For any freelancer, even the mention of the Finanzamt can bristle nerves. However, communicating and dealing is a perpetual and unchanging part of becoming a freelancer or self-employed person in Germany. It’s often a great idea to consult with a Steuerberater before you start your operations, as knowing what the Finanzamt expects and when they expect you to report it, and this can also differ profession to profession. Regardless of whether you engage a Steuerberater, you will still need to have impeccable records to evidence your taxation reporting, should they ever be required from the Finanzamt. However, this is of great benefit - simply knowing the system and following the rules will help you sleep at night and avoid any nasty financial surprises! Firstly, let’s start with some overarching fundamentals:
- When you decide on how you will manage and document your finances, be strict and regularly spend 15 minutes to half-an-hour to log expenses, income and anything else important from your business activities. This will mean when it comes to monthly, quarterly or annual reporting tasks, you won’t be facing an insurmountable challenge of back-tracking receipts and invoices.
- Keep it simple: ensure the communication of expenses and income by having a dedicated bank account for your business. First, it may be a violation of the terms and conditions of your private account to use it for business functions - ensure to consult your bank. Second, banks such as Kontist whose services are designed with freelancers needs in mind with easy set-up and no overdrafts. Kontist will even save tax spendings such as VAT in sub-accounts, so you are ready to pay without delay. Services like this alongside having a single statement the purely relates to the business eases the burdens of the reporting process.
- Tax in Germany is complicated, and this guide is meant to give you a basic introduction as to what is expected of you. While there are some standards for record keeping that this guide will generally address, ensure you know all of the rules, allowances, limitations, and exceptions as it relates to your profession or business classification. Finanzamt can be quite forthcoming with helpful information if you book an appointment and ask for information prior to beginning your operation otherwise seek the guidance of a tax professional.
- Tax Money is not your money: no one likes taxes, but we at least agree to it when we start freelancing or self-employment. Staying on top of your records gives you a clear idea of what is ‘your’ money and what is to be paid to the Finanzamt. While it can take some time getting used to when you’re new to the game, it’s the best mindset to use when approaching your finances. Now we have the fundamentals in mind, let’s get into some details. Bear in mind, this is the general foundation for bookkeeping, but, you should consult a Steuerberater or Finanzamt to check what applies to you.
Paper or Digital? Trick question: everything should be digital
Records such as receipts, invoices and bank statements are required to be kept for 10 years. For many who have gone fully digital, many great accounting applications exist to track receipts in real time. However, there are many people who still use paper receipts as it can be easier to track certain expenses who do not realize they need a digital copy of the records as well. In the case of emergency or the aging of documents, the evidence of your activities may be lost. Ensure you have a cloud-based or backed up digital file, scan in your documents and ensure it correlates with your paper records. Using a cloud-based service also means you can provide easy access to external consultants, or be able to access your documentation from anywhere in the world.
Filing, and automated tools to help you stay on top of it
The Finanzamt needs to see who you invoiced, who paid you, what you paid for, what the correct taxes paid or received were on these amounts, and exactly when these transactions occurred. Even if you have a Steuerberater, you will need an Excel control file that summarises your business activities: one for incomings and one for outgoings. This should be organized in chronological order as per your bank statement. For incomings and outgoings you will need to include the follow data for each entry: unique invoice number (chronological), client/payee, date paid, payment channel, a breakdown by taxable unit clearly display individual and compounded netto (net) and brutto (gross) amounts (summarised at the end of the logs as well) and a final netto amount. This is a bare-bones overview of the basics, ensure you consult with a tax professional to confirm exactly what you are required to log, in your field.
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An accounting system for issuing invoices is also very handy. In addition to automatically generated invoices and payment reminders, many will allow you to export .CSV summaries of your incomings, so you can simply copy and paste the appropriate data into your control file. A freelancer bank like Kontist is working to provide the same .CSV export service to their customers, meaning you can also just export your statement. Regardless, you will need to input your data into a control file that summarises everything to standard.
When it comes to receipts, it’s always important to leave clear notations on what the expense is for, how it was paid, when it was paid and any additional information. For example, a lunch expense will require notes on who you met with, and why. Similarly, transport claims such as hire cars or drivers must include the start and end location, alongside the purpose. While it can be helpful to have an electronic receipt tracker, jotting alongside the paper receipt, attached to plain paper, can be just as painless considering everything has to go into a control system.
Most importantly, it is important to file regularly both receipts and incomings to avoid the end-of-month mess. While technology that automates our lives is often appealing, it can create complications for small-time freelancers. A good bank, a good invoicing system and a good monthly control document alongside regular logging can often be the most efficient method. Lastly, set up a master file ‘Finance’ and sub-files for every month. Each month should include: ‘Receipts’, ‘Invoices & Income’, ‘Bank Statements’, ‘Finanzamt Correspondence’, and ‘Control File’. Using the same system every month keeps everything clean and tidy for those times you have to look back.
Setting up your banking for business and life
Keep it simple: ensure the communication of expenses and income by having a dedicated bank account for your business. When selecting an account for your business, be sure to check their policies on Privacy, Data, their protection limit and regulations of the Federal Laws.
This bank account should be easy to access online, have a good reputation for customer support and give you an option for online purchases. Bonus points for banks: automated accounting or sorting, automatic taxation estimates or storage and syncs with an accounting system. Thankfully, after years of horror stories from freelancers and their banking issues - Kontist came into the game, providing these services and more, and making the separation of business and real life for freelancers easy to manage.
Getting ready for reporting
The last step is reporting to the Finanzamt, be it submitting your summary numbers to a Steuerberater or you choose self-submission have learned the ELSTER-portal system. You will have agreed on your reporting frequency and method with the Finanzamt already, so it’s simply a case of staying on top of these deadlines. By putting in regular work and attention to managing your records, by the end of the month/quarter/year, this can be quite painless and you can set up your Excel sheet to do all the heavy math on your behalf.
If you use a handy tool like Kontist, you can also correlate the taxes set aside in your sub-account with your control document and be prepared to pay the amount the Finanzamt will request for payment without stress. You can read more about this and how Kontist can help you, here. Essentially, you should just have to triple check your incomings and outgoings against your bank statements and receipts, which should be filed chronologically. Save all of your summaries that were submitted, including the correspondence in return from the Finanzamt in the same corresponding folder as it comes available - and not only were you ready for reporting, you are ready to look back if need be!
It’s not so bad with the right tools and information
Of course, all of the above can seem overwhelming to have to go be diligent of so many tax-related responsibilities, especially for expats or people with very small-time or owner-operator managed business not used to the German system. However, for most, it’s actually not so daunting once you have a good bank, good record keeping system and the knowledge. Once you get into the routine with your set-up, keeping the Finanzamt happy just means following the rules and being prepared for payments. And, hopefully, you stay focused on your work with all your taxes and records in order.
Guest author: Kate Bailey