Trade Tax for Self-Employed - an explanation
This is an article for those who fall under the trade obligations of self employment. On our blog, you will find many articles about how to understand these distinctions and the implications each of those distinctions come with. What we are aiming to do here is to lay out what is required when it comes to trade tax, and specifically, the declarations you are required to make. Some of you may have hired a tax agent to handle this for you, but, the fact remains, you need to be properly informed and aware of all of the obligations that you must adhere to to keep your business successful, and also sustainable. So, we are going to explore this topic, and perhaps it is not the topic you want to fill you mindspace with, but it will inevitably take your mindspace and some point, so let’s come to good terms with it!
The fact is, many of those who are self-employed have registered a trade in Germany. Unless they are one of the occupational groups that are exempt from trade tax. This includes all freelancers but also agricultural activities, and many other differentations we have laid out in previous articles. If there is any confusion there make sure you read our lengthy guides, talk to the tax office or talk to a professional - why pay when you don’t have to and why risk being in a situation you did not know you had obligations to pay? So, as soon as you work on your own account for an economic activity with the intention of earning a profit (and are not part of the freelancers or working in agriculture) you have to register a trade. You can find out how to do that in our article " Registering a business - step by step to your own business ".
If your business is registered, you can start with your work and earn a lot of profit. Once you bring this in, the income tax is due. And not only that: since you run a business, you are also obliged to pay trade tax. There are now some costs. How do you calculate the business tax, when it is due and why you do not have to fear tax disadvantage against freelancers - let’s dive in!
What is the trade tax?
Anyone who practices a trade must pay trade tax in Germany. This will normally be levied by the municipality in which your company is located. Therefore, the business tax is often referred to as municipal business tax. The amount of the trade tax is based on the profit you make with your company, not revenue. But also the municipality in which your trade is registered, has influence on the amount of the trade tax payable. Debt is the Gewerbesteuerhebesatz but more on that later.
First, why is the trade tax levied at all? In fact, every business within a locale faces similar obligations. This should be offset by the trade tax. Likewise, the trade tax is intended to ensure that municipalities have an interest in settling and obtaining businesses in their area. You do not have to be afraid of smaller businesses: a fairly high tax deduction ensures that companies are not unnecessarily taxed in times of crisis.
Who has to pay trade tax?
The most important thing before we move into this: if you are a freelancer, you do not have to pay any business tax. Otherwise, every trader in Germany is obliged to pay trade tax. This depends on his trade income. Whether one is a trader or not, can be determined by the activity performed. For example, journalists, doctors, tax accountants and many more do not have to pay business tax, as these jobs are part of the freelance work.
If you are unsure whether or not you have to pay trade tax, there is a simple trick: If you have received a trade license with the inclusion of your business, you are also subject to trade tax. At least if your profit exceeds 24,500 EUR (that's the free allowance) per year. However, this deduction applies only to partnerships and individual companies. Corporations are excluded from this.
Are freelancers preferred for tax purposes?
Since freelancers do not have to pay trade tax, but only income tax, one might think that this professional group is preferred for tax purposes. That is not right! Although traders have to pay trade tax, they can claim it in the income tax return (more in the section "What does trade tax have to do with income tax?"). That can already make many savings - and thus leaves the trader no worse off, as a freelancer, who must pay accordingly more income tax. Do not be worried about this ‘’additional’’ tax - after all, the reasons for all this complication is to create fairness across the board.
Calculate business tax: how does it work?
Calculating the trade tax is not difficult. In general, the calculation is divided into two phases. In the first step, you need to know your profit and use this to calculate the business tax amount. In the next step, the regionally varying trade tax levy comes into play, with which you calculate the actual trade tax. How that looks exactly, we explain in the next sections.
Trade tax amount x rate of levy = tax burden
In the first phase, the tax office determines the trade tax assessment amount. To do this, you give the tax office the profit you made with your trade last year. From this, the deduction amount of 24,500 EUR is deducted and thus finally the taxable profit is determined. This profit is then multiplied by a statutorily determined figure (currently this is 3.5%).
Profit - Free allowance = taxable profit Taxable profit * 3.5 = trade tax credit
Let's calculate this with a profit of 50,000 EUR. We deduct the allowance amounting to 24,500 EUR and receive a taxable profit of 25,500 EUR. This will now be multiplied by the statutory figure of 3.5%. So there remains a trade tax of 892.50 EUR.
The trade tax levy comes into play
In the second phase, the municipality determines the trade tax. For this purpose, she uses the trade tax assessment amount and multiplies it by the tax rate. This varies considerably from one municipality to another and is currently between 200 and 500 per cent. You can talk to your tax office, research online or discuss directly with a tax professional. This point is that the result of the invoice is then the trade tax.
Once the business tax has been calculated, the municipality issues a business tax assessment on which the sum of the trade tax can be found. Now you can pay the business tax to the municipality. This is paid directly to the tax office you are registered with.
How often and when is the trade tax deducted?
Once the business tax amount has been determined for your business, the annual upfront payment is calculated based on that amount. These trade tax prepayments are due then four times a year, always in the middle of the quarter So in each case for the 15th of the months of February, May, August and November.
Certainly, it may be more convenient to pay the calculated trade tax just once a year. But the quarterly prepayment also has its benefits: the advance payment, the financial burden after submission of the next trade tax return is not so high. After all, you have already paid part of your tax. And yes, many freelancers actually forget the tax and then get a shock when suddenly a high tax payment is due for a full year. Since the payment every three months you already have a kind of security.
Assuming that your fiscal year was similar to the previous year, and you have diligently made your upfront payments, you probably will not have to make any large back payments after filing your tax return. Yay! And if the current fiscal year looks to be less than the year before, you'll even get back some of the tax offices (since your prepayments were based on the good fiscal year before).
Where do I transfer my trade tax?
As mentioned, the trade tax is paid to the responsible municipality or the tax office. For details, you will take your trade tax certificate. In addition, you can easily track your community's bank details through Google. Or you ask your local tax office. And always, use the official bills and summaries they send you - with the relevant numbers.
Trade tax declaration: When does it have to be handed in?
Anyone who has a trade and is liable to tax must submit a trade tax return. And always by May 31 of the following year. This is regulated by law. But there is one exception: If a tax consultant takes care of your trade tax return, the deadline is extended to 30 September. In certain cases, even a further extension is possible until February 28 of the following year.
The trade tax return forms the basis for calculating the business tax because it shows your expenses and income. Only with the data from your trade tax declaration is it possible for the municipality in which your trade is based to issue a trade tax notice.
The form you need for your business tax return can be found online. Alternatively, if you find it too complicated to fill in, you can also opt for tax software that will guide you, step by step, through the Trade Tax Declaration. Or otherwise, if it is affordable and preferential to you, a tax consultant can create and submit the business tax and of course the income tax return for you.