For many freelancers, registering for VAT is not only inevitable but a somewhat good thing to be happening for a business - it means lots of activity! If you’re here and just getting started, well, you will need to wait two years anyway. The Finanzamt require you to declare your income every month in your first two years of business. This also means you have to pay it every month as well. For those of you who are past this point, maybe it already makes sense to do an analysis and see: should I be paying monthly or quarterly? If you have just arrived and you are just getting started: it can make a lot of sense to be paying attention and knowing what you are in for - maybe it will be a transition for you too! So, let’s delve into the question of monthly or quarterly taxes?
Without question, the way we manage our taxes ties in with how we manage our bank accounts, how we manage our bill payments, how we manage our cash flow and how we manage our personal funds as a result. Without a doubt, no matter which country you are in, you are going to be paying taxes as a self-employed or freelance person and therefore it makes sense to work within a system that suits you. For example, imagine that your business works on longer-term contracts, and from your regular clients you only get paid once everything three months (or seem to, anyway). It could make more sense and you could have more clarity by reporting quarterly. Maybe it makes more sense, in this case, to do it monthly, and level out spending to quarterly. Only you will know what works best for you but by the end of the day, knowing what options you have is the best start!
Some quick notes about VAT
It’s important to note in this article we are referring to VAT filings. You still must do your income tax and, if applicable, your business tax on an annual basis. The larger assumption here is that you are registered for VAT or considering that you will have to register for VAT. Value Added Tax (VAT) in Germany is, by law and officially, “Umsatzsteuer”. However, you may also see the term “Mehrwertsteuer”. Both terms have the same meaning, so do not be confused by this. To recap, this is Value Added Tax, that is passed onto the final customer/consumer with all the manufacturing or labour based taxes having been added along the way, making it an ‘indirect’ tax. Basically, what happens in the reporting cycle is that you accumulate your expenses and earnings separating your revenue from the VAT on both sides. You will either take less or more than you earned. If there is a surplus of VAT inputs over outputs (more VAT incurred than charged), then a German VAT credit arises. In theory, this is due back to the VAT registered business. In the German VAT return, there is a box to tick to apply for a refund which should be returned within three months. However, this may trigger a VAT audit by the tax authorities. Otherwise, the credit is rolled over to the next filing.
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The First Two Years of Business
According to §18 of the Umsatzsteuergesetz (VAT law) for the first 2 years after starting activity, you will have to do a VAT announcement (Umsatzsteuervoranmeldung) each month AND pay each month as well. For example, if you had a net turnover of 2000 EUR plus 190 EUR VAT in April 2016, you have to electronically announce that to the Finanzamt electronically by May 10th, 2016 AND have also transferred the 190 Euro into the Finanzamt’s bank account by May 10th, 2016. You already know about the obligatory electronic announcement, but I’ll bring it here nevertheless for people who (wrongly) think it’s a big deal because it’s not. The Umsatzsteuervoranmeldung can be quite straightforward once you know your way around it, the Finanzamt has a software you can download, ELSTER ( and lean more how to use it: Freelancers Guide To ELSTER, where you fill in your name, address, tax number and the money you TOOK IN (turnover) for the last month and software calculates the VAT, you also fill in the summed amount of any invoices you PAID, and it then calculates the difference between the two VATs, which is the amount you will have to transfer to the Finanzamt that month. You then send that filled in form to the Finanzamt just by clicking send (ok, choose in the menu “Datenübermittlung=data transfer”, the entry “Steuererklärung an das Finanzamt übermitteln = send to Finanzamt”) and you don’t even need a certificate to do it, so anybody who knows your tax number can do it (and since you have to print your tax number on all your invoices the door is wide open to nasty practical jokes…). No, not really, that’s fraud! But chances are that you are well versed in Tax-ology and tax life at the point of two years in, so it is about assessing what is right for you and congratulations on making it the first two years!
Analysing Cash Flow
The cash flow statement is the financial statement that presents the cash inflows and outflows of a business during a given period of time. It is equally as important as the income statement and balance sheet for cash flow analysis. Without a cash flow statement, it may be difficult to have an accurate picture of a company’s performance. The income statement will tell you how much interest you paid on a loan and the balance sheet will tell you how much you owe, but only the cash flow statement will tell you how much cash was consumed servicing that loan. The income statement will record sales and profits but it’s the cash flow statement that will alert you if those sales aren’t generating enough cash to cover expenses. A huge part of why this is coming up in this article is because tax and especially VAT plays a huge role in the growth (or stagnation) of your business and freelance finances. You could be paying a lot in different when it comes to taxes and this is a huge burden in the first two years to be doing every month. Of course, it is totally possible and totally fine but at the end of the day, this monthly routine is easiest when managed in a highly effective way. A cash flow analysis is a great start in understanding EXACTLY how money is spent on your business, not just how it is THEORETICALLY spent in your business.
Kontist - helpful no matter when you do your filings!
Somehow, it feels like you may know of or be wanting to learn more about Kontist… you know because you are here on our blog! The thing about Kontist is it is kind of like having an extra employee: a bookkeeper! The lack of a clear overview over how much to set aside for tax and VAT - and what is left to spend - has always been an issue for freelancers - we are literally talking about it, right now. But, Kontist really came in and solved that problem. Your very own integrated personal finance manager that just notifies you when something is happening. If you think about it, one of the biggest sacrifices freelancers and self-employed people make is that they are no longer supported by massive HR teams and accounting teams that take care of everything for them. In addition to this VAT situation we are discussing, there is also a liability to cover your own insurance, pensions, health insurance and the associated costs of essentially employing yourself. This is why freelancers in Germany are so excited about the concept and the technology of Kontist. Freelancers are just happy with the automation and quite rapidly, in a development context, Kontist has a goal to automate 80% of regular administrative tasks like accounting and banking for freelancers. As an expat in business for myself for 4.5 years, Kontist was a dream because it was also so well executed, not a lot of promises that come with hidden fees like other products on the markets.
Pay The Thing
ALWAYS, ALWAYS, ALWAYS put your correct tax number (Steuernummer) on the bank transfer and the correct bank account number of your Finanzamt. Normally the details space on the bank transfer form should be filled in like this: Umsatzsteuer April 2018 St.-Nr 345/678/1234567
This is said most importantly because there are some notorious stories in freelancer community involving tears, frozen bank accounts and long waits at the most famous ex-barracks building in Berlin….