Paying taxes as a freelancer in Germany—what you need to know
Taxes are complex—especially for freelancers. But don’t despair! Read on to learn what you need to know about taxes for the self-employed.
8 min read
Self-employment offers many perks, especially when it comes to flexibility. But there are also pitfalls—and perhaps none are more present than the tiresome issue of taxes.In this article, we’ll explain the different types of self-employment, the kinds of taxes you have to pay, where you can take advantage of tax savings, and what you should keep in mind when filing your tax return.
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What’s the difference between freelance professional work, freelancing, and self-employment?
If you take on work outside of a traditional employment relationship—meaning you don’t have a fixed employment contract which defines your location, salary, and working hours—then you are considered to be self-employed. This also includes individuals who take on freelance professional work and those who are full-time freelancers.There are two main groups of self-employed individuals—tradespeople (Gewerbetreibende) and freelancers (FreiberuflerInnen). Neither of these groups work for an individual employer, but there are differences between the two—especially when it comes to taxes.If your work is literary, educational, artistic, or scientific in nature, then you belong to one of the “catalog professions”—or Katalogberufe, as they’re known in German. Jobs in these fields are considered “professional freelance work.” If your self-employed work doesn’t fall under one of these occupational categories, then you’re considered to be a tradesperson, meaning you’re subject to trade regulations. If it’s unclear which category you fall under, the tax office will decide whether your work can be classified as freelance when you register your self-employed activity.
What’s the difference between freelance professional work and freelancing?
Freelancers can be both self-employed and work as tradespeople. Each works independently while taking on projects for different clients. Most regularly work for specific companies without a permanent employment contract, meaning they’re responsible for filing and paying their own taxes.The main difference between freelancers and those who do professional freelance work is that the latter aren’t necessarily in independent employment relationships—for example, they may simply take on freelance work as a doctor or teacher, but continually work for the same clients. By contrast, freelancers rarely have fixed clients, working hours, or vacations.
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You are required to pay various taxes on all your self-employed work, provided it meets the minimum threshold. The exact taxes you’ll have to pay depends on whether you work as a freelancer or have a registered trade, and the amount you’ll owe is determined by your annual income, or tax bracket. In the next section, we will explain the taxes that apply to professional freelance work, freelancing, and trades.
Self-employment and income tax
No matter what kind of self-employed work you do—as long as you earn above the income tax threshold, you’ll have to pay income tax. Your tax base (what you’ll pay income tax on) is calculated by deducting your business expenses from your income. The more income you earn with your self-employed work, the more income tax you’ll have to pay.If you register your self-employment with the tax office, be careful not to overestimate your expected profits, as the tax office uses your estimates to calculate the amount of income tax to be paid in advance.
Self-employment and VAT
On top of income tax, there is an additional value-added tax (Umsatzsteuer in German)—a fixed tax charge for all self-employed individuals. This tax is charged on sales of most goods and services, usually at a standard tax rate of 19%. This means that, if you’ve met the income threshold for charging VAT, you’ll need to add 19% of the total amount to each service you provide. Failing to do this may mean that you need to pay it out of pocket. The resulting additional income is then paid to the tax office.
Self-employment and trade tax
Any tradespeople or freelancers that do not fall under the catalog professions are required to pay trade tax (Gewerbesteuer) in addition to income tax. Trade tax is calculated based on profits made each financial year. If your self-employment as a tradesperson falls into the category of partnership or sole trader, you have a tax-free allowance of €24,500.
Self-employment and input tax
If your self-employed work means you are subject to VAT, you can offset the amount you owe against “input tax.” Input tax is included in goods and services that you commission, order, and pay for in your self-employment activities. As VAT was added to these goods and services by the companies that provided them, you can claim and offset these amounts as input tax. In practice, this means that when you make a purchase for your professional activity—for professional equipment, supplies, or coaching, for example—you will effectively not pay the VAT charged because it can be deducted from the VAT you would normally pass on to the tax office.
Self-employment and tax prepayments
“Tax prepayment” (Steuervorauszahlung) is a way for self-employed taxpayers to avoid a large tax bill at the end of the year and—on a macro level—to ensure liquidity from tax revenue. This prepayment is based on previous tax assessments, or on the estimated amount of expected income from your self-employment activities. The tax office will then calculate your prepayments against your actual tax liability on your annual tax return and either issue a refund or charge you the difference.
What tax allowances apply to self-employed individuals?
A tax allowance is a set amount of generated income that is not subject to tax. To reduce taxable income, there are some tax allowances that you can claim for tax purposes—depending on your personal situation.
Personal allowance for self-employed individuals
The purpose of the personal allowance, or income tax allowance, is to ensure that income required for minimum subsistence is not taxed. Workers are automatically entitled to this base living wage, regardless of whether they are self-employed or in a permanent employment relationship. The personal allowance is €11,604 for single individuals ( €10,908 for the 2023 tax year) and €23,208 for married couples who submit their tax returns together (€21,816 for the 2023 tax year). The federal government recalculates this every two years.
Trade tax allowance for self-employed individuals
If your self-employed activity is considered a trade, as an individual or in a partnership you can claim a trade tax allowance of €24,500 per year. Actual income from the trade activity is not taken into account here.
What to watch out for when filing your tax return as a self-employed individual
Tax returns for the self-employed are much more complex than tax returns for standard employees. But many self-employed individuals have higher costs and expenses, many of which they can claim for tax purposes, and that reduces the amount of taxes they have to pay.To make your tax return as easy as possible, the most important thing is to document income and expenses meticulously as you go along. Even if you don’t have an accounting obligation—which is usually the case—as a self-employed individual, you still have an obligation to keep thorough records. So, throughout the year, you’ll need some way of recording all your income and expenses that you’ll need to include in your tax return. This saves you the hassle of looking for them when it comes to completing your tax return.
Taxable operating costs for self-employed individuals
As a self-employed individual, you naturally have lots of expenses that you can and should claim for tax purposes. Operating expenses cover a wide range of expenses that you incur in the course of your freelance work. This may include leased office space, work materials, and travel expenses. If you work from home, you can also deduct costs for either part or all of your home office.Costs that don’t fall under “normal” operating expenses can sometimes be included on your tax return as special expenses. This includes costs such as health and nursing care insurance, donations, childcare, maintenance, vocational training, and much more.If you have to make purchases for your self-employed work from time to time, whether big or small, they may also be tax-deductible. You can have smaller expenses of up to €952 credited to you on your tax return, but you may need to write off more valuable goods over several years.
Forms for self-employed individuals
Within the tax return itself, there are some important forms that you will have to fill out if you’re self-employed. However, some of these forms differ depending on the type of self-employment, so it’s important that you find out exactly whichforms you need to complete as a freelancer before you submit your first tax return when you’re self-employed.
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