptly and consistently.

This also has advantages for you as a sole trader: you do not have to pay all the VAT in one lump sum, and you receive a prompt refund of the VAT you have paid yourself — for example on business purchases.

How often you must submit the so-called VAT advance return depends on how much VAT you remitted to the tax office in the preceding year ("VAT liability").

If this amount is between 1,000 and 7,500 euros, a quarterly VAT advance return is sufficient. Above 7,500 euros per year, the VAT advance return must be filed monthly.

Incidentally: below 1,000 euros the VAT advance return can be dispensed with entirely — an annual VAT return at the year end is sufficient.

The filing and payment deadlines for this tax for sole traders are as follows: for monthly VAT advance returns, the 10th of the following month; for quarterly returns, the 10th of the month following the end of the quarter.

Important to know: The VAT advance return must be submitted online via the ELSTER portal of the tax authorities.

Since the VAT advance return tends to be one of the less popular tasks — especially for newly established businesses — it makes sense to engage a tax practice to handle it.

The team at Guhr Steuerberatung in Berlin is happy to take care of this — please get in touch with us.

Corporation tax must be paid by incorporated companies (GmbH, UG, AG). For so-called "legal persons", it is the equivalent of income tax. The tax rate is a flat 15 per cent.

There are no tax-free allowances. Sole traders who opt for one of these legal forms must file a corporation tax return each year.

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