Part 2: Being self-employed in Germany - Which taxes do I have to pay in Germany?
When being self-employed in Germany you have to pay several kind of taxes depending on whether you are a freelancer or trade and business. That’s why it is so important to exactly check before business registration whether you are a freelancer or trade and business.
The following taxes have to be paid when being self-employed in Germany:
- Income Tax
- Trade Tax (only when having a trade and business)
When do I have to pay these taxes?
Monthly VAT Return
When registering your business or freelance activity at the German tax authorities you will receive a personal tax number. As of date of business registration you have to submit monthly VAT returns and declare your turnovers and input VAT. In these declarations, the German input VAT you were invoiced is deducted from the VAT you charge. Consequently, there will either be a VAT refund or a VAT burden, depending on your monthly turnover/input VAT.
The VAT return has to be submitted until 10th of the following month e.g. your VAT return for February has to be submitted until 10th March at the latest.
Freelancers who establish a business in Germany need to file monthly VAT declarations for the first 2 years after opening their business. After this two years period, the period of filing VAT declarations is determined by the VAT of the prior year:
- If the total paid VAT for the prior year was less than EUR 1.000, you don’t need to prepare monthly VAT declarations in the future but you need to declare all turnovers/input VAT in your annual VAT return (in German “Umsatzsteuererklärung”).
- If the total paid VAT for the prior year was less than EUR 7.500, you need to prepare quarterly VAT declarations.
- If the total paid VAT for the prior year exceeded EUR 7.500, you need to go on preparing monthly VAT declarations.
Yearly VAT Return
In Germany at the end of the year you have to prepare a yearly VAT return. Generally there is neither a tax burden nor a tax refund. Only in case further turnovers or input VAT have been considered subsequently, this would result in an additional VAT burden or VAT refund. Please note that a VAT burden has to be paid within one month after submitting the yearly VAT return.
Income Tax Prepayments/Annual Income Tax Return
When registering your business at the German tax authorities you also have to provide the authorities with information about your estimated profit. Based on this estimation the tax authorities in most cases will assess income tax prepayments which have to be paid on a quarterly basis (10th March, 10th June, 10th September and 10th December). These instalment payments will be credited to the annual income tax i.e. when you made less profit than estimated you will receive an income tax refund. When you made more profit than estimated there will be an additional tax burden.
Those prepayments will be adjusted for future years when a final income tax assessment for a prior year has been made. Furthermore it is possible to adjust the income tax prepayments during the year in case you know that you will make less or more profit.
Trade Tax (only applicable for trade and business)
At the end of the year you have to prepare a yearly trade tax return in Germany. The city administration will assess trade tax and prepayments on a quarterly basis (15th February, 15th May, 15th August and 15th November). As trade and business (sole proprietor) you have to pay trade tax when the profit is exceeding 24.500 €. Each community has its own multiplier for trade tax. Düsseldorf has a multiplier of 440%. You can offset a part of the paid trade tax (deductible multiplier is 350%) as expenses in your income tax return.
Special Rule for „Kleinunternehmer“ (small business entrepreneur)
If you operate a so called small business with annual turnover not exceeding EUR 17,500 you can opt whether your business will be subject to VAT or not. If you decide that your business is not subject to VAT, you are not allowed to charge VAT in your invoices and are not allowed to claim back input VAT in a VAT declaration.
The before mentioned information do not apply to company forms such as GmbH or AG.
Also interesting: How to distinguish between freelancer and trade and business?