4 things every freelancer in Germany needs to know about their taxes
From registering as a freelancer to charging VAT, saving up your tax payments, and deducting expenses, there’s a lot to get your head around as a newly-minted freelancer in Germany. Accountable, a smart accountancy app for freelancers, walks us through their top tips.
If you’re just starting out as a freelancer in Germany, there’s a lot of new stuff to get your head around. That’s why we’ve gathered all of our best tips here in one place – follow along and you’ll be well on your way to freelancer success.
1. How to invoice your clients
Invoicing your clients is an inherent part of being a freelancer. In Germany, the invoices you send to your clients should have a certain number of features. Make sure you get it right the first time by ensuring your invoice has all of the following:
- Name and address of both yourself and your client
- A unique invoice number
- Date of invoice
- Your Steuernummer or VAT number (Umsatzsteuernummer in German)
- A description of the work you are charging for
- The price per unit (this can also be per hour) and the total amount charged
If your client is located outside Germany, but inside the EU, the requirements are slightly different, as you won’t be charging any VAT. In this instance, you will need to include your client's VAT number on the invoice.
The reason for this is the Europe “reverse charge” regime. This regime states that, when selling goods or providing services between two VAT-taxable entities within the European Union, the seller does not charge VAT. However, the customer declares, pays and deducts VAT in their own country, according to local laws.
2. How to manage your VAT correctly
In Germany, Umsatzsteuer (known as value-added tax or VAT in English) is charged on most goods and services. However, the business providing such goods or services cannot simply pocket the VAT they have charged - they must transfer it to the tax office. This is done via the Umsatzsteuervoranmeldung.
This happens every month or quarter, depending on your turnover. Your local tax office (Finanzamt) will let you know whether you need to make monthly or quarterly VAT returns. In both cases, the return must be submitted digitally, via the Finanzamt’s ELSTER tax portal, by the 10th of the following month.
However, not all businesses are required to charge VAT. Smaller businesses with lower turnover (including freelancers) can gain a VAT exemption by making use of the Kleinunternehmer (small business) designation. You can be considered a small business - and therefore exempt from charging VAT - if you earn less than 22.000 euros in your first year of freelancing and less than 50.000 euros in the following year.
Being classed as a Kleinunternehmer comes with a number of advantages. For example, you will have to do less accounting work. You will also have a competitive advantage against people who are obliged to charge VAT when selling to customers who are private individuals. This is because individuals cannot reclaim VAT, so anything they buy that doesn’t incur VAT is automatically cheaper for them.
However, being a Kleinunternehmer also has its disadvantages. If your business is about to incur a large business expense, for example, you won’t be able to deduct the VAT on the purchase, whereas someone who is subject to VAT could.
3. How to pay income tax in Germany
Conveniently, the German financial year runs from January 1 to December 31. Once the year is through, it’s time to prepare your income tax return, which is usually due to the tax office by July 31 of the following year.
When you become a freelancer in Germany, the Finanzamt (tax office) needs to see a year’s worth of your earnings information before it can make an assessment of how much you owe them, and start dividing it into monthly or quarterly payments. For this reason, the first year of freelancing in Germany can be tricky: you need to save up a year’s worth of income tax without accidentally spending it in the meantime.
Any income above the tax-free threshold is taxed progressively. In 2020, the threshold is 9.408 euros. Remember that as a freelancer, you are only taxed on income after any business expenses have been deducted.
4. How to reduce your tax burden by deducting business expenses
Tax authorities understand that you need to spend money to make your business grow. Therefore they believe that it is the profit generated by your business activities that should be taxed, not your revenue. In other words, this means that you will eventually be taxed on what you earn, minus the expenses that you make for your business. This also means that the higher your business costs are, the lower your net income will be, and the less tax you will have to pay.
In order to claim an expense on your end of year tax return, you must have a receipt for the purchase. This is also important if you want to claim back the VAT. Be sure to keep a record of all these receipts, for at least five years, because the German tax authorities can decide to audit your business at any time - even years after the financial year has ended.
A few things you might be able to deduct as business expenses include:
- Office costs (for renting an office or co-working space)
- Home office costs (a portion of your at-home costs, depending on the size of your office)
- Work-related food and drink (coffees with clients, not your birthday meal!)
- German classes (if you can make the cases that it helps you get new clients)
- Accounting costs
- Client gifts (one per client per year, up to 40 euros each)
- Work-related equipment purchases such as computers, phones, cameras and gadgets
- Work-related equipment hire
As you can see, being a freelancer comes with quite a few administrative tasks. Make sure you never have to waste a precious Sunday on your admin: let the experts take care of it all. Accountable is an all-in-one tax solution for freelancers in Germany. It not only helps you keep track of your expenses and revenue, but it also prepares your VAT returns for you, ready to submit in one click. Try it for free.