Do you want to work on yourself in Germany but legal terminology confuses you? Being self-employed in Germany can be done in different ways such as opening a business as a trader as classical trade freelancing.
These are two different self-employment types and you need to know all distinctions and nuances between them so you can decide which one is fit to you.
Overall, in Germany self-employment divided into three different terms: self-employed (Gewerbe), freelancer and freiberufler. Although they all are quite similar, behind each hides a different origin and more importantly different legal obligations. The classification also decides, for example, whether an entrepreneur must pay trade tax (Gewerbesteuer) or not.
Before worrying about documents, registration, taxes and so on, you need to understand the difference between being a freelancer and being self-employed in Germany.
Self-employed in Germany
Self-employment is one of the popular ways to work independently in Germany. Usually, it’s a trader who carries out a trade or a company. To start you need to register a Gewerbe (trade) in the local trade office, this is the basis of your business, even if it’s one-man trade.
But “Gewerbe” can also be confusing. You also have a trade when you only earn online with Affiliate Marketing. That means having a trade isn’t mandatory having a shop or a Cafe. In simple words, a trade means any commercial activity.
Here are legal forms of self-employment in Germany, but you can found only one of them:
- Solopreneur/Proprietorship (Einzelunternehmen) – most common type
- Society of civil law (GbR)
- Open trading company (OHG)
- Partnership Company (PartG)
- Limited partnership (KG)
- GmbH Co. KG
Or limited liability company such as GmbH and joint-stock company – AG. However, you will need to have the starting capital to be able to found them.
Therefore you can become self-employed through proprietorship or by opening your own company. Self-employment is possible in almost every industry.
If you decide for your own company tax structure will be different that I describe in this post. Read more here about taxation related to GmbH in Germany.
Self-employed people most likely have a kind of ownership in Germany, such as a shop, small office, or any other physical representable where they sell their products and services.
That’s why you need to register a Gewerbe (trade) in order to “trade”. For example, if a freelancer in Germany runs a company with a” commercial ” name runs the risk of being classified as a trader or proprietorship and falling under the trade tax liability.
Legal term of being self-employed in Germany:
- it’s a form of gainful employment
- independent of an employer
- available for independent work
- freedom of decision about the orders
- to have customers
- have advertising possibilities
- bookkeeping and taxation must be done yearly
Keep in mind that self-employed in Germany can’t receive unemployment benefits (Arbeitslosengeld I) in case of bankruptcy, however, they are protected by a work law (Arbeitsrecht).
Registering as Self-employed in Germany (Gewerbetreibende)
In contrast to freelancers, self-employed must register self-employment as a business.
As I already mentioned first you will need to register a Gewerbe (trade) at your local Gewerbeamt (trade office). Please note that in this case, you will need to register your Gewerbe before going to your Finanzamt for your tax ID.
What you will need to take with you to the trade office:
- a valid passport or national ID document
- a residence or settlement permit (if you are from outside the EU)
- depending on the sector in which you want to work (eg. catering), a permit/authorization
- A craft card (Handwerkskarte) or trade card (Gewerbekarte) if you will be working in the trade or craft sectors
- between EUR 10 and EUR 40 for the registration fee, depending on the municipality
After this, your business will automatically take on the legal structure of sole-proprietorship (Einzelunternehmen). You don’t need any capital, however your liability now unlimited.
We aren’t talking here about how to set up a company, it’s another story, which requires other steps and starting capital.
As a self-employed, you will be responsible for your health insurance. If choosing a public provider, a business owner will be obligated to pay 14,6% of the monthly income for insurance contribution, to avoid it, it’s recommended to sign for a private one. Private insurance companies charge customers independently from their income, therefore, it will save you some good amount of cash every month. Best health insurance for expats, international self-employed, and business owner – Ottonova.
Freelancer in Germany
Freelancer translates as a Freiberufler in Germany, but this term is wrong and actually qualifies a special form of self-employed which I will describe later on.
Yet freelancers are called free employees (freien Mitarbeitern) in Germany because they do work but the company isn’t obligated to provide them benefits that regular employee receives.
Freelancers aren’t directly employed by a company as employees but receive work orders from different companies or clients. This means that freelancers are primarily employed during a project, for example, or support a company in certain tasks and challenges. They independently manage their working time, load, working place, etc.
