Taxes & business banking for the self-employed


10 Easy Mistakes To Make When You're a Freelancer or Self-Employed

Last updated on Feb 21, 2020

Kate Bailey

Freelance Editor

Mar 25, 2019

Many people coming to Germany from far away lands (or, a time zone or two over) are not just migrating for the first time, but starting a business for the first time. Armed with knowledge and experience after years of slogging away (likely making coffees for the Man), there is finally a pathway to “be your own boss” success. As with anything and everything - the first time we are doing that variation of any or every - we are likely going to be pretty bad at it! And, that’s OK, we all need to learn and grow in our own ways. One of the most interesting parts about working for yourself it truly understanding how you work. It can confront much more than just the things you thought you would be bad at (paying taxes on time!) and things you thought you would be good at (making sure you have some holiday time booked!). Beyond the eye opening experience that the money sent your way is not all yours, is not actually all profit, is the realisation that even as just one employee you are essentially your own little empire, your own employee, your own HR manager - your very own corporation. Thankfully, some of the “first time self employed” mistakes can be pretty common - and here is our pro-tip guide to navigating your way around them!

1. Failing to register in a business or self-employed capacity

There’s a lot Germany can offer freelancers in terms of lifestyle and the quality and quantity available business wise. However, if you speak to Freelancers and Self-Employed expats that have ‘made-it’, most will tell you they wish they had been more informed before they started the process. Commonly, this is because when you have to produce so much verifying information in a short period of time, it can create a stressful experience and limit the quality of what you turn in. It can result in late taxes, late paperwork and communication problems with all the important agencies in Germany. The best way to avoid this: is to start with a full, self-initiated education - know what you are getting into before you fill out your first form and the whole process becomes a lot easier and a lot more manageable - so you can focus on building your German business! The first step of this process is of course to begin with registering as a self-employed person or freelancer with the tax department. Without the numbers and registration that comes in this part of getting registered you will find yourself in that aforementioned group that is behind the 8-ball - this is a long enough process without it being apart of a broader stress of not being officially a business when you should be!

2. Underestimating workload

Remember, even as just one employee you are essentially your own little empire, your own employee, your own HR manager - your very own corporation. For every client, there is an accounting implication and also an expense, potentially receipts you need to process. A workload is now not as simple as just doing the job, because you are also your own receptionist… Basically, It’s easy to keep doing what you know. So, you were an accountant in a big corporate firm and you become a self-employed accountant working with smaller businesses. You fill your days with work for your new clients and then you realise that you have your own accounts, marketing and admin to do. So, it eats into your evenings and weekends. You’re now working 60 hours a week for yourself to avoid working 40 hours for someone else! Make sure you build time into your working week to get the admin, the planning, the networking, sales & marketing done.

3. Mis-budgeting business needs and personal needs

Tax money is not your money… yep, we said it! The health insurance money is not your money… The legal insurance… The income tax… The capital tax… OK-OK-OK - you should start getting the idea. If you have never been in business before, how could you know exactly what expense you will be up against? What we are referring to here is that often the first two years of business is severely underfunded - as in, the pulling of money goes not only into a new side of the businesses, but maintaining a lifestyle an employer likely once maintained for you. It’s as much about the new business as it is about those personal needs, that will have to be the first to be sacrificed when the business needs money

4. Mixing personal and business finances

So in line with the mis-budgeting, there is also the mixing of personal and business finance. For example, using the same card as personal and business expense. Maybe you could already guess, but the Finanzamt is really not into this at all. This is where a service like Kontist is great. Not only do they provide an account exactly for this but they also have a lot of integrations to essentially make your business seamless! Having distinct accounts for personal you and professional you makes tracking your business expenses a whole lot easier. Come tax season, sorting through your accounts and trying to remember which charges were personal and which were professional eats up hours of the day you’d want to spend by actually doing your job. (Or relaxing, because you deserve it, because all your stuff is in order!)

5. No insurance or emergency fund

As a freelancer, you’re closely acquainted with the concept of volatility. Some months you’re flush with cash; others, you’re budgeting until the last second of the 31st of the month. So, it shouldn’t come as a surprise to you when life throws you curveballs—specifically, curveballs that require money to amend as life can tend to do, an injury that your health care doesn’t cover, a spouse or partner losing a job… and we’re sure you can think of a few more and maybe you have even been thrown a few more.

6. Not keeping to tax deadlines or letting tax expenses build up

This is a well covered topic on the Kontist blog - because, well, we get you! And here is a refresher on why this is so very important…

“Putting off, forgetting or simply ignoring your tax payments can become a real hazard. It is unusual to find anyone who relishes dealing with taxes. As a result, some freelancers just use their gut to manage their finances. This is clearly dangerous as it’s hard to get a feeling, particularly in the first few years of your business how much money you actually need to save for taxes and VAT. Other freelancers work with a tax consultant in the hope that they will just take care of everything for them. This can turn out to be a big mistake. Although a tax consultant can help you organize your financial life, they are ultimately not responsible for making sure you have enough money saved to meet your tax burden.”

7. Not claiming deductions correctly

For better or worse people tend not to claim their deductions properly. As, in one case they may claim something they really shouldn’t and in the other case, they may be throwing away valuable receipts for things it is perfectly legal and recommended to claim. In general, Germany is quite respectful when it comes to formulating its broad listing across deductibles and it is indeed the one hope you will have as you immerse in the world of Finanzamt paperwork, spreadsheets and crinkled receipts. Be sure to be 100% informed about what you can and cannot claim - it makes a huge difference at the end of the year!

Nachdenkliche junge Geschäftsfrau mit schwarzen Haaren bei der Erfassung von Steuernummer und Steuer-ID.

8. Not taking time off

This is now your life - and the lines of separation between personal and professional are somehow so fine and so precarious that it’s all too easy to fall into the mindset that because you’re your own boss, everything always depends on you, thus you can never have time off. Or, you give yourself way too much time off, or time off at the wrong time! Because being on your own can be so stressful and all-consuming, it’s especially important to give yourself mental breaks and set aside time for the other things in life that you love—even if it’s 10 minutes of meditation or a phone call with a friend.

9. Not bringing in the experts when you need them

Tax agents. Lawyers. External contractors who can make the work easier for your client and for you, even if it does cut your profit slightly. As above, the management of time is one of the most important parts of being a successful freelancer or self-employed person and being able to identify where you can take these shortcuts is step number 1.

10. Working without contracts or clear scope of work

Emails and phone calls run hot and plenty when you are first getting into a freelance agreement with a company. You may be super lucky and really like your contact. But! Get it in writing - and not just email or handwritten - but a legally binding document that ensure the client knows what they are getting and that you know what you entitled to. And on top of these more obvious reasons, the sheer act of asking your client to sign a freelance contract with you—clarifying the details of your new working relationship—will give you a chance to fully qualify them and see if they're really 100% serious about kicking off the project you've agreed to.

There are easily another ten pitfalls, but these are the first most common mistakes we need to move ourselves along with understanding and from there - we can simply enjoy being our own boss. Yes, indeed!

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