Self-Employment in Germany: a Beginner’s Guide
Being a freelancer comes with lots of perks, but the journey into self-employment isn’t always easy. Don’t worry, though! In this guide, you’ll learn all there is to know about becoming self-employed.
10 min read
Whether you’re starting a business or getting into freelancing, self-employment has plenty of benefits — for starters, a much more flexible lifestyle. After all, you’re the one who gets to decide when, where, and how much you want to work. However, life as a freelancer also comes with a few challenges. Beside meeting project deadlines, you need to take care of finding new gigs, writing invoices, getting insurance, and paying taxes. To help you get started, we put together this practical guide to becoming self-employed in Germany. Read on to learn about the pros and cons of self-employment, common mistakes new freelancers make, and much more. Let’s go!
Self-employment in Germany: What you should know
In Germany, anyone who works outside traditional employment is considered self-employed. When you’re self-employed, you don’t have a work contract that lays out the terms of your employment such as location, working hours, or salary. It’s your responsibility to make sure you get paid for the work that you do.
Therefore, one of the most important steps to becoming successfully self-employed is to find clients — and make sure that they’ll be able to pay you. For this, you need to have professional knowledge about the field you’re planning to freelance in. Organizational skills, responsible money management, and lots of personal initiative are extremely important, too. It’s also a good idea to know (at least a little bit) about the tax system in Germany, because your first step into self-employment leads straight to the tax office — so you can get a new tax ID. Once you’ve done that, get informed about how to create legally valid invoices and how to organize your income and expenses efficiently.
If that sounds good so far, you’re ready to get started — that is, if you know which career field is calling your name. If you’re not quite sure yet, then keep reading!
What industry for freelancers is right for you?
Always dreamed of opening your own café? Or do you just want to be your own boss? It doesn’t matter if you already have an idea of what you’re going to do or if you’re still looking for inspiration — before you take the plunge into self-employment, you might want to ask yourself the following questions:
- What do you want to do?
- What skills do you already have?
- What else can you learn?
- Do you want to work as a full-time or part-time freelancer?
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The pros and cons of self-employment
Working from the beach or at a cozy coffee place with just a laptop — it’s a familiar stereotype of freelance life. However, even though self-employment comes with a lot of perks, it has a few downsides, too. Let’s take a closer look at the pros and cons of self-employment.
Advantages of being self-employed
- More freedom. You can work anytime, anywhere, and on anything you want. If you don't manage to get out of bed in the morning, simply shift your working hours later in the day.
- Variety. You can work with different clients and focus on the areas and projects that you enjoy the most.
- Work-life balance. You can plan your work life around your personal life and arrange your working hours (or locations) however suits you best. Feel like traveling? No problem: Just take your laptop with you.
- No salary limitations. Theoretically speaking, there’s no limit to how much you can earn. The more you work, the more money you make.
- New learning opportunities. Working for different clients not only requires technical but also social skills, so you’ll always be learning something new. Professionally and personally, you also benefit from the self-reliance, problem-solving, and project management skills that you learn when you’re self-employed.
As you can see, there are many reasons for becoming a freelancer. For many people, flexibility is a major reason, as well as the increased earning power that you have, depending on the industry and your experience.
Disadvantages of being self-employed
- You’re on your own. Being self-employed often means too much work and too little time off. Freelancers usually don’t work on a team, so there’s no one to share the workload with.
- Irregular income. Be aware that your income will fluctuate, especially in the beginning. The number of gigs you have can vary from month to month, because it might take a few months until you’ve built a solid client base.
- Irregular working hours. Every freelancer knows the dilemma: Last month, you barely had any work, and now you’re working non-stop on multiple projects.
- Lack of security. If you’re unable to work for some reason, you don’t enjoy the same social security benefits that employed people do. As a freelancer, it’s even more important that you plan ahead and prepare for the worst-case scenarios.
- Psychological stress. Great freedom definitely comes with great responsibility. Some people aren’t built to withstand this type of pressure. To avoid burnout, set boundaries for yourself early on and be willing to say no to new gigs if you’re overworked and overwhelmed.
Taxes and insurance for freelancers
Freelancers face quite a few expenses. Beside equipment and rent, remember to include taxes, pension, and other insurance premiums in your budget.
Taxes for the self-employed
- Income tax: If you earn more than the personal exemption — currently €9,744 per year as a freelancer in Germany — you have to pay income tax, regardless of whether you’re in a trade or a liberal profession. Just like the wage tax that employees pay, income tax depends on your overall personal income. But unlike the wage tax, which is usually deducted monthly from your salary, income tax is paid annually and is based on your total income of the preceding year.
