Mixing employment with self-employment and freelance: a 2021 reality

In the world of freelancing and self-employment, it is safe to say that there is rarely an easy and direct transition from employment to self-employment in totality. Similarly, and given the impact of the Corona crisis on companies, projects and similar - there may be times when a self-employed or freelance person may need to sign up for part-time employment. Whatever the case, what do you need to know if you find yourself in these circumstances?

It’s strange to see that we are living in unknown and uncertain times, waiting for the full economic impact of the Corona crisis and many people are really having to readjust how they procure and perform their work through self-employment and freelancing. The KfW Start-up Monitor 2020 shows that there were 605,000 start-ups last year. Of these, 439,000, i.e. more than half, started as a sideline.

Those who are self-employed part-time enjoy the secure source of income from their main job and at the same time realize their business idea as their own boss. However, part-time founders must know that the same legal requirements must be met as with full-time founders. This article is about the mixing of ‘’employment types’’ and how that might change or define how the Finanzamt or the German system at large may consider you, and the obligations you may have as a result.

Pros and Cons

Not everyone can or wants to give up their main job if they have a brilliant business idea. After all, working as an employee or civil servant offers a secure income - and who, as a founder, can estimate how their own company will develop, or for that matter, how fast? Part-time self-employment offers an interesting alternative here, because you keep your main job and set up your own company "on the side". 

Here are some of the pros:

• The regular income from the main job through the employer provides security and takes the pressure to succeed.
• You have the opportunity to test your business idea in peace and only later to convert it into full-time self-employment.
• Because of the regular income, the financing of your part-time self-employment is individually controllable, which minimizes the financial failure (risk).
• Compared to a full-time business start-up, you can give yourself more time to develop, invest fewer hours and take time off if you are self-employed as a part-time job.
• A part-time self-employed activity can be expanded to become your main occupation, e.g. in the event that you become unemployed.
• If you are successful as part-time self-employed, you will increase your overall income.

Cons:

• A part-time company in addition to your main job requires a lot of energy and time. Family and leisure activities have to take a back seat.
• Think carefully about whether your free time and your strength are sufficient to successfully be self-employed on a part-time basis.
• Overall, you can invest significantly less time in your company than full-time founders.
• Customers, business partners and suppliers often rate self-employment as a sideline negatively. You suspect a lack of commitment and a lack of professionalism.
• The main occupation limits you when it comes to timing. They are less able to react to peak loads and customer requests.
• If the dream of being self-employed on a part-time basis fails, you can work off any debts you may have incurred with your salary or realize your assets.

The way you want to be self-employed as a part-time job has a major impact on success. Consulting work or a tax office are easier to run alongside your primary job than, for example, a shop or anything with a physical requirement or limitation.

Getting Started

A business registration is required for full-time self-employed persons as well as for self-employed in part-time business. In order to become self-employed as a part-time job, the following new rules apply:

The procedure for registering a business changed with effect from January 1, 2021.

From this point in time, the responsible tax office must be informed electronically of the start of agricultural, forestry, commercial or freelance activity by taxpayers or their tax advisors without prior request by submitting a questionnaire for tax registration within one month of the start-up.

This can be done, for example, via "My ELSTER - the online tax office". ELSTER makes it possible to send tax data to the tax authorities without paper and free of charge, regardless of time and location application to initiate a registration process with a safe and completing individual ELSTER certificate. If company founders already have an ELSTER certificate, they can also use this to submit the questionnaire in question for tax registration.

If, on the other hand, the company founders do not yet have an ELSTER certificate, there is another option of promptly electronically sending the questionnaire for tax registration via the ELSTER portal. Using the so-called "ELSTER Light Certificate", all that is required is an e-mail and password. In addition, there is the option of converting the Light certificate into a full ELSTER certificate. You can register via ELSTER.

Before registering, also check whether the work you are doing is subject to certain requirements for example permits, trade approval, master craftsman obligations and so forth.

The combination of a full-time part-time job and a freelance part-time job is not uncommon. However, income in the principal occupation is usually low and the number of hours worked is low. So that you do not experience any nasty surprises and have to pay additional health insurance contributions, you should apply to the health insurance company for a status assessment procedure if you are legally insured.

