Start freelancing in the Germany

The German Freelancing system is not a complex one itself yet, it comes with a series of bureaucratic hurdles that make this attractive economy bit so attractive for freelancers.

If like us you really love the idea of freelancing, and have your mind set on Germany, here is a guide to help you start out.

Where to get started

In german, Freiberufler and freelancer are often considered equivalent terms but, as we’ll soon discover, there are a few options for people looking to freelance in Germany. If you have any doubts on how to register, check with your local tax office. **

Freiberufler

In this case, you’ll need to register as a freelancer with the tax office maximum four weeks after you start. You can inform your local tax office by letter that you are setting up as a freelancer. The letter should contain your contact details, tax identification number, description of the activity and start date.

The next step will be the tax registration questionnaire. You may receive it from the tax office or submit it online via ELSTER. The tax registration questionnaire is extensive, and you will probably need time to fill it out. Once this step is complete, you’ll receive a confirmation letter with your tax number from the tax office.

Gewerbetreibender

If you can’t be classified as a Freiberufler, you’ll need to register a business at your local trade office. The costs involved are high and depend on the municipality. When registering as a business, you’ll still have to register your self-employment with the tax office the same way as for a Freiberufler. At the beginning of your self-employment you’ll be exempt from membership in your regional Chamber of Industry and Commerce (IHK) but it is mandatory for almost all Gewerbetreibende and you’ll need to pay contributions, based on your profit.

As you can see, you have less work to do when registering as a Freiberufler. So it's best to find out in good time whether this is an option in your case.

Where to declare, what, and how much

Starting out as a Freiberufler is relatively easy however, you can easily reach the top tax rate if you earn enough. Additionally, in Germany companies are progressively more reluctant to work with freelancers due to the fact having a full-time freelance employee can potentially cause many problems. Having a GmbH structure, although more expensive (the starting capital is 25,000 Euros), can enhance the attractiveness to potential clients, as the reputation of a GmbH is higher due to its established legal form and the requirement of start-up capital

The opportunity of a GmbH

• Lower taxes: Freelancer profits are taxed as personal income at a top rate of 42% for an annual income of 58,000 euros or more. If your income is below the limit for the top tax rate and you need it completely for your living expenses, a GmbH is not a good idea since it will just represent more costs for you (the formation of a GmbH costs about 1,000 euros and you have to calculate with another 1,000 euros for the more complex accounting). On the other hand, the profits of a GmbH (limited liability company) are taxed at a lower rate of 30% consisting of 14% trade tax and 16% corporate income tax. This means that when a freelancer sets up a GmbH, they can take a salary that covers living expenses and keep the remaining profit in the company, which would be taxed at a lower rate. This profit can then be used for a company pension plan or can be invested in shares, with the added benefit of paying a lower tax on share profits compared to private individuals.

• Limited Liability: This allows you to protect your own assets, because the liability only applies to the company capital. As a freelancer without a GmbH, on the other hand, you could eventually be liable with your personal assets for anything that might go wrong with your business.

VAT (Umsatzsteuer)

In Germany, VAT is referred to as Umsatzsteuer and most businesses providing goods and services must include it in their invoices and charge their clients for it if they earn more than €22,000/year. German VAT rate varies from 7% to 19%, and you will have to return your VAT turnover to the Finanzamt through the ELSTER tax portal.

The frequency of VAT submissions, either monthly or quarterly, is determined by the instructions of your local tax office.

Income Tax (Einkommensteuer)

The term "income" encompasses all of your income, including rent, investments, etc., as well as what you earn as a freelancer. If you freelance in Germany, in addition to VAT, you’ll also need to pay income tax if you’ve earned more than €9,744 during the year.

The German income tax rate ranges from 14% to 42%, plus a solidarity surcharge of 5.5%.

Income tax is due once you declare your income to the Tax Office at the end of the tax year that Runs from January 1 to December 31. We suggest calculating your income tax roughly and saving every month to avoid being surprised and make sure you will be able to afford it at the end of the year. Depending on the situation, you may be reimbursed or asked to pay additional fees if you have paid more or less than required.

When to change company structure

As your business grows, you may want to consider changing the structure of your company. For example, you may want to form a GmbH or a UG. This can provide you with additional legal protection and tax benefits. However, it's important to consult with a tax professional and lawyer before making any changes to your business structure.

What to write on quotes/invoices

When creating quotes and invoices for your clients, it's important to include your business name, your tax identification number, and your contact information. You should also include the date of the quote/invoice, a detailed description of the services or products provided, and the total amount due. If you're collecting VAT, be sure to include that amount on the invoice as well. Additionally, it's important to keep accurate records of all quotes and invoices, as this will help you to track your income and expenses.

More information

To help you through most every step of registration and tax returns, there are resources and services available in both German and English. For more information on taxes for freelancers in Germany, be sure to check out the Finanzamt website (www.finanzamt.de). The Finanzamt website provides detailed information on registration, tax filing, and business structure options. Additionally, the website provides information on self-assessment, VAT, and business structures. This is an essential resource that every freelancer should have on hand.

Another useful link to bookmark is ELSTER, a service for self-employed workers based in Germany to do their taxes entirely online and get information.