Paying taxes as a freelancer in Germany should not be as scary as it sounds. For most of us, it is only a matter of understanding the basics of the German tax system and language barrier. Learn all about German freelancer taxes in this post.
As a freelancer in Germany, you will have to deal with the taxes at some point. Most non-German speaking self-employed people resort to hiring German tax consultants (as I did), however, it turns out to be extremely pricey for filing simple tax reports.
In this post, I will give an overview of the main taxes and tax reports that every freelancer in Germany is required to file and how you can prepare them with any external (or expensive) help.
Here is all about preparing and paying taxes as a freelancer in Germany.
Watch the video version of this guide here. It’s less than 5 minutes!
1) What Taxes Do Freelancers Pay in Germany?
Self-employed people in Germany pay a number of taxes. Mainly,
- VAT (Umsatzsteuer)
- Income Tax (Einkommensteuer)
- Trade Tax (Gewerbesteuer) – Only for those registered as a Gewerbe or sole trader in Germany
Value-added tax (Umsatzsteuer or Mehrwertsteuer) in Germany, is a tax placed on products and services. Usually, every business or self-employed person must pay VAT. The only exception to this is when you are registered as a small business owner (Kleinunternehmer).
VAT is charged at 19% in Germany. Some reductions apply to certain products and services at 7%.
1.2) Income Tax
Income tax is what comes after you have filed your end of the year income declarations to your local Finanzamt. Everyone in Germany has to pay this tax to support social security systems.
What is the income tax rate for freelancers in Germany?
The income tax rate in Germany ranges from 14% to 42%. On top of income tax, there is also a solidarity surcharge of 5.5% and a church tax if you are a member of a church.
As of 2020, anyone with income below €9,408 is exempted from paying income tax in Germany.
As of 2021, anyone with income below €9.744 is exempted from paying income tax in Germany. In 2022, this amount is supposed to raise to €9.984.
This is called Grundfreibetrag or Steuerfreibetrag in German. Everything earned above this amount is taxed.
German freelancer taxes are calculated based on all the different sources of income – including income from self-employment, employee income, stocks, investments, rent etc.
You can calculate your individual netto income and estimated taxes using MyStartupGermany’s freelancer tax calculator.
What are quarterly income tax prepayments (Einkommensteuer-Vorauszahlungen)?
While salaried people in Germany pay income tax on their salary every month, freelancers pay their income tax with quarterly prepayments and a final payment at end of the financial year.
Freelancers in Germany have to transfer the quarterly prepayments to the tax office and pay them off once every three months. The deadlines for these advance payments are:
- 10 March,
- 10 June,
- 10 September and
- 10 December
After submitting your annual income tax declaration, you will either pay the Finanzamt or get reimbursed for the difference between the prepayments and the final income tax amount.
How are the advance tax payments determined?
In the first year of business, this amount depends on your information in the tax office questionnaire. When you register as a freelancer in Germany, you have to provide the estimations for your expected yearly income to the Finanzamt, and they determine the prepayments based on those figures.
If you already have been a freelancer in Germany for over a year, then the amount of the advance payments is calculated based on your total income from the previous year.
But what if you had a great last year and now having a crappy current year (2020 anyone?)
Good news! Advance tax payments are not set in stone.
You can have them adjusted to the changed business situation in the current year. All you need to do is submit an informal application to the tax office.
Finanzamt will send you an adjusted advance payment notice by post. However, the tax office may also demand proof in case of doubt.
2) What Tax Reports Do Freelancers Submit in Germany
As a self-employed person in Germany, you have to make your own tax declarations. These are the main tax reports that freelancers in Germany must submit to their local tax authorities.
- VAT Reporting/ Declaration (annually/ quarterly/ monthly)
- Profit and Loss Statement (annually)
- Income tax Declarations (annually)
In the following sections, you can read about each of these tax reports and how you should prepare them for your Finanzamt.
2.1) VAT Declaration (Umsatzsteuererklärung)
In an annual VAT declaration, you have to summarise the VAT you have paid and received during the financial year. After submission, you will either pay the difference to Finanzamt or get reimbursed by them if the amount differs from your previous payments.
What is Advance VAT Return (Umsatzsteuervoranmeldung)?
Advance VAT return is a VAT declaration that freelancers in Germany have to report to their local tax office on a monthly or quarterly basis.
