Taxes & business banking for the self-employed


The advantages and disadvantages of self-employment in Germany

Last updated on Feb 21, 2020

Mar 25, 2019

Self-employment might sound like a dream to some people. Charging your desired hourly or daily rate, only working the projects you want to and enjoying life might be some of the thoughts people associate with self-employment. In most cases, the reality looks quite different.

Where to start?

Depending on what field you want to be self-employed in, you should get a so-called ‘Gewerbeschein’ (which translates to trade certificate) and a ‘Steuernummer’ (tax number) from your local ‘Finanzamt’ (German tax office). Not all jobs require a Gewerbeschein, but those jobs who don’t do are normally predefined (such as attorney or doctor). Here is a list of some jobs that don’t require a Gewerbeschein . Before you obtain your tax number, you have to fill out a Fragebogen zur steuerlichen Erfassung , which is a survey, by which the German tax office wants to gather some basic information about your business, so they know, how they should classify you. Don't be scared of that short survey. While it might sound inundating, you can always find help with answering the questions; you can visit the Finanzamt in person, ask via phone or find a tax consultant.

You should ask yourself in general, how you want to go about taxes in the future. Do you want to prepare them yourself or find a tax accountant (from the beginning)? Outsourcing your taxes might save you some time, but will also cost you money. Depending on how well your knowledge of the German language is, finding someone to help you professionally with taxes can be a good idea. Depending on your job, there might be a chamber or other professional association you have to join. If you need a Gewerbeschein, you will also join the IHK (Industrie- und Handelskammer, which translates to chamber of industry and trade) by default. However, you only have to pay membership fees once you make more than 5.200 Euros per year. If your company does not have to be registered in the commercial register (Handelsregister) or if your yearly revenue does not reach more than 25.000 Euros, you also do not have to pay the basic fee for the first two years and the levy for the first four years. In addition, you might also have to be (board) certified to work certain jobs in Germany. This does apply for jobs like physician and attorney, but also some other jobs like craftsman.

Should I become an ‘eingetragener Kaufman’, a ‘GmbH’, an ‘AG’, a ‘UG’, a ‘Limited’ or something completely different?

There are quite a few business forms to choose from. Some forms offer a little more liability protection, but require more capital upfront. If you want to freelance, it could be fine to just register yourself as a freelancer and get a Steuernummer. If you work with a number of people and have plans to grow quickly, it might make sense to choose a different option. The UG is somewhat of a German equivalent to the British Limited ; you can start it with just a few Euros (not including possible fees for attorneys or other consultations). A GmbH (Gesellschaft mit beschränkter Haftung, which translates to company with limited liability) requires 25.000 Euros in corpus, of which at least 12.500 Euros have to be in the company’s bank account when the company is formed. An AG (Aktiengesellschaft, which translates to stock company) requires 50.000 Euros in corpus. Both can limit the liability of the companies to the business assets. But Germans are not as litigious as other nations and there are also insurances for freelancers available that help them in case someone wants to hold them liable, as well as with legal expenses. A GmbH and an AG also require more legal and business paperwork, for which you might have to pay an expert as well.

I’m done with the paperwork, where will I find clients?

Congratulations. If you want to run a business, you will need clients. Not much news here, but where to find them? There are a few options you can pursue. Where would your future clients physically be? Are there events, presentations or meetups where you might find them? Then look up those events and attend them. Don’t try to sell too hard, but understand what your potential clients are looking for. You might find them at trade shows, which are also a great way to further your knowledge.

Maybe you can find clients online. If you work as a freelancer, there are quite a few job boards or Facebook groups that can connect you with future clients. You should not randomly spam different companies you don’t know. It is most likely against German data law and will not yield much of a useful result. Try to aim more for quality than quantity. Some clients will be won quicker than others and honesty does go a long way.

What should I charge my clients?

