Self-employed in Germany? Taxes, tips, and more
Thinking about working for yourself? Our guide will break down what you need to know about taxes when you're self-employed in Germany.
6 min read
Sitting on a beach in Bali with your laptop, free to do whatever you like: It’s the typical fantasy of being self-employed. But no matter when and where you work, there are some obligations you can’t avoid. Along with deadlines, invoices, and pension contributions, you also have to deal with taxes.At the end of the day, self-employment isn’t a hobby — it’s a way to earn an income. You’re classed as self-employed if you set your own working hours, you’re not generally subject to someone else’s instructions, and you aren’t part of a labor organization. Some self-employed people run companies, like their own café or an online shop. Others are lawyers, consultants, or copywriters who work on a freelance basis for various clients. No matter what you do, if you’re self-employed in Germany, you’ll generally have to pay taxes.
What taxes do you have to pay if you’re self-employed, and why?
There are lots of reasons to become a freelancer besides just the flexibility. Depending on your sector and experience, you may be able to earn more, too. But remember to calculate your hourly or day rate as a gross figure. Employees have social insurance contributions and income tax automatically deducted from their gross salary, but self-employed workers need to factor in those deductions for themselves. Probably the most important tax for self-employed workers is income tax.
If your annual earnings from self-employment in Germany are more than the tax-free allowance (as of 2022: €9,984), you’ll need to pay income tax (Einkommensteuer) — no matter whether you’re a freelancer or run a company. Like with any income tax, the amount you’ll need to pay depends on the size of your income. But unlike employees, who generally have income taxes deducted from their salary each month, you pay income tax annually on your entire self-employment income from the previous year. Later, we’ll show you how you can calculate your taxes yourself.
Do you generate more than €22,000 a year in revenue? If so, you need to pay sales tax (Umsatzsteuer), regardless of whether you have a company or work freelance. In other words, your invoices need to include an additional sales or value-added tax — usually 19%. Either monthly or quarterly, you’ll submit a sales tax return and transfer the amount you owe to the tax office. Small businesses with an annual income of less than €22,000 are exempt from this rule.
Bear in mind that your company expenses — like internet, office supplies, and even the rent for your office space — generally also include sales tax. You can deduct these expenses on your sales tax return to save tax, which is helpful if you’re self-employed!
Run a business or an online shop? Then unlike freelancers, you’ll pay trade tax (Gewerbesteuer) — unless you’re under the tax-exempt amount, currently €24,500. Otherwise, you’ll pay 3.5% of your profits to the tax office. You’ll need to complete a trade tax return and make an advance payment, which you’ll usually do quarterly. Incidentally, you can offset your trade tax in your tax return.
Wage tax on employees’ salaries
If you’ve got employees, you’ll also pay wage tax on their salaries every month when you run your payroll. Not only is wage tax deducted from employees’ gross salaries, but employers also need to pay their contribution, which is roughly the same as what your employee pays. For example, if an employee’s gross salary incurs wage tax deductions of €100, you’ll pay another €100 on top. The same goes for employer contributions to social insurance, like health, retirement, and unemployment insurances.
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How much does self-employed tax add up to? An example
There are various ways to calculate your self-employed taxes yourself. If you have a sizable annual income, it’s worth hiring a tax advisor to do this. They’ll handle your income, sales, and trade tax returns for you, saving you a ton of time and math. Of course, it’s cheaper to do your returns yourself. You can use handy tools like Taxfix for your income tax, for example — and if you have an N26 account, you’ll get up to 50% off Taxfix.
Our tip: before you make the leap into self-employment in Germany, think about how much tax you might have to pay. This means you can have a better idea of your hourly rate or prices before you get started. As far as income tax goes, the higher your income, the higher your taxes will be — it can be up to 45%. When you’re calculating your taxes, you first need to deduct your professional expenses from your net income to work out your profit. Your tax bracket (for example, are you married or unmarried?) and church affiliation are also important. Online tools like the Federal Ministry of Finance’s income calculator are helpful, offering calculation formulas and tax rates. Here’s a simplified example:
- 2022 income: €50,000
- Professional expenses: €5,000
- Taxable income: €45,000
- Income tax (unmarried): €10,111
So, you’d pay €842.58 each month. That’s a hefty sum, so you need to make sure you include it when you’re calculating your prices, on freelance platforms, for instance.
Want a rough estimate of the sales tax you’re likely to pay? Just add up all the sales tax on your outgoing invoices that your customers have already paid for a given quarter. Then, deduct the sales tax you’ve already paid on incoming invoices (i.e. invoices you’ve paid during the same period). N26 Spaces (sub-accounts) can help with this. For example, you can set up a sub-account for sales tax. As soon as your customers have paid their invoices, you can move the sales tax that you collected over to the dedicated Space. This means you’re not at risk of accidentally spending the money. After all, 19% is hardly peanuts! You can find more tips in our FAQs for freelancers.
Employed and self-employed: what taxes do I need to pay?
Want the freedom of going freelance and the security of a permanent job? You can! You can work full-time or part-time and also generate income from self-employment on the side. If you have a side job in which you’re self-employed, you might need to pay taxes on that income. The amount you’ll have to pay depends on your total income from all sources. Find out more in this article.
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Your finances at N26
As you can see, there are important things to pay attention to when you’re self-employed in Germany. But don’t stress—we’re here to help, and not just during tax season. Our blog has all kinds of useful tips, including ideas for your portfolio. And with N26’s 100%-mobile business bank accounts, you’ll be just as flexible as your working hours. If you’re still at the start of your self-employment journey, our free business bank account is the perfect option for you. Keep an overview of your income and expenses with the Statistics feature. Plus, paying invoices is as easy as dragging and dropping, no matter the currency—and with zero fees, too. Want an upgrade? With our Smart, You, and Metal premium accounts, you’ll get access to N26 Spaces (sub-accounts), each with their own IBAN. Create up to 10 sub-accounts for your taxes from self-employment or use Rules to set up standing orders for your monthly payments. Compare our business bank accounts and find the right option for you.
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