Whereas a Freiberufler generally has their own practice, firm or a studio where customers visit them to receive their services.
Freelancers distinguish themselves from tradesmen (self-employed) by their professional qualifications and the independent work they can accomplish for other businesses.
Their clients are mostly other businesses and not the end customers (consumers). For example, a web development agency hiring a web developer or graphic designer. A business hiring a marketing consultant, etc.
Their employment relationship is often regulated by a work or service contract.
Basically, freelancers are independent service providers, he has no employees and can freely make their services available to any company.
Freelances are neither involved in the general work processes of the company nor bound by instructions, but primarily works independently on the respective (partial) project.
In Germany, they are mainly active in the fields of media, advertising and IT, but it can range and potentially freelancing is much more than only these areas.
Besides, freelancers responsible for working conditions such as working time and place where they actually do the work. In terms of income, freelancers don’t receive a regular, fixed monthly income, but are usually paid an hour’s salary or an agreed beforehand compensation.
Description of freelancers in Germany:
- self-employed person who carries out orders of a company
- has a service or work contract
- no social security obligation
- employment in the context of a temporary employment relationship
- no-strings-attached/not bound by instructions
- usually several clients at the same time
- work at their client’s office or remotely from their home office or a coworking space
Find the job as a freelancer in Germany:
Registering as a Freelancer in Germany
The registration process is more straightforward and easy than for self-employed. Firstly freelancers don’t require to register Gewebe at the Gewerbeamt (trade office).
However, if their qualifications don’t fall into Freiberuf (free profession) they also need to register a Gewerbe and pay tax accordingly.
Read more about Freiberufe below.
So as a freelancer you will only need to register with the tax registration office (Finanzamt) and receive your business’s tax ID.
This is simply done by submitting the completed Tax Number Registration Form (Fragebogen zur steuerliche Erfassung). After you will get your tax ID. It’s a unique number that will be used by you to charge your clients and by the tax office to collect taxes from you.
Who is Freiberufler?
Freiberufler is oft confused with freelancers in Germany. It literally translates as a free profession. And it’s somewhat true, because termination Freibufler can be used only in connection with particular occupations.
If holders of these professions become self-employed they called Freiberufler. It’s especially relevant for legal stuff, such as taxation and registration prozess.
Their clients are generally end-customers. i.e patients that need medical treatment from a doctor, clients looking for legal help from a lawyer, or professionals who need tax consultation, etc.
In Germany, free professions include:
- medical professions: doctors, dentists, midwives, practitioners of alternative medicine, psychologists, physiotherapists and occupational therapists
- lawyers, notaries, attorneys
- coaches, teachers
- graphic designers
- engineers (IT included), architects
- commercial chemists
- auditors, inspectors, tax consultants, economics and business consultants
- journalists, writers, photojournalists
- interpreters, translators
- traffic controllers
Or other persons who pursue a scientific, artistic, literary, teaching or educational activity and similar professions.
By far most common are doctors, lawyers, and architects. Freiberufler often open own practices and offices there they serve private clients.
Anything which is not covered under these professions isn’t considered as a Freiberuf in Germany. Therefore you can register as a normal freelancer if your expertise allows you to work on other businesses or become self-employed and register a Gewerbe.
From the legal side freiberufler exempt from trade tax and don’t necessarily have to keep books, they don’t have to register a trade (Gewerbe) like self-employed do. However, they still need to pay income tax as any other individual who has an income.
Tax Differences Between Self-employed and Freelancer in Germany
Since tomorrow I am having exam on business taxation, I feel quite confident speaking in this topic:)
Traders (self-employed) are obliged to pay trade taxes, freelancers-freiberufler are exempt from this obligation but others aren’t and have to pay it together with the traders.
Both of them have to plan ahead of the time how they will pay taxes next year to avoid a troublesome situations.
The following overview illustrates the tax difference between freelancing and self-employment:
- Freelancers don’t have to register a business
- Freelancers-freiberufler don’t pay a trade tax
- Freelancers aren’t subject to trade supervision
- Freelancers aren’t subject to trade law
- Freelancers aren’t subject to commercial law
- Freelancers aren’t subject to the obligation to be members of a chamber
- Freelancers aren’t required to keep accounts (regardless of the amount of income)
- Freelancers only have to submit a surplus income statement for the annual accounts
Read more about taxation in Germany on their official website.
