Navigating the German Tax System – Tips for Freelance Newbies
Last updated on Feb 21, 2020
Mar 25, 2019
Deciding to be your own boss is huge. Especially when you’ve chosen to do so in a foreign country and your language skills extend to ordering ein Bier . Here, a short freelancer’s guide to the basics of German bureaucracy and the German tax system.
About four years ago I decided to throw caution – and a regular salary – to the wind and try my luck at freelancing in Berlin. At the time, I didn’t know anybody who had mastered freelance life and whose footsteps I could follow in. So, I hired an advisor. Clearly, a savvy move, I thought, patting myself on the back. But I was quick to realise that having somebody to fill out your forms is one thing, actually understanding German bureaucracy and the tax system quite another.
Like any good optimist, I often winged it. But guess what? Turns out that can get you into a lot of trouble. So, for all the freelance newbies who want to get it right the first-time round – here, a short 101 to help get you on your feet and avoid (literally) paying for your mistakes.
First Things First: Go Register! Get a Visa!
If you’ve recently moved to Germany and plan on setting up your freelance life here but don’t speak the language, the first thing you should do is go out and find yourself a German buddy. Trust me, this will be a massive game changer when faced with the small avalanche of paperwork that is about to hit you.
Next step: determine what category of self-employment you fall into in Germany. If you offer a service you will be categorised as a freelancer but if you offer goods you will qualify as a tradesperson. If you have a trade business, you need to register as such and pay Gewerbesteuer (business tax) on top of your other taxes. For this article, I’ll focus on freelancers providing a service.
Next up: hit the citizen’s bureau aka Bürgeramt and register. Google your local Bürgeramt and make an appointment online. You should bring your passport, a letter from your landlord confirming that you are a tenant and possibly a birth certificate. Depending on your language skills, it may be wise to take your new German friend along to translate for you as a lot of people working at the Bürgeramt don’t have a great command of the English language. Do this within 14 days of relocating.
Are you not from the EU? Then you will probably need to apply for a Visa or Blue Card. Again, it’s highly advised that you ask someone who can help translate to walk you through the required steps.
How to Get a Tax Number
So, you’ve registered and are ready to set up your freelance business. Have a glass of bubbly! Celebrate! Ok. Enough now. Time to get serious.
After registration, the federal tax authority will automatically send you a tax ID number or Steuer-Identifikationsnummer (that word is about 100 letters long, isn’t German incredible?!). This is needed for social benefits and by employers. But as a freelancer you will need an additional number, called Steuernummer . This number will need to go on to your invoices and should be quoted in any communication with the Finanzamt (tax office). To obtain the Steuernummer you need to apply for it at the Finanzamt . You can do this by contacting your local tax office in writing or making an appointment. You will be asked to fill out a pretty crazy form called Fragebogen zur steuerlichen Erfassung in German – and this is where it’s time to invite your German bestie for dinner! Not least because this form goes into the real nitty-gritty of your business plans including profit estimation, which leads us on to the next question:
Umsatzsteuer – Do I Need to Charge VAT (And How Much Do I Charge)?
Whether you’re a writer, dancer, developer or on track to become a famous freelance pooch walker – at some point you will most likely have to deal with the issue of paying VAT (value added tax). You may hear people talk about VAT as both Umsatzsteuer and Mehrwertsteuer – essentially, both mean the same thing.
The first time you may be confronted with this is when filling in the Fragebogen zur steuerlichen Erfassung and estimating your revenue. Based on this amount, the tax office will determine whether you need to charge VAT. Important to know: If your annual revenue is under 17.500€* in the first year and no more than 50.000€ in your second year of freelancing, you don’t have to charge VAT.
There are pros and cons to this . Pros : if you are selling a service to private customers rather than businesses, your prices can be lower/more competitive. VAT doesn't, however, make a difference to businesses because they can claim it back. You also don’t have to deal with VAT returns.
Cons : If you don’t add VAT, then you in turn can’t claim back VAT that has been added to items or services that you’ve bought and that are related to your business. So, for example, if you are a freelance photographer and have a lot of expenses for equipment, it may work in your favour if you can get back the VAT added to these items.
