Oh, the German tax system. Beautifully intricate or just plain dysfunctional? After reading our guide on German taxes for the self-employed, we'll let you decide.
Yes, freelance taxes in Germany can sometimes be a hassle… Still, they’re inevitable. To fly under the Finanzamt's radar and avoid missing any big deadlines, it’s vital you learn about the different tax types. So let's get started!
What's included in our tax guide?
- Company types and self-employed taxes
- Introducing income tax and corporation tax in Germany
- Income tax (Einkommensteuer) – for sole proprietors
- A note on church tax (Kirchensteuer)
- Corporation tax (Körperschaftsteuer) – for corporations
- A note on the solidarity surcharge
- Trade tax (Gewerbesteuer) – for Gewerbe only
- Value Added Tax (Umsatzsteuer) in Germany
- Tax returns for the self-employed
Pep talk! A note for self-starters
You’ll notice something pretty early on in your self-employment: while taxes are usually deducted automatically from employees’ wages, the self-employed have to show some initiative. Don't worry, you've got this.
Company types and self-employed taxes
Which one are you? Please pick from the following.
- Sole proprietorship (Freiberufler, Gewerbe)
- Partnership (GbR, OHG)
- Corporation (GmbH, UG)
Your company type determines which taxes you’ll pay as a self-employed person. Your sales and profit also play a key role. We’ll break it down.
Introducing income tax and corporation tax
These two taxes make up the German Federal Government’s main income sources. Income tax is paid by ‘natural persons’ – a legal term you’ll often hear in Germany, which in this case means someone who is personally liable for their business’ debts (i.e., sole proprietorships). Corporation tax, on the other hand, affects only corporations. The clue is in the name.
Income tax – for sole proprietors
Are you a Freiberufler or Gewerbe? If you’re one or the other, you’ll pay income tax (Einkommensteuer) in Germany.
To do this, you either create:
- An income surplus invoice
- A profit and loss statement (always at your fingertips, in Holvi)
How is income tax calculated?
It works like this:
- At the beginning of your self-employment, you fill out the Questionnaire for Tax Collection (Fragebogen zur steuerlichen Erfassung) on ELSTER, and provide an income estimate
- Based on your income estimate, the tax office calculates your income tax prepayment (Einkommensteuervorauszahlung). You pay this monthly to start.
- At the end of a tax year, you submit an income tax return (Einkommensteuererklärung). The tax office determines the final amount of income tax based on your actual annual income. If it differs from your estimated income, you either make back payments or get a partial refund – cha-ching!
How much is income tax in Germany?
As in most countries, how much German income tax you pay varies with your income level. The tax rate is between 14% (base rate) and 42% (top rate, for big earners).
A note on church tax (Kirchensteuer)
Church tax is collected alongside income tax if you’re part of a religious community. The church tax is 8 – 9%, depending on which state you’re in.
In Germany, if you're a member of any religious communities, you'll need to pay church tax (Kirchensteuer). You must state your religion when completing Anmeldung.
Corporation tax (Körperschaftsteuer) – for corporations
Remember, income tax only affects natural persons (i.e., anyone operating as a sole proprietorship). If, on the other hand, you operate as a GmbH or UG, you’ll pay corporation tax on your profits.
Note – Are you a partnership?
You might notice partnerships aren’t included in this guide. They’re a little more complicated, and not really our thing. But if that’s you, try this page.
How much is the corporation tax?
Corporation tax is a standard 15% of annual profit, across the board.
And what about your personal salary?
As a founder of a GmbH or UG, you pay yourself a managing director's salary. As with any employee relationship, you – or more precisely your company – pay tax on this salary.
A note on the solidarity surcharge
For a long time, the solidarity (‘soli) tax applied to parents and served to finance the costs of German unity. But as of 2021, it no longer applies to around 90% of German taxpayers. The solidarity surcharge is 5.5% of your income tax or corporation tax.
Who pays the solidarity surcharge in 2021?
As of 2021, the ‘soli’ surcharge only applies when your combined gross annual income exceeds €151,000, or €61,000 for single taxpayers.
Trade tax (Gewerbesteuer) – for Gewerbe only
As soon as you’ve registered your Gewerbe and reached a certain profit level, you’ll have to start paying trade tax. Remember, whether you have to register a business at all depends on how you classify your activity, as a Freie berufe or as commercial work.
Contrary to income tax and corporation tax, which is collected by the Federal Government, trade tax is collected by local authorities. A portion of it is then shared with the Federal Government and the Länder (state governments).
Who pays trade tax in Germany?
Anyone who registers a business (i.e., not a Freiberufler) and whose profit exceeds €24,500 must pay trade tax (Gewerbesteuer).
How much is trade tax?
Calculating trade tax is a little more complicated. That’s because on top of the base rate there’s an additional local tax, called Hebesatz, which varies regionally.
Here’s how it goes:
- Start with a base rate of 3.5% of your trade profits (not revenue)
- Add on between 200 – 900%, depending on the municipality
This brings the trade tax to at least 7%. However, as a rough guide the average trade tax rate in Germany is 15%.
