Taxes & business banking for the self-employed


Calculating Income Tax for the Self-Employed

Last updated on Feb 21, 2020

Kate Bailey

Freelance Editor

Apr 3, 2019

Tax time. No one likes it, and many people in Germany would argue even the tax office doesn’t like it. The accountants and tax agents, well, maybe they like it. That said, it is of course inevitable. Even if you have gotten professionals and experts to help you with your income tax it is important that you are able to account and prepare for income tax time. That means not just in the financial sense but in terms of the obligations upon you as a business owner in the administration sense. We have covered off extensively the differentiations in self-employment constellations, so this article is going to really hone in on the nuances and requirements of the specific tax element of calculating your income tax payables. And hopefully, you’ll be able to run these exercises on your own time and get prepared. The only thing worse that taxes, are surprise taxes, after all.

Most ordinary workers usually do not have to file income tax returns because the income tax is paid directly by the employer on wages. It is usually worthwhile for employees to receive such income tax returns only when extraordinary charges have occurred.

It is worthwhile for every self-employed person to understand the income tax return themselves. You can also make prepare them yourself if you become dutiful enough and can spare the time, and thereby even save money in most cases by minimizing your taxable income by claiming all eligible costs, including an Income Tax Calculator for the self-employed.

After all, the income tax return for the self-employed is not as cruel as many think. It is time-consuming, confusing and sometimes really, really, REALLY confusing - but this would unique compared to most cases. The only preliminary work that you have to do to properly calculate your income tax is to keep all the necessary evidence. In addition, a decent income-taxed income tax return as a self-employed person spares you a lot of trouble with the tax office.

The income tax return, however, applies to all self-employed who earn income from self-employment (which are probably all). Nonetheless, income tax is only payable if there is a taxable profit. The calculation of exactly this profit should be explained below.

The difference between revenue and income

Your earnings are all payments made to your account based on your activity. If you are otherwise liable for VAT, you may like to start by setting aside 19 per cent (and pre-paying if possible). Furthermore, your earnings include payments that are not due to your work, such as orphans pensions, maintenance, capital gains and so on. Whether and how you have to pay tax on these revenues is to be examined on a case-by-case basis. There are a total of seven types of revenue in Germany.

From this income, you now have to make income, because only on this the income tax is calculated. The income is synonymous with your profit after deduction of all costs. So before you can calculate your income tax, your income must be stated correctly. If on the plus side, you want to set aside enough to avoid having to pay huge sums of money afterwards (sometimes more than a year passes between the current tax year and the tax return), you should cover around 30 per cent of your earnings. This value is in most cases slightly too high or too low but has been proven to be safe until the final calculation.

The exact calculation of the income for which the tax return for self-employed is due takes into account all expenses that were either to generate your income or in the form of extraordinary charges occurred. There's a lot of room here, as you'll see in a moment. The correct and exhaustive assertion of expenses can sometimes lead to hundreds or thousands of EUR of taxes, which you can save. At the same time, the income tax return for the self-employed, who do not earn much money, can simply claim certain lump sums. As a matter of fact, anyone who earns a clear account also usually has a clearer income tax return.

What can be deducted, and why are these deductions so important

First, the tax-free allowance to be mentioned stands at 9,000 EUR in 2018. This means that you reduce your income mathematically by 9,000 EUR and only have to pay the remaining income tax. If less than 0, you will not pay income tax. The allowance was € 8,820 in 2017 and € 8,652 in 2016. For married couples, this amount is doubled in the case of a joint tax return, which is also possible as a self-employed person.

Now begins the part for which you should constantly collect receipts. For example, there are travel expenses. It should be noted that some aspects can only be deducted proportionately, while the meal allowance is fully valid. As a self-employed person, for example, you can always deduct your professional telephone and Internet costs. Private connections can be deducted at a flat rate of 20 per cent, but not more than 20 EUR a month. Incidentally, that's up to 240 EUR a year (but only if you have insanely expensive contracts).

Also interesting are expenses for your professional support - such as training, textbooks and so on. A degree may also be deducted insofar as it has a recognizable connection to your activity. Especially with distance learning, which is more expensive, this can be worthwhile. In addition, there are work clothes, a professional used PC, travel expenses and so on. For purchases of less than € 400, the amount can be claimed within one year. For purchases that are more expensive, they will be charged pro rata over the expected useful life. It should also be noted that you have to bear a private share in many purchases, so the costs can not claim to 100 per cent.

The expenses related to your income is usually the heart of the income tax return.

It should also be noted that various professional groups (applies to freelancers) can also use tools or flat rates from the tax office instead of the individual evidence of lump sums. This is always worthwhile if real expenditure undercuts the lump sums. Whether you can make use of it, you should look into a great length based on your activity. No evidence is needed on the benefits of the lump sums.

So what sum does the income tax return for the self-employed refer to?

The income tax return for the self-employed refers to what's left over from your earnings after deducting all costs - and continues to incur exceptional charges. Extraordinary burdens can be many things - such as burial costs, court costs and other costs that were burdensome. This is usually always assessed in the individual case so be sure to ask and follow up. In addition, child support payments can still be deducted, up to a maximum amount equal to the tax-free allowance - as an example, it is around 9,000 EUR in 2018.

Income tax is now paid on the remaining amount, the tax rate being progressive. In addition, there is a solidarity contribution and, if necessary, church tax.

How a gross net calculator works and what else you need

You need an example of how the income tax return for the self-employed works now? A gross-net calculator helps you enormously. In a few cases, it outputs a result that is maybe not one hundred per cent accurate (because an easy-to-use calculator cannot consider every single document and special case), but it gives you a very good orientation. Important questions to be clarified in advance when using a gross-net calculator is the question of the eventual spousal splitting and whether the expenses (income-related expenses) are summarized or not.

For example, this may look like this for 2018:

Revenues: 40,000 EUR
Advertising costs: 5,300 EUR
Allowance: 9,000 EUR
Miscellaneous Debit: 1,600 Euro

The taxable income is the income less all costs, less the allowance, so in this case 24,100 EUR. Income tax is paid on this sum. In this case, it would be around the 3,600 EUR you would have to pay for the year 2018 income tax. In addition, if necessary, the church tax (8 or 9 per cent, ie in this example around 300 EUR) and the solidarity contribution with about 5.5 per cent. A gross net calculator will serve you all these numbers. It should be noted that the solidarity contribution is not levied on very low incomes and you can leave the church as needed to save those taxes as well.

A gross net calculator will always ask you about the tax year you are referring to. As you know, the tax allowance has changed - but other packages can and will change. In addition, you must feed the gross net calculator with the actual taxable income, unless it explicitly asks you for all your expenses.

Note: Income tax as a progressive tax rate is charged exclusively on taxable income. If you pay attention to all expenses and always keep the allowance and possible lump sums in mind, then you also realize that the income tax return as a self-employed also has many pleasant sides. Because the more meticulous you are, the more money you save in the end. Does not sound so bad, right?

It is important that you always have receipts for all advertising costs. Lawmakers require you to keep them legible for ten years (which is absurd, of course, given the poor print quality of most receipts). Not everything has to be proven in the declaration, but for any checks, it is better to be able to prove everything.

The income tax return for the self-employed consists of collecting evidence of costs, calculating your actual taxable income and making such a statement. Of course, it's important that you already know what to expect - so that you can do what you later do. In addition, the tax office will ask you quarterly to pay the income tax - based on the income of the previous year. One more reason to calculate your expected income tax already during the current year, in order to be able to cover enough for additional payments if necessary.