Whether a monthly or quarterly reporting applies to you depends on how much VAT you had to pay last year:
- over 1,000 Euros VAT – quarterly advance VAT return declarations
- over 7,500 Euro VAT – monthly advance VAT return declarations
Read more about Advance VAT Return (Umsatzsteuervoranmeldung)
Who has to submit Advance VAT Return and VAT declaration?
Every business or freelancer in Germany must submit a VAT declaration once a year, regardless of whether or not you have submitted advance VAT returns during the year.
The deadline for submitting the annual VAT declaration is the 31st of July of the following year.
The advance VAT return must be submitted to the tax office by the 10th day of the following month. For example, the advance return for tax on sales/purchases for January must be submitted by 10 February.
2.2) Profit and Loss Statement (Einnahmenüberschussrechnung/ EÜR)
A typical profit and loss statement is called Einnahmenüberschussrechnung in German (EÜR in short). You prepare this at the end of the financial year before your income tax declaration.
The profit & loss statement is a summary of your annual income and expenses from your freelance work in Germany. In this report, you provide the tax office more details about the income and expenses from your business.
The EÜR statement is used to determine the profit for all sole traders and freelancers in Germany who are not required to prepare a balance sheet. Small businesses (Kleinunternehmer) must also submit an EÜR statement to the German tax office.
In general, if your income is higher than your expenses the EÜR will show a profit and vice versa it will reveal a loss.
What should go in EÜR?
The EÜR is calculated based on your actual cash flow, i.e. the date on which you received a payment or incurred an expense.
For example, if you send a client an invoice in December 2019, and received the payment in January 2020, the income should be added to the 2020 EÜR report. The same concept applies to your expenses.
To create a profit and loss statement, you should summarise your actual income and expenses. The final report should have the following components:
- Information about business operation
- Declaration of business revenue
- Declaration of business expenses
2.3) Income Tax Return (Einkommensteuererklärung)
Sole traders and freelancers in Germany are obliged to declare their previous year’s income to their tax office (Finanzamt). The tax office then uses this data to calculate the due German freelancer taxes.
You generally have until 31 July of the following year to declare your income as a freelancer in Germany. So you can expect to file your freelancer taxes for 2020 by 31.07.2021.
If you hire a tax consultant, then there are up to 14 months to declare freelance income to Finanzamt. E.g. the tax return for 2020 does not have to be submitted to the tax office until 28 February 2022!
Click here to learn how you can file your German freelancer taxes yourself.
What should go in the income tax return?
The income tax declaration is a summary of all your income and expenses during the year and is done to determine the taxable income.
Your income can be based on multiple sources, including income from any side jobs, mini-jobs, investments, real estate, etc. You can also add any state benefits or unemployment allowances to this income.
Your deductions can come from personal expenses, like health insurance, costs of childcare, personal liability insurance, pension fund payments, etc.
It is possible to reduce your taxable income, by deducting a number of expenses.
What happens if you are married?
If you are married, your spouse’s income will also be taken into account.
Married couples in Germany can file income tax together, where they can add the total income together, and then divide it by two. This results in a lower tax burden for married people. This is called Ehegattensplitting in German.
MyStartupGermany’s freelancer tax calculator can calculate your individual as well as joint taxes using the Ehegattensplitting function.
What if my partner is employed by a company?
You can still submit your income tax declaration together, since income from employment is just another source of income, along with your income from self-employment.
How to Prepare and Submit Your German Freelancer Taxes?
You can prepare and submit taxes as a freelancer in Germany electronically via ELSTER.
However, ELSTER is not exactly the most user-friendly tool. Firstly, it is only available in German. Secondly, you need a special authentication certificate that is sent only through snail mail and it takes a couple of weeks to receive it.
While there are several online tax filing software for expats in Germany, there’s only one English tool for self-employed people.
Sorted is one such online tool for filing German freelancer taxes.
I filed my 2019 German freelancer taxes using Sorted (without spending a cent on a Steuerberater). This tool single-handedly takes care of ALL stages of being a freelancer:
- it guides you through your registration process as a freelancer with your local Finanzamt
- it helps you keep a track of your expenses and invoices
- it helps you file your German freelancer taxes –
- Income-tax return (Steuererklärung),
- Annual profit report (EÜR),
- Annual VAT return (Umsatzsteuererklärung),
- Advance VAT declaration (Umsatzsteuer–Voranmeldung)
Sorted is available in simple German and English which makes it very handy for non-German speaking freelancers in Germany.
You can read the full step by step guide for paying taxes as a freelancer in Germany using Sorted.