The German tax system can be summed up as complicated, especially for a freelancer trying to find your feet. I’ve been a freelancer in Berlin for 20 months already and I’ve had my fair share of expensive conversations with accountants and scary-looking letters from tax authorities. In this post, I wish to give a simple overview of what freelancers in Germany can expect. As a disclaimer, I’m not a professional accountant or financial advisor so see this post as just a general guideline.
1. Apply for a tax number
Before you even start taking on jobs, you first need to have the appropriate documents; starting with the correct resident visa. Here’s something I wrote previously on how to get a freelance visa.
Once you have the correct visa in your passport, it’s time to make a trip to your local Finanzamt and apply for a tax number (Steuernummer) that will allow you to work as a freelancer (Freiberufler). You don’t need to make an appointment and the wait time isn’t so long.
Once you’ve submitted your form, it can take up to four weeks or even longer to receive your tax number by postal mail. During this time, you can work but you’re not allowed to invoice your client and get paid as your invoice is incomplete without the tax number.
It took me more than two months to receive my Steuernummer and thankfully I had some savings set aside to get me through the three months of not being paid.
2. How to tell if you’re really a Freiberufler
As a freelancer, it means you have different clients over different periods. When you start only working for just one client over a duration of a year, you are not considered a freelancer and might even get fined.
I’ve seen posts saying that you need to make sure that 80% of your income can’t just come from one client. I’m not sure if this is accurate but key point is not work for one client over a long period.
There’s also a classification as a ‘trades person’ but I’m really not sure what the distinct difference between a freelancer and a trader. Here’s a description from IHK:
3. When you are no longer a Kleinunternehmer
A direct translation of Kleinunternehmer is simply a “small entrepreneur.” It means you don’t make more than 17,500 Euros (gross) in one year and don’t intend to exceed 50,000 Euros in the following year. The advantage of being a Kleinunternehmer is that you don’t have to register for VAT (Mehrwertsteuer aka MwST). As soon as you go over 17,500 Euros, you must start charging VAT immediately or the start of the next calendar year.
Let’s say you reached 30,000 Euros in October 2014, you are no longer considered as a Kleinunternehmer. On January 1st 2015, you must start charing your clients VAT.
4. Charging VAT isn’t as bad as you think
Before you can charge for VAT, you will need a VAT number which is separate to your Steuernummer. You can apply for a VAT number online and within a week or so, you will receive the number in your postal mail.
Charging VAT to your clients means adding 19% MwST to your net invoice charge (the percentage varies for different industries such as farming and publishing). Let’s say you charge 100 Euros for your service, you will need to add 19% to calculate the gross amount (which comes to 119 Euros). The only time you don’t need to charge VAT is when a client is based overseas and has a VAT number.
The VAT isn’t yours to keep but will need to be ‘returned’ to the government on a monthly, quarterly and sometimes yearly basis (this depends on your status and whether or not an accountant is doing this for you).
Charging VAT means more paperwork, but it also means that you can get VAT refunds immediately on business-related purchases. Which essentially means you will receive a 19% discount on items and services like a mobile phone, computer, conferences, books and even soap and glassware — as long as you can prove that they’re related to your business.
5. Don’t feel guilty if you need to charge clients VAT
I was a bit hesitant to charge VAT as I wasn’t sure if raising my rates by 19% was going to deter clients. The thing is, as long as your clients have clients themselves or they’re an established company, they will get back the VAT you charged. So charge away and don’t feel guilty or deflated about this. It should be the least of your tax concerns.
6. The money you receive from clients isn’t all yours
A lot of freelancers run into the problem of spending money that isn’t theirs. As a freelancer, you’re subjected to paying income tax, whether you’re a Kleinunternehmer or not.
When you’re a regular permanent employee, your employer will deduct your income tax from your monthly salary. As a freelancer, you need to be setting that income tax money aside and not even touch it.
So how do you calculate just how much your income tax is? Use this nifty tool here. Simply put in the estimate total amount you expect to make in the year and it will spit out roughly how much you will be taxed. Here’s an example:
If I was expecting to receive 30,000 Euros for the year, I would probably be charged around 20% of income tax. Which essentially means that every month, I will need to set aside at least 20% as I will owe this to the government when I complete my annual tax statement.
Here’s the total amount of my invoice:
Essentially it means that the VAT I’m paying (29.95 Euros) will need to be handed over. And if I’ve calculated that 20% of my income will be taxed, I should also set aside around 32 Euros (157.65*0.20).
It’s worth setting up a savings account just so you don’t touch the money and accidentally spend it.
7. Tax deductibles
The easiest way to pay lower taxes, is to deduct business-related expenses. Items and services could include:
- Health insurance
- Work dinners/lunches (make sure to include who you were with and what the occasion was)
- Office space
- Travels relating to your work
Business-related items will reduce the amount of VAT you need to hand over and also lower your income tax (as income is calculated as revenue minus expenses). To get the most out of your tax deductibles, hire an accountant to do the work for you. It doesn’t hurt to submit receipts and your accounting and the the tax office will decide whether it’s legit or not. Also make sure that you keep ALL your invoices for at least seven years as during this time, you can get audited and will need to produce paper receipts.
8. These references could help
IHK: Starting a Business pdf
Although this document is for people looking to set up a company in Germany, it certainly provides some great insights for freelancers as well. The document is in English and produced by IHK Berlin. Download link here.
Accountant: Benjamin Gruschla
I’ve probably visited five different accountants and really enjoyed working with Benjamin. He speaks English, knows international taxation (great if you’re an expat), friendly and super helpful. He’s actually funny, which is a good change from the usual dry, awkward humour of some German accountants. You can e-mail him: benjamin.gruschla [at] spezialisten.de.
Startup in Germany blog
Although this is targeted at entrepreneurs, there are some good points and additional references and sources that could help freelancers too. http://startupgermany.tumblr.com