- VAT: If your turnover is higher than €22,000, you have to pay value-added tax (VAT). This means you have to add the VAT (usually 19% of the net amount) to your invoices. The German tax office will determine whether you have to declare and pay VAT monthly or quarterly. Small businesses with a turnover of less than €22,000 are exempt from this rule, regardless of whether they’re in a trade or work independently. And another thing: You can deduct business expenses such as rent, internet, office supplies, and more from your VAT return, since those expenses include 19% VAT.
- Business tax: Unlike freelancers who work in other professions, you have to pay business taxes if you run a store or an online shop — unless you’re below the basic tax-free allowance in Germany (currently €24,500). For everything higher than that, you’ll have to pay 3.5% of your earnings as business tax. You need to hand in your business tax declaration and pay in advance, usually on a quarterly basis. But one perk is that you can then deduct the business tax payments from your tax declaration!
- Tax for wages: Do you have employees? Then you probably pay wage taxes on their salaries each month. The wage tax isn’t only deducted from the gross salary of employees. Employers usually have to match the employee’s contribution. For instance, if one of your employees is paying €100 monthly in wage tax, you pay another €100 each month on top of that. The same goes for social security contributions (health, pension, nursing care, and unemployment insurance).
Want to know more about which taxes apply to the different types of self-employment and how to save money on your taxes? Read our guide to paying taxes as a freelancer in Germany.
Handling your taxes effortlessly with Accountable
To help you file your tax return as easily as possible, we partnered up with Accountable, the tax app for freelancers. Simply connect your N26 bank account with Accountable to file your tax return in just a few steps — no prior knowledge needed. Here’s how it works: Create invoices for your clients. Scan your receipts for your business expenses. Check over your finances. Done!
And more good news: As an N26 customer, you get free access to the full version of Accountable for six months, including income tax and VAT returns and all other features. Simply click on this link, create an account, and paste in the promo code. You can find your code under Perks in the Discover tab in your N26 app.
Insurance for freelancers
Insurance is another topic you should consider when becoming self-employed. As a freelancer, you’re not automatically insured through your employer like contracted employees usually are.
The types of insurance that apply to you will depend on your individual circumstances. However, there are some insurance policies that you definitely need to have, such as:
Depending on how dangerous your occupation is, you might also want to take out accident insurance. Speaking of danger: Let’s have a look at common mistakes to avoid when becoming self-employed.
The most common mistakes when going freelance in Germany
- You don’t put enough money aside for taxes. As a freelancer, your income will probably vary from month to month. If you miscalculate your projected income, you might end up with a nasty surprise when it’s time to pay your taxes. Our advice: Use the Accountable app to keep track of your income and expenses. This way, you always know how much you earned and how much money to put aside for income tax.
- You don’t think about your pension. According to the German Institute for Scientific Research, solo-entrepreneurs are at a greater risk of old-age poverty. Even if retirement is decades away, start saving for your pension as soon as possible and invest in pension funds or insurance.
- You forget to deduct recurring bills and business expenses: Admittedly, taxes are complex, especially for new freelancers. However, knowing what you can deduct from your taxes can really pay off in the long run. If you’re not sure, you can always use the Accountable calculator to quickly check whether specific expenses are tax deductible.
- You don’t keep the receipts for your business expenses: Congrats, you know now what to deduct from your taxes. But make sure to keep every single receipt for your business expenses, since the tax office can request receipts from you up to 10 years after you filed your tax return. Luckily, Accountable has an easy solution for this too: With secure photo recognition, you can digitize your bills with just one click. That helps you save space in your home office and find specific expenses with just a quick search.
- You don’t know the important deadlines: You’re saving enough money, regularly paying your pension insurance premiums, and keeping up with all your bills. That’s great — but all that effort doesn’t help you if you miss the most important deadlines. The deadlines for the income tax and the surplus revenue statement are especially important for freelancers. Also remember the deadlines for your VAT return, and (if you have clients outside the EU), the recapitulative statement.
After your first year as a freelancer, the German tax office will determine the amount and frequency of your advance income tax payments. This means that you have to pay a specific amount in advance toward your income tax for the current year. The amount and frequency is based on your income from the previous year. Find out more in our guide to taxes for freelancers in Germany.
Your money with N26
Going self-employed can be pretty complicated — so the last thing you need to be worrying about is keeping your finances organized! With N26 Business Smart, the intelligent business account for freelancers, you can manage your finances directly from your smartphone. You’ll benefit from handy budgeting and saving features, plus 0.1% cashback on all purchases with your N26 Mastercard. And with our partner Accountable, the tax app for freelancers, you can file your tax return effortlessly.
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