If you reckon that you are not eligible to pay VAT, then you will be regarded as a Kleinunternehmer (= small tradesman/business). You will have to add a sentence to your invoices indicating this, for example “Gemäß § 19 UStG wird keine Umsatzsteuer berechnet” .
If you are eligible to charge VAT, then you will also have to submit monthly or quarterly VAT returns and this is done electronically. The easiest way is to use the free software supplied by the tax office called ELSTER. If you are unsure about doing this, it may be worth consulting a tax advisor or accountant who can do this for you. You will also have to do an annual VAT return which needs to be submitted by the 31st of May of the following year (unless you have a chartered accountant and then this cut-off date can be extended.)
Do your thing, not your taxes
Einkommenssteuer – What’s That and How Should I Plan For it?**
So, your pile of German paperwork is growing steadily alongside your confidence that you can, in fact, figure this whole tax system out. And then one day somebody asks you, “Hey, how much are you putting aside for your Einkommenssteuer ?” And you almost drop your Feierabendbier in bewilderment. There’s even MORE tax stuff to consider?!
Unfortunately, Einkommenssteuer – or income tax – is an area where a lot of freelancers “face-plant” (DE: auf die Nase fallen ). But just because others (me included) did, you don’t have to. In theory, it’s pretty simple: for everything you earn, you should be putting aside a percentage for income tax. There is a so-called Steuerfreibetrag , currently at 8.820€* (this sum is updated every year), and any income that you earn up to this amount is income tax free. Everything above is subject to income tax. How much you should be paying depends on the tax bracket you’re in (this takes things into consideration like how much you earn and your family status).
It can be a little tricky to work out how much you should be putting aside, especially if you’re starting out and don’t have a good overview yet. There are, however, a few online tools which can help you calculate the right amount like this one here (German only). A word of warning: it’s advisable to err on the side of caution and put away a little more than you expected. You will have to submit your income tax declaration by the 31st of May of the following year, unless you have a Steuerberater who can extend this period for you.
Tip : To help keep an overview of your income and taxes, try keeping an excel sheet which you update regularly. If you use the Kontist app, you can automatically see the amount of income tax and VAT which you will need to pay from your earnings.
Tax Advisor or Accountant – Yes, No, Maybe?
When starting out, it may seem daunting to deal with your tax returns by yourself. It may seem even more daunting, however, to find a tax advisor ( Steuerberater ) or accountant ( Buchhalter ) who speaks good English! Try googling Steuerberater or Buchhalter Englisch or reaching out to other freelancers, for example in co-working cafés or in Facebook groups.
The main benefits of a tax advisor are that he or she can help you communicate with the Finanzamt and extend deadlines (for example, when your income tax is due). An accountant can help you fill in all your forms, too, but can normally not apply for extended deadlines. However, if you notice that you can’t make a deadline for a good reason, you can always (get someone to) contact the Finanzamt and explain the situation – contrary to popular myth, they’re human, too!
Alternatively, take a look at the online invoicing and accounting tool debitoor . It also ties in with your Kontist account.
Unfortunately, there are a couple of other things that you will need to wrap your head around before you can truly set sail and leave the bay of bureaucracy behind (at least for the time being).
As a freelancer, you are not obliged to pay into the public healthcare, unemployment or pension insurances. But it is mandatory to have healthcare – which can be public or private. It is hugely advisable to speak with an advisor at this point as the offer out there is substantial and benefits and costs can vary considerably.
If you are a writer or artist, for example, you may be eligible to join the Künstlersozialkasse (KSK) which is a social insurance that covers healthcare, care for the elderly and pensions, and contributions are income based.
Open a bank account: There are some great digital banks out there which enable you to open an account with a lot less hassle than going to one of the traditional branches. Kontist has been designed especially for freelancers and you can set it up in just 10 minutes.
*correct at date of research
About the author: Kathy Kunz is a Berlin-based bi-lingual copywriter who was born and bred in Scotland to German parents. She hopped on the freelance rollercoaster 4 years ago and is still enjoying the ride. Most of the time. Kathy also works in interior design.
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