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 or becoming a freelancer.
These are two self-employment types, and you need to know all distinctions and nuances between them to decide which one fits you.
In Germany, self-employment is divided into two terms: self-employed (Gewerbe) and freiberufler. Different rules, registration, and legal aspects apply for each of them. The classification also decides, for example, whether an entrepreneur must pay a 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. If you want to do freelance work on the side of your full-time job, read this article.
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 start 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 companies such as GmbH and joint-stock company – AG. However, you will need to have the starting capital to be able to start 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 to own a company, the tax structure will be different from what we describe in this article. 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 representative where they sell their products and services.
That’s why you need to register a Gewerbe (trade) 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.
The 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 already mentioned, 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 (e.g., 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 is now unlimited.
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, signing for a private one is recommended.
Private insurance companies charge customers independently from their income; therefore, it will save you a good amount of cash every month. Ottonova is the best health insurance for expats, international self-employed, and business owners.
Freelancing in Germany
Freelancer translates as a Freiberufler in Germany, but this term is wrong and qualifies as a special form of self-employed, which I will describe later on.
Yet, freelancers are called free employees (freien Mitarbeitern) in Germany because they work, but the company isn’t obligated to provide them the benefits that regular employees receive.
Freelancers aren’t directly employed by a company as employees but receive work orders from different companies or clients. This means freelancers are primarily employed during a project, for example, or support a company in specific tasks and challenges. They independently manage their working time, load, working place, etc.
Whereas, Freiberuflers generally have their own practice, firm, or 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 primarily other businesses and not the end customers (consumers). For example, a web development agency hires a web developer or graphic designer — a company hires a marketing consultant, etc.
Their employment relationship is often regulated by a work or service contract.
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 work independently on the respective (partial) project.
In Germany, they are mainly active in the media, advertising, and IT, but it can range, and potentially freelancing is much more than only these areas.
Besides, freelancers are responsible for working conditions such as working time and the place where they actually do the work. Regarding income, freelancers don’t receive a regular, fixed monthly salary but are usually paid an hour’s salary or an agreed-upon compensation.
Therefore, they work on a contract-to-contract basis.
Description of freelancers in Germany:
- a 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 a job as a freelancer in Germany:
Registering as a freelancer in Germany
The registration process is more straightforward and accessible than for the 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 must also register a Gewerbe and pay tax accordingly.
So as a freelancer, you will only need to register with the tax registration office (Finanzamt) and receive your business’s tax ID.
It’s 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 you will use to charge your clients. You should also refer to this number when paying taxes to the tax office.
Who is Freiberufler?
Freiberufler is oft confused with freelancers in Germany. It translates as a free profession. And it’s somewhat true because termination Freibufler can be used only in connection with particular occupations.
When holders of these professions become self-employed, they are called Freiberufler. It’s especially relevant from a legal side, 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. Freiberuflers often open their own practices and offices where they serve private clients.
Jobs that aren’t covered under these professions aren’t considered Freiberuf in Germany. Therefore you can register as a regular freelancer if your expertise allows you to work on other businesses or become self-employed and register as a Gewerbe.
From the legal side, freiberufler are 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 freelancers in Germany
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 must plan how they will pay taxes next year to avoid 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 the official website.
1. Einkommensteuer (Income tax)
In Germany, self-employed people 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 yearly salary; 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 of 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.
2. Gewerbesteuer (Trade tax)
As already mentioned, this tax only applies to Gewerbetreibende (self-employed/trader) and to freelancers who don’t fall into the category of Freiberufe. Therefore, only freiberufler is 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 at the latest on 31. July 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.
3. Umsatzsteuer (VAT)
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 is that you can claim a return in taxes on purchased items or services at the end of the year.
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 statements.
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 unsure, you should consult your tax advisor or the tax office. All other goods and services are taxed at 19%.
Some exceptions to VAT:
If your yearly revenue is lower than 50,000 EUR and you are 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 to spend on accounting and other legal things.
4. Solidarity surcharge
The solidarity surcharge is a 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 must pay income tax and VAT. Self-employed also pay trade taxes. However, income taxes will be calculated only after the deduction of advertising and 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 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.
Tax management tools for self-employed in Germany
To manage all your taxes with the German tax office, we recommend signing for the online tool Sorted. Sorted manages your invoices, expenses & income, and submit all papers to the tax office. It covers the entire tax needs for the vast majority of freelancers and self-employed professionals in Germany.
This post contains affiliate links. The affiliate link means we may earn an advertising/referral fee if you make a purchase through our link, without extra cost to you. It helps to keep this blog afloat. Thanks for your support.
Ausbildung or vocational training is a great way to enter a German job market with minimal investment of money and time. Such programs are intended for fresh school graduates who want to start...
There are many situations in life when you might consider getting a loan. Borrowing money from the bank isn't always the best solution, but it's the preference of many Dutch when they don't have...