Changes to Taxes in Germany for Freelancers & Self-Employed in 2021

The German government has been releasing new information regarding income taxes and tax relief ever since the onset of the Corona crisis, and planned changes even likely before. Taxation is one way to provide latent relief for people and thankfully freelancers and the self-employed are indeed included in a series of changes that are coming into effect in 2021. Let’s review these changes to give you an overview!

Generally, it is advised that we keep on the good side of the Finanzamt, as in, we should keep them happy but for this blog entry we are able to write an article about them bringing happiness to you!

Changed burden of income tax for individuals including freelancers and the self employed

Maybe you are not used to it after 2020 but here is some good news: the increase in the basic tax-free allowance, i.e. the non-taxable portion of your income, will be very generous in 2021. They will increase the basic allowance from 9408 to 9744 EUR. That is a big plus of over three percent, which is even more significant the lower the total turnover. SME’s can really benefit from this alongside your average ‘’traditionally employed’’ folks.

In theory, if your business is booming and you are raking in the cash you may find that with your increasing income, however, the tax savings also decrease significantly. Where this is a relief for freelancers in the start-up phase with low incomes or low wage earners is achieved. For example, you could also experience terrible issues as a result of Corona, and this could really take the burden off your shoulders.

Any expat can tell you they are generally confused by what is known as the solidarity surcharge. Well, even many Germans themselves are confused by it and if they do understand it, they are somehow annoyed by it. Such is life! But, big news! The duty to pay the surcharge designed to help East Germany for 30 years will no longer apply to most taxpayers from 2021. What previously made up 5.5 percent of income tax will only affect income of 61,717 EUR upwards in the future.

At that point, and up to an earned taxable amount of 96,409 EUR, it is not charged in full, but increases gradually to match the earnings. This is to avoid an additional burden due to the income limit. From EUR 96,410, it is again due with the full 5.5 percent of income tax. The result? More than 90 percent will not have to pay the solidarity surcharge in the future, which: good for that 90%. But, this is Germany, so, of course, there are exceptions.

One exception is investment income. Where the final withholding tax applies, i.e. for stock market profits, interest income and dividends and so on, the additional burden of the solidarity contribution will also apply in the future. This then amounts to 5.5 percent of the final withholding tax, which as a rule makes up 25 percent of the investment income (after exhausting the saver's allowance of course).

However: people who apply for a cheaper check at the tax office may get the solos back, provided that the total income is below the regular limit for payment of the solidarity surcharge that will apply from 2021. However, this only makes sense if the total income tax (investment income is treated as income in the cheaper test) is not significantly higher than 25 percent and the total income is below the limit from which the solidarity surcharge is paid. With the corresponding income, however, this is likely to be the case. 

Another exception are companies subject to corporation tax, which are not relieved by the reform. Amounts of 5.5 percent of corporate income tax are still due.  

Changes in lump sums - interesting for freelancers in the home office, with disabilities and commuters

It is really great news that Germany has recognised the need to compensate disabled people. In general, the recognition of disabled people in government and society needs attention, effort and persistent work to be fully realised on a human rights level. People with a degree of disability now also have an easier way of using flat rates and these are doubled.

From 2021, a flat rate will apply from a grade of 20 (previously 25). All previous lump sums have been doubled. A degree of disability does not necessarily have to do with incapacity for work or the like. Many chronic diseases, restrictions on freedom of movement and the like are recognized disabilities that entitle you to a disability card with corresponding discounts. 

In regards to general reforms, flat rates will also be more efficient and easier to calculate in 2021. For example, for those who do not state the flat-rate advertising costs (1000 EUR in general; more for individual professional groups), for example, they can use the home office flat rate in the future. This is 5 EUR a day, but only if no office is tax deductible. This goes up to a maximum of 600 EUR per year. T

his even applies retrospectively for 2020. This is interesting for every freelancer where home office is the rule and the sum of 600 EUR plus other operating expenses is higher than a possible flat rate. The commuter allowance will also be adjusted: 30 cents per kilometer, 35 from the 21st kilometer of the one-way trip. This means that state sums are collected for frequent travelers, which incidentally also apply to work-related journeys with local public transport.

Furthermore, if the actual travel costs (especially train and bus tickets) are higher than the possible flat rate, the actual costs are used. A combination is not possible. 

Reduced VAT: the party is over

For half a year in 2020, many things were cheaper in Germany. The lower value added tax should above all stimulate the economy and make purchases more attractive. From January 1, 2021, it went back to the 19 percent society and everything is - probably - a little more expensive again. You now have to make sure that you state your sales tax accordingly and input tax payments also change accordingly.

For amounts shown on invoices, the date on which the service is rendered is decisive and not the invoice date. If you completed an order as a freelancer at the end of 2020, but will not write the invoice until 2021, 16 percent sales tax will be reported. There is an exception here for gastronomy operators who will enjoy the lower rate of 7% on food sales in-house until December 31, 2022. This dramatically improves the situation for these operators in terms of cash flow. For the rest of us, however, the party is over.

Increasing health insurance premiums for everyone, railways raise prices slightly

It is currently proposed that the so-called ‘’additional contribution’’ for health insurance contributions be increased from 1.1 to 1.3 percent. However, health insurance companies can decide this themselves, so that there are differences here. It can be assumed that contributions to health insurance will increase from 2021 onwards. It will be 15.9 percent on average in the future. The reasons are additional burdens due to the current situation, regular adjustments and the individual financial situation of the insurer. 

Now let’s talk about public transport. Your BahnCard 25 or 50 are still available for the same price. However, the flex-price tickets and the BahnCard 100 will be between 1.5 and 1.9 percent more expensive. The super-saver-price tickets should remain cheap. In addition, the Senioren-BahnCard will only be available from the age of 65 instead of 60 in future. In general, this is in line with the trends across the world and Europe of raising retirement ages and access to cheaper goods by raising the age requirements.

Feels a bit cruel - but OK, have it your way government. Most of these changes came into effect on December 13, 2020. The bottom line is that rail travel will be more expensive, especially for flexi-price ticket users. However, prices are still lower than in 2019 due to the current reduced VAT rates for train tickets. 

There is no better year for freelancers and the self employed to pay special attention to their tax returns

Nobody really knows whether everything will be "normal" again in late spring, summer or not until 2022. The vaccination has been problematic in this sense because it was a big relief, then encountered distribution problems. Regardless, we can have hope 2021 will be better than the continuous shock of 2020.

Hopefully, the income soon increases again for those who have suffered losses. Some of the tax changes are all the more practical for freelancers, who should make sure, especially for 2020 and 2021, to get everything out of their tax return that somehow saves money. 

Overall, we can anticipate that the government will attempt to deliver relief be it through the things like the KfW Corona Quick Loan or various other programs. Not every change to the tax system will benefit every individual, freelancer or self employed person but certainly in this round of announcements there are positives to be taken away - and after the last year, we can all celebrate that!