Einkommensteuer (Income tax)
In Germany self-employed are exempt from income tax up to an annual income of 9,408 EUR, anything earned beyond that must be taxed. The income tax is calculated depending on the annual income, the higher the income the higher the taxes. Overall, the tax rate is between 6% and 42%.
For freelancers and self-employed people, the income tax will apply to everything they earn with their activities. The income tax has to be paid yearly before the 31st May to the Finanzamt. It is a part of the Steuererklärung (tax declaration).
For the second or third year of your independent work, Finanzamt usually decides to set quarterly payment instead, based on previous declarations.
This means that instead of paying the whole amount at once every year, you need to transfer a part of it every quarter. This has the advantage for your financial planning and cash flow.
Gewerbesteuer (Trade tax)
As we already spoke this tax only applies to Gewerbetreibende (self-employed/trader) and to freelancers who don’t fall into the category of Freiberufe. Therefore only freiberufler exempt from these taxes.
Also, limited companies, partnerships, and joint-stock companies are all subjected to this tax.
Trade tax is a responsibility of each municipality in Germany, the amount varies from municipality to municipality (from city to city.
This tax applies to your overall turnover for the year. Self-employed/freelancers only need to pay a trade tax if their annual revenue annual higher than 24,500 EUR.
Trade taxes are paid to the Finanzamt and are also a part of the tax declaration, they need to send in before the 31st of May. For high-earners, you can also expect quarterly payments. The tax declaration itself has to land the latest on 31. Juli at Finanzamt.
The amount of trade tax to be paid is determined by the municipality in which your place of work is located. In addition, the sum depends on your income.
Both self-employed and freelancers are obligated to pay VAT or Umsatzsteuer.
Each self-employed in Germany needs to pay taxes on goods or services they sell. The good thing about VAT that at the end of the year you can claim a return in taxes on purchased items or services.
Freelancers and businesses must prepare their VAT declarations monthly for the first two years. After that, how often you need to declare VAT will depend on how much you earned in the first two years.
If your VAT the previous year was less than 1,000 EUR you don’t need to prepare VAT declarations in the future, but you need to declare all revenue in your annual VAT return (Umsatzsteuererklärung).
For VAT declarations less than 7,500 EUR you’ll need to prepare quarterly declarations.
There are two rates for Value Added Tax (VAT): reduced 7% and regular 19%. Which one applies to you depends on the type of service or product you serve in your business.
The reduced tax rate of 7% applies to food, books, newspapers, works of art and hotel accommodation, but copyright-protected texts and other services may also fall into this category.
If you are not sure, you should consult with your tax advisor or the tax office. All other goods and services are taxed at 19%.
Some exception to VAT:
If your yearly revenue is lower than 50,000 EUR and earning under 17,500 EUR you can avoid VAT taxes. This especially makes sense, if you don’t have large purchases for your freelance work and can therefore not get a return in tax on purchased items.
Furthermore, you save the time and money you would have spend on accounting and other legal things.
Solidarity surcharge is the weird tax, which everyone needs to pay in Germany, even employees. It has a fixed rate of 5.5% of the income tax to be paid.
Every self-employed person and freelancer is obligated to pay income tax, VAT. Self-employed also pay trade taxes. However, income taxes will be calculated only after the deduction of advertising and some other costs, which are eligible to deduct.
An additional 5.5% solidarity surcharge must be paid on the final income tax amount.
Let’s imagine that you are self-employed, live and receive your income in Frankfurt, don’t have employees and your yearly profit is 50,000 EUR.
Income tax: 50,000 EUR profit * 25% tax rate = 12,561 EUR tax liability
The solidarity surcharge: 5,5% from 12,561 EUR = 690 EUR
Gewerbesteuer (trade tax) 50,000 EUR – free tax-free 24,500 EUR = 25,500 EUR
25,500 * 3.5% trade tax rate = 892,50 EUR
892,50 EUR * 460 rate for Frankfurt /100 = 4,105 EUR in the trade tax
Total: 12,561 + 690 + 4,105 = 17,357 EUR tax payments in this year, therefore your net income is 32,642 EUR.
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