Tip – Living in Berlin?
In Berlin, the Hebesatz is 410%. This makes the total trade tax 14.35% of your profit.
Do Gewerbe pay more tax than Freiberufler?
While Gewerbe are responsible for paying the extra trade tax, this is offset against income tax deductions. Most of what you pay in trade tax you get back as income tax credit.
Income tax credit is 13.3% of your profit. So if you live in Berlin, where the trade tax is 14.35% of your profit, you’ll get back 13.3% of that.
- 14.35 - 13.30 = 1.05
So you pay an extra 1.05% compared to Freiberufler. Not too bad, after all.
Value Added Tax, or VAT (Umsatzsteuer) in Germany
In Germany, you pay VAT on most services and products. As a self-employed person, you also need to collect VAT on your goods and services, and in turn pay this to the tax office.
The only exceptions are for certain occupational groups, goods and services, and for small businesses (Kleinunternehmer).
How much is VAT?
VAT is usually 19%, but a reduced rate of 7% applies for basic food, books and visits to the doctor.
What is the ‘input tax deduction’ (Vorsteuerabzug)?
For the self-employed, VAT is in constant motion – ebbing and flowing with your business’ ins and outs.
- On each product/service you sell, you collect VAT and pay this to the tax office
- On each product/service you buy, you pay VAT to another company. This is called input tax (Vorsteuer)
Your VAT balance is your VAT collected minus VAT paid (input tax). This process is called ‘input tax deduction’ (Vorsteuerabzug), and it reduces how much VAT you pay in total.
Tip – See your VAT balance in real time
How much of your earnings are actually yours to keep? See you real-time VAT balance straight in your Holvi business account – so you always know what you owe. No surprises.
Avoid VAT with the small business regulation (Kleinunternehmerregelung)
As a small business owner (Kleinunternehmer), you’re 100% exempt from paying VAT. This regulation is designed to reduce the administrative burden VAT puts on the self-employed.
Who's eligible for the small business regulation?
Do you tick these boxes?
- You’re self-employed
- Have a revenue of less than €22,000 in the current financial year
- Predict a revenue of less than €50,000 in the following financial year
If so, you’re eligible to become a ‘small business owner’ (Kleinunternehmer), and can opt out of paying VAT. This also means you can’t claim back any input tax.
Benefits of the small business regulation
As a small business owner, you enjoy:
- A competitive advantage – since you don’t charge VAT, you can offer products or services at a lower price
- Less admin – no monthly of quarterly VAT payments!
- Easier taxes – You don’t have to submit an annual VAT return
If you have lots of private clients, this might make sense. You can offer them lower prices, as you’re not obliged to collect VAT. But if you deal with lots of corporations, this won’t affect you much.
Disadvantages of being a small business owner
Once you become a small business owner, you need to mention this on each invoice. This means that your customers know your revenue. Here are some disadvantages:
- No VAT deductions – you’re unable to deduct VAT from business expenses
- Small player reputation – the absence of VAT is noticeable on invoices, and while your clients will enjoy paying less, they’ll perceive you as a small business. Depending on your industry, this can leave a bad impression.
So think carefully about what’s right for you. Does the small business regulation really help you financially? Does it let you grow?
Note – Careful what you sign up for
By signing up as a small business owner, you lock yourself into this decision for 5 years. It goes without saying, anything lasting 5 years should not be taken lightly. Consult with a tax advisor to decide if it makes sense for you to operate as a small business owner.
Tax returns for the self-employed
Income tax return (Einkommensteuererklärung)
If you operate as a Freiberufler or Gewerbe.
- You make monthly or quarterly prepayments
- You submit an annual income tax return (Einkommensteuererklärung) at the end of the financial year
Corporation tax return (Körperschaftsteuererklärung)
If you operate as a GbR, OHG, GmbH or UG.
- You make monthly or quarterly prepayments
- You submit an annual corporation tax return (Körperschaftsteuererklärung) at the end of the financial year
Trade tax return (Gewerbesteuererklärung)
If you operate as a trader (Gewerbe) and not as a Freiberufler.
- You generally make monthly or quarterly prepayments
- You submit an annual trade tax return (Gewerbesteuererklärung) at the end of the financial year
VAT returns (Umsatzsteuervoranmeldung)
For all self-employed business types except ‘small business owners’ (Kleinunternehmer).
- You make monthly or quarterly VAT returns based on your income and expenses (Umsatzsteuervoranmeldung)
VAT return (Umsatzsteuererklärung)
For all self-employed business types.
- You submit an annual VAT return (Umsatzsteuererklärung) at the end of the financial year
- Small business owners (Kleinunternehmer) are also required to do this, only in a simplified form
So what do you think about German taxes for the self-employed?
Want to learn more about freelancing as an expat in Germany?
What do you think? Is the German tax system beautifully intricate? It's certainly interesting, that's for sure! We hope this article helps you understand your responsibilities with respect to paying taxes on your self-employed work in Germany. If you want to explore more expat topics, check out: