Thinking about becoming self-employed Part 2: Taxes, taxes, taxes
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In the first part of our series about starting the self-employment journey, we already answered some of the most asked questions about starting a freelance business – and warned you about the most common mistakes many freelancers make at the beginning of their new profession.
In the second part of the series, we now want to dive a bit deeper into the general topic of taxes, so you are perfectly preferred to start your freelance career.
- How much taxes do I have to pay?
- What are the tax free thresholds for freelancers?
- Do I have to submit a tax return?
- Do I need an accountant?
- What happens if I make a mistake in my tax return?
- What do I need to know about letters from the tax office?
- What are tax prepayments?
- How do I register officially for tax in Germany?
How much taxes do I have to pay?
If you are registered in Germany and are earning money, you will have to pay income tax. How much money you have to pay is dependent on your income, as Germany uses a so-called progressive tax rate.
This basically means that, the more you earn, the more you have to pay in taxes. Currently, the highest tax rate in 2024 is set at 42% for top earners, who have made more than 58,597 Euros a year.
Good to know: The only exception is the so-called wealth tax, that comes into account for annual earnings of more than 277,826 Euros and equates to a 45% tax rate.
So, how much you will have to pay in taxes is primarily dependent on your income. However, there are a few additional aspects that are considered when determining your taxable income:
- How many (if any) kids you have
- The amount of deductible purchases you made
- Details about your workload (vacation days, hours per week, etc.)
The more business expenses you have, the less tax you will have to pay, as business expenses can be deducted from your taxable income, thereby reducing the overall amount of income tax you have to pay.
To identify your final income tax rate, the German tax office uses a tax formula, as per the income tax law (Einkommensteuergesetz or EStG). Currently, there are five tax tiers, reaching from 14% up to the aforementioned highest rate of 42%.
In order for people to correctly calculate how much tax they will have to pay, the German ministry of finance (Bundesministrium für Finanzen or BMF) regularly updates a tax calculator tool on their official website. All you need to do is enter the year for your tax return as well as your taxable income and you will get a detailed description of the formula and how much tax you will have to pay.
What are the tax-free thresholds for freelancers?
Germany has a tax free threshold, which basically means that every Euro earned under that threshold is not subject to income tax. The tax free threshold in 2024 is at 11.604 Euros.
There are further tax free thresholds that you can use to your benefit, for example in regards to trade tax as well as for investment income. Parents are also able to claim additional benefits for their kids.
Do I have to submit a tax return?
If you are registered to pay taxes in Germany, and you are earning money here, then you will have to submit your income tax return. If you fail to do so, you may face some serious financial and legal consequences.
For example, missing the income tax deadline by more than 2 weeks can result in fines of 0.25% of your outstanding tax for each starting month, or a minimum of 25 Euros – which can easily add up to quite a substantial amount.
The deadline for handing in your income tax return usually is the 31st of July of the following year.
But due to the COVID-19 pandemic, the ministry of finance has suggested extending this deadline. So the income tax return for 2022 had to be handed in on 30th of September 2023. The deadline for the income tax 2023 will be end of August, but because the 31st falls on a weekend, deadline will be the 2nd of September.
💡 Tip from Accountable: If the day of the deadline is either a weekend or a holiday, the deadline moves to the next weekday! If you use the Accountable software to submit your taxes, it will inform and remind you of all relevant deadlines automatically.
Do I need an accountant?
It is up to you if you want to work with an accountant. If you feel knowledgeable (and sufficient in German) enough to tackle the German tax system, you are free to do so on your own.
But since there are many details and specifics to look out for when working as a freelancer, you might want to consider getting some help from an accountant.
As you’ll soon find out, you not only have to hand in your tax return, but also a revenue surplus statement and potentially other forms when you are