One of the most important questions for self-employed folks that are just starting out. How much should I charge for my work? That depends on a few factors. Try to find answers to the following questions: What does my competition charge? What do I think is a price that reflects the quality of my service? What remuneration would satisfy me? It is hard to find the right price, but you can also adjust with time, which can be much easier than it would be for someone working as an employee. Also, you will make mistakes, so don’t be afraid of them, but find ways to not repeat them, solve and learn from them.

Is being self-employed easy?

It can be, after a while. In most cases, the beginning is one of the harder parts. But once you get clients thanks to word of mouth and raised your rates a few times, it starts to pay off financially and emotionally. Don’t expect it to be easy, but ask yourself, what you desire long-term. If you’re looking mostly for security, self-employment probably should not be your first choice. If you’d like more freedom and aren’t afraid of adventure, self-employment could be for you. It is important to not give up, when times get harder, but to find a long-term solution. Self-employment will also teach you how to deal with stress; at least it should, if you want to remain self-employed. Also, don’t spend all your money at once, but put some of it aside for a rainy day. In spite of all that; find some time and way to relax, so you do not burn out and remain motivated.

What should I know about taxes?

While I am not a tax consultant nor do I have the knowledge to give you much tax advice, there are a few things you should know. For instance about German VAT (which is called Umsatzsteuer ); if your revenues for one particular year are not above 17.500 Euros, you can choose to charge VAT (yet don’t have to), but also have to transfer said VAT to the German tax office. In essence, you collect taxes for them. This has the advantage, that you can deduct the VAT from goods and services that you bought for your business from the VAT you collected for the German tax office. But it also causes you more work and if your clients are mostly consumers, rather than businesses, they will have to pay a higher price (because they cannot deduct VAT). In most cases, German VAT amounts to 19% of the price of a good and service. For newspapers, groceries and art, German VAT is only 7%. If you have a Gewerbeschein, there is a chance that might you also have to pay trade tax (Gewerbesteuer). The amount of said tax depends on what sort of business you registered and the municipality you live in.

What happens when I get sick or have to retire early?

You should also think about the future and scenarios that might be a bit unpleasant. By law, everyone in Germany is required to have health insurance. Unlike in some other countries, it is very affordable in Germany. However, while German employees also get their salary when they are sick, self-employed folks do not. That’s why you should put some money aside and your calculation for your hourly/daily rate should include that. If a client asks you to justify your remuneration, you can tell him/her about you having to take precautions for when you get sick and for retirement. It might also be a good idea to ponder an insurance in case something happens to you. Being self-employed in Germany allows you to choose if you want to pay into the federal retirement and unemployed fund; if you are an employee you have to do so by default. Instead, you can find other options to reinvest your money for retirement, but should always consider the risk associated with certain investments.

I finished the project and sent the client the invoice, but have not received any money yet

What many people won’t tell you is that you sometimes have to run after your money, even though you have already delivered what you promised to. This can be annoying and time consuming. I advice you to remain friendly, but let the customer know that you appreciate collaboration. It pays off to be persistent. If your client refuses flat out to take care of the invoice or simply does not pay up after numerous reminders, there are a few things you can do. The quickest is to forget about it. This might be the easiest solution, but not always the best. Even if the amount at hand is small, it might send the wrong signal. You also have a few other options at hand.

You can work with a collection agency ( called “Inkasso” or “Inkassounternehmen” in German). Those companies will remind the debtor about your invoice and try to get him to pay it up. Collection agencies can get paid either up-front or if they are successful. In addition, you can also use court collection proceedings. You fill out some basic information (either online or via paper; but filling it out online comes with some prerequisites) which gets sent to a certain district court (called “Amtsgericht”) in Germany. In most German states (‘Bundesländer’), there is only one district court that takes care of unpaid invoices. This district court then sends the invoice to the district court of the debtor, which informs him of his open debt. If he does not want to pay up then, you can still sue him in court.

Most clients are honest and do pay up, even though they might need a few reminders. However, it does not hurt to remain a calm and professional, yet distinct tone.

Self-employment does require some organisational skills and patience. It also helps to realise your mistakes and try to do things differently. If you’re comfortable with (calculated) risks, it might be a good professional choice for you.