It is quite possible that in this case, the statutory health insurance will decide that you are not self-employed as a part-time job and in this case you have to pay contributions for both your dependent employment and self-employment.

Salaried employees should inform the employer about the planned part-time self-employment. Even if the employment contract says otherwise, it's a formality, as long as you stick to the rules: 

• You are not competing with your employer.
• Your full-time job does not suffer from secondary employment: You continue to appear reliably to work, are not overtired and remain committed and productive.
• You do not have access to funds or data from your employer.

While full-time entrepreneurs can receive a lot of subsidies and grants, the choice is much smaller if you become self-employed as a part-time job. Some start-up loans from the Kreditanstalt für Wiederaufbau (KfW) can also be used by part-time start-ups if full-time self-employment is sought in the long term. Part-time founders should not underestimate the capital requirements and should carefully check whether they can receive funding from the state, the state or their own community.

How do taxes work in these circumstances?

The income from your part-time self-employment, like your regular work income, is subject to income tax. If you set aside around 30% of the profit for tax payments, you will not be surprised by unexpectedly high back payments.

VAT

If you are eligible for VAT, you need to submit regular VAT returns to the tax office, which founders usually have to submit monthly for the first two years of operation. 

Small business regulation

In order to relieve start-ups and small businesses, the state offers the small business regulation upon request. If you earned less than 22,000 euros in the previous year and less than 50,000 euros in the current year, you can use this rule. You will then not charge your customers any VAT and in return, you will not be able to deduct any input tax. If you are self-employed as a part-time job and the expected sales are manageable, the small business regulation can be an option. Since the choice of the small business regulation can be made dependent on different aspects, it is preferable to make this known prior to or as soon as registering your business.

Compulsory social security

If working hours and income do not exceed the limit values, you usually finance statutory health insurance as a part-time self-employed person with your main job. There are no further contributions.

If a self-employed activity becomes the primary operation or the higher earning of the two, you are no longer self-employed as a part-time job. In this case, you must voluntarily take out statutory health insurance. In addition, you should check the activity to be taken up with regard to compulsory pension insurance. There are activities that trigger compulsory pension insurance, also in the case of self-employed secondary employment.

Legal forms of business

Part-time founders should also consider carefully which legal form they should choose for their company. The most common choice is the sole proprietorship - whether as a trader or as a freelancer. The advantage lies in the simple and inexpensive foundation. The disadvantage, however, is that as a sole proprietor you are liable with all of your private assets. If you would like to set up a group as a part-time job, the civil law partnership (GbR) is the ideal legal form. Here, too, the formalities and costs are low.

Although you can verbally agree on a GbR, a partnership agreement is strongly recommended. Please note that the GbR is open to freelancers and traders. In the case of the GbR, liability is also not limited. The final option is of course a limited company, known as a GmbH or UG (limited) but the effort and costs are significantly higher here and the requirements for bookkeeping are increasing - maybe not the best option for this employment configuration.

In summary, here are the basic steps:

• Develop a business idea and create a complete business plan. The business plan shows you whether your business idea is viable and makes economic sense.
• Clarify whether you have the qualifications, permits and, if applicable, the evidence required to carry out your self-employed activity.
• Inform your employer.
• Inform the social security agency, as stated above, that you are self-employed as a part-time job.
• Run the company in a professional and motivated manner and do the bookkeeping correctly. This requires a lot of training at the beginning, but it's worth it. If you outsource the bookkeeping to a tax advisor, there are high costs. If necessary, invest in good accounting software and training. Please keep in mind, however, that individual tax advice (even before the establishment) is useful.
• You should also clarify with your insurance company whether and to what extent self-employed secondary work is also insured. Additional insurance may be necessary or useful for or because of the operation.
• If you need financing and/ or funding, you should consider that before proceeding with full establishment especially if you will rely on it to totally get your business idea off the ground.
• Register your freelance part-time job. Freelancers contact the tax office directly, tradespeople contact the trade office at the company's headquarters.

As with most things business in Germany - it is possible to have this kind of employment configuration, but you are liable and obliged to inform authorities and comply with the obligations we have outlined in this article. Hopefully, you are opting for or considering this configuration because it is a new and exciting opportunity or it is a product of necessity in the post-Corona economy - either way, we are happy to bring you information about the basics, and good luck!