Tax #1 - Income Tax
Income tax is applicable to both kinds of ‘freelancers’ and has a base rate of 14 percent and this can scale up to 42 percent. Generally, to stay on top of your Income Tax you will be required to pay this on a quarterly basis, in advance and you will be required to complete a tax assessment yearly. You will be taxed on your income after deductions, which is often referred to as ‘profit’ because you are seen as a business but if have gone the extra step and indeed do differentiate as a Gewerbetreibende your income and ’profit’ are seen as exclusive figures. If you are single, your ‘profits’ are taxed with a single person allowance, however, if you are married your income is taken together at double that rate. For the most current tax rates, there a multitude of income tax calculators online.
What is most important about the income tax, is that it is offset by your deductibles. Firstly, as a self-employed person you will have an allowance of EUR 2,800 for your health insurance, but it is crucial you keep all of your receipts and the relevant documentation. Secondly, depending on your profession, you may be entitled to write off expenses in a lump sum without requiring separate receipts and this can often be up to as much as 30% of the revenue. This is best to be discussed with a tax professional.
Beyond this, you can claim deductions in the form of: equipment, office and work space rents, stationary, travel, pension and insurance membership contributions and if you are a parent, great news, you can claim costs of childcare. We wrote about this in our article Keeping the Finanzamt Happy - which also covers off the importance of record keeping for your deductibles!
Tax #2 - VAT
VAT, or ‘Value Added Tax’ is a European wide tax, with different rates applicable depending on the country. It is generally known as Umsatzsteuer (USt) , but can still be called after its original name Mehrwertsteuer (MwSt) . In Germany, the rate is generally 19% but depending on the goods it can also be 7% - a highly important differentiation when you are dealing with food goods, as an example. Generally, ‘necessities’ will fall into the 7% category. You are liable to register into the VAT system if your income exceeds EUR 17,500. In this case it does not, you will need to list yourself as exempt for VAT on your invoices. If you do qualify to pay VAT each month, as you record your expenses, you will be required to complete a summary of your VAT purchases. Here, you will report how much VAT you personally paid in expenses or to suppliers and how much was paid to you. The balance of which is either owed by your to the Finanzamt, or perhaps you have overpaid. Reporting occurs via the ELSTER portal and this can be done by yourself or your tax agent. It must be submitted by the 10th of the following month, so your June VAT declaration must be complete by July 10.
Tax #3 - Trade Tax
You may be a commercially registered business - depending on your profession. In this case, you will be liable for a municipality determined trade tax. This can range from 7% and up to 17.5% and is pre-determined for prepayment on a quarterly basis with the final assessment to be completed at the end of the financial year with your annual declaration or Steuererklärung . In the event your income does not exceed EUR 24,500 you will not be liable for this tax.
Beyond this, there are of course social insurance taxes that may be applicable to you. You should receive this information if you register for speciality professions, but be sure to fire a letter to the Finanzamt to explain your situation and verify. A tax agent can be very useful here, and we will be sure to write an article about this in the future.