How to manage your freelance income taxes
Figuring out your taxes probably isn’t something you imagined when you were dreaming about your new life in Germany. But that doesn’t mean it has to ruin your experience here.
Originally from New Zealand, I’ve been a freelancer in Germany for four years now. After the first couple of years where I paid an accountant to manage my taxes for me, I eventually learned how to manage my own freelance income taxes, saving myself thousands of euro each year and earning some serious German kudos.
Here I cover how you, too, can successfully manage your freelance income taxes in Germany.
Are you a freelancer?
In order to be considered a Freiberufler (or Freelancer) in Germany, you need to be offering some kind of service. So you might be a doctor, a journalist, a painter or an accountant.
If you’re running a business that sells products, then you’re classed as a Gewerbetreibende , or tradesperson. We will deal with how to manage your taxes as a Gewerbetreibende in a separate post. Here we cover how to manage your income taxes as a freelancer in Germany.
How freelance income tax works in Germany
The German financial year runs like the calendar year: from January 1 to December 31.
For the first whole financial year that you are a freelancer in Germany, you will need to save up your income tax for the entire year . Yes, it’s a drag – I recommend getting a savings account, putting your contributions in there and trying not to look while you do it.
If you become a freelancer part-way through the year, then you will need to do this for the remaining part of the year, and the entire next year.
Thankfully, reprieve is in sight! Once you make it through an entire financial year, dutifully saving up your income tax, you will be allowed to move on to making quarterly payments, which will be determined in advance by the Finanzamt , or tax office.
This means you will pay a predetermined amount to the tax office at the end of each quarter, so you’ll no longer feel as if you’re working blind. The only thing to watch out for here is if your income increases during the year, you’ll need to save up a bit extra to make sure you’ve covered yourself when it’s time to make the annual tax return – you’ll have to pay the outstanding amount.
On the other hand, if your income decreases, you’ll be getting a nice deposit from the tax office, straight into your bank account. At the end of each year, the Finanzamt will adjust your quarterly payments in accordance with your previous year’s earnings.
Hot tip : if you aren't feeling safe with this method, you can always contact the Finanzamt and ask them for quarterly payments. Then you don't need so much discipline.
How much income tax do you need to save up?
This is a very good question, and a difficult one to answer. When I became a newly-minted freelancer in Germany, I had an accountant who encouraged me to save up a percentage of my income considerably higher than was necessary, with the idea that I could shout myself a treat at the end. Four years on, I still believe this might be the safest way to run it.
What percentage of your earnings you will need to save up will vary greatly depending on your earnings, as income tax in Germany is a progressive tax. Income earners pay somewhere between 0 and 45 percent of their income, depending on their earnings.
There is also a tax-free threshold, which is 8,820 EUR in 2017. Any income above this threshold is taxed progressively; any income below it is not.
But you can save yourself trying to piece all these bits together in your head: there’s a fantastic calculator that I’ve found to be bang-on when it comes to predicting how much tax I will owe each year.
Use this calculator to get an estimate of your income tax burden for the year – it’s a free service in English.
The amount you enter in the yellow box at the top should be your income after expenses. Because here comes the best part about being a freelancer in Germany: there are numerous business expenses you can deduct to reduce your taxable income.
Your income tax return is due by May 31 for the previous financial year. But you can do it on January 1 if you’re ready – as soon as you’ve got all your invoices paid up and receipts for any work-related expenses, you’re good to go.
Hot tip: if you end up owing the Finanzamt some money, you usually have about a month to pay it. So if you’re in your first year, and you’ve been struggling to save up enough income tax, you might like to give yourself an extra couple of months before filing the return, since you have until the end of May. Remember you can use this calculator for a solid estimate of how much you’re going to owe the taxman.
You will need to create a profit/loss assessment to submit to the Finanzamt . This can be a simple Excel spreadsheet, breaking down your income and expenses across the year. Here are some free templates .
Once you have made the profit/loss assessment, you’ll have all the information you need to file your income tax return on ElsterOnline – more on exactly how to do that in a future blog post.
When you use ElsterOnline, the form will give you an instant indication of whether you owe some income tax, or whether the Finanzamt owes you. This is usually confirmed by email within the next couple of days, and then you have a month to pay anything you owe. On the other hand, anything you are owed is deposited into your bank account within a month-or-so as well.
Remember to keep your invoices, receipts and profit/loss assessment somewhere safe, in case you get audited and need to refer back to them in years to come.
Double taxation is when your income is taxed by more than one country, and it’s definitely something you’re at risk of as a foreigner living and earning money abroad.
Germany has agreements with many countries to prevent people like us having to pay income tax twice, but it’s best to check with your local embassy to find out whether this might be a problem for you, or what you can do to prevent it becoming an issue.
You can do it!
Personally, I’ve found it really empowering to take care of my freelance income tax myself. It’s helped me to feel more confident in my German skills and it’s also saved me thousands of euro. I hope the same for you!