Probably freelancer taxes in Germany aren't your favorite topic. The whole thing can seem confusing at first, or even scary. Maybe you don't even know where to start, or you fear high back payments. We give you the facts, so you don't lose track of the different types of taxes.
Differences based on status and legal form
When it comes to taxes, it makes a difference whether you are a freelancer or a tradesman (in German: Freiberufler or Gewerbetreibender). In the second case you have to pay trade tax, in the first you don’t. Your chosen legal form plays a role too: Are you self-employed or have you founded a corporation, for example a GmbH or UG? In the latter case, for example, corporate income tax is due. We focus the situation for freelancers without a corporation for the sake of simplicity in this article.
Taxes as a freelancer in Germany: income tax
Just like employees, you have to pay income tax as a freelancer. (In German, it is called Einkommensteuer.) However, this tax is not withheld directly from your salary, as is the case with salaried employees. Instead, you have to take care of the payment yourself. When you register as a freelancer with the tax office, you fill out the tax registration questionnaire and indicate your expected income.
On this basis, you will make advance payments for income tax. Make sure that you don’t overestimate your income at the beginning. Otherwise, the advance payments may be too much of a burden for you. After your first tax return, the amount of the advance payments will be adjusted. You will then be refunded any overpayments, but you may have missed the money in the year before.
Income tax for freelancers is levied on the profit, i.e. your income minus the costs of your business. Germany uses a progressive income tax rate. That means, the higher your profit is, the higher your tax rate will be.
By the way: There is a tax-free amount (Grundfreibetrag) for income tax in Germany. Up to this amount, income is tax-free. In 2022, it will be 10,347 euros.
Taxes as a freelancer: value-added tax (VAT)
Value-added tax is also known as sales tax, and it is due on almost all goods or services in Germany. (The German terms are Umsatzsteuer and Mehrwertsteuer.) The standard rate is 19 percent, but there is a reduced rate of 7 percent. For you, this means that you add the tax rate that applies to you to your invoices. If you want to charge 100 euros, your customer will pay 119 euros if you use the regular sales tax rate. The reduced rate is applicable, for example, when you write texts.
You don’t keep the sales tax you charge, but you pass it on directly to the tax office. The payment is usually made monthly. Of course, you also pay sales tax yourself when you purchase products or services for your business. In this context, it is referred to as input tax (in German Vorsteuer). You can deduct this amount from the sales tax collected before you pay it to the tax office.
For this purpose, you use the advance VAT return (in German Umsatzsteuer-Voranmeldung): You enter the sales tax and input tax for the previous month and this results in the sum that you have to pay (the so-called payment charge, in German Zahllast). Under certain circumstances, you can even get a refund if the input tax you have paid is higher than the sales tax you have charged. However, this should not be the rule, because then you would permanently spend more than you earn.
By the way, you only have to pay sales tax as a freelancer if your client is located in Germany too. If this is not the case, there are several possibilities:
- If the client is located in the EU and has a VAT ID, you do not charge VAT.
- If the client is located in the EU and does not have a VAT ID, you charge VAT.
- If the client is not located in the EU, you do not charge VAT.
Most freelancers can choose between debit taxation and actual taxation (in German Soll-Versteuerung and Ist-Versteuerung) for sales tax if they do not make more than 600,000 euros in sales per year. This can be an important decision. The difference between the two options:
- With actual taxation, you only pay the sales tax in the month in which you receive it, i.e. when the customer has paid the invoice.
- With debit taxation, you pay the sales tax for the month in which the invoice was issued - regardless of the receipt of payment.
If customers fail to pay high invoices for a long time, this can mean liquidity problems for you with debit taxation. Actual taxation often makes more sense for freelancers. You can apply for it directly when registering or apply for it later.
Sales tax exemption with the small business regulation
Under certain conditions, you can be exempted from the sales tax obligation by the so-called small business regulation (in German Kleinunternehmerregelung). You then don’t have to charge sales tax, and this is noted on your invoices. The prerequisite: You have made a maximum of 22,000 euros in sales in the past fiscal year and are not expected to make more than 50,000 euros in the current fiscal year.
As a small business owner, only the net amount without sales tax is shown on your invoices, and you don’t have to submit an advance sales tax return. However, you cannot reclaim the input tax you have paid yourself on purchases. Therefore, you should carefully consider whether this status makes sense for you or not.
Taxes as a freelancer: Business tax
You only have to pay this tax if you are not classified as a Freiberufler - they are exempt from it. If you have to pay it, an exemption amount of 24,500 euros per year applies. You only have to pay trade tax on profits above this amount. The exact tax rate depends on the municipality in which you have registered your business.
Tax return as a freelancer
As a freelancer, you are obliged to file a tax return. With a tax advisor, you save time and nerves, you make sure that everything is done correctly, and you exhaust all possibilities to save taxes. Of course, you can also work on your own and prepare the tax return yourself.
As a freelancer, you have it easier, because you can use cash-based accounting (in German Einnahmen-Überschuss-Rechnung, EÜR), and list your income and expenses in it. It is simpler than a balance sheet, which you always have to submit as a tradesman with a profit of over 60,000 euros per year.
Part of your freelancer tax return is also an annual return for sales tax and possibly for trade tax, if you are not a Freiberufler.
The submission deadline depends on whether you prepare the tax return alone or with a tax consultant. In the latter case, you have more time and can submit it by the end of February of the year after next (for example, by the end of February 2023 for the year 2021). If you do the return yourself, you have until July 31 of the following year (for example, July 31, 2022 for the year 2021). Due to the pandemic, the filing deadlines for the 2020 and 2021 declarations have been significantly extended, and this will also occur for 2022.
Nevertheless, it is always advisable not to put off your tax return for too long. You can then close the year for yourself, and often you get money back.
Save taxes through business expenses
If you want to reduce your tax burden as a freelancer, you can do so through business expenses. They are deducted from your profit and thus reduce the amount on which you have to pay taxes. It's best to keep receipts for all deductible expenses and file them properly, for example in your accounting software.
Examples of such expenses include rent for your office or a coworking space, office supplies, training costs, your laptop, or software you need for your work. If you are unsure what is deductible, ask your tax advisor.
By the way: As a 9am member, you are entitled to a call with a tax advisor. Learn more here and sign up for free.
What taxes do freelancers pay in Germany?
As a rule, freelancers in Germany pay income tax and pay the sales tax they collect to the tax office. They can deduct the input tax that they themselves have paid on purchases. If they get the Freiberufler status, they are exempt from trade tax.
When are freelancers in Germany liable to sales tax?
Freelancers must charge and pay sales tax if they do not make use of the small business regulation (Kleinunternehmerregelung) and are thus exempt.
What can freelancers deduct from taxes?
Various business expenses can be deducted from taxes, for example office rent and work equipment. A tax advisor can help with the assessment of what is deductible and what is not.
Do freelancers have to pay business tax in Germany?
If freelancers get the Freiberufler status, they are exempt from trade tax. Otherwise, they must pay it.
What is the tax rate for freelancers in Germany?
The tax rate depends on the amount of profit. The more a freelancer has earned, the higher their taxes will be.
Please note: We have prepared this text to the best of our knowledge, but it does not replace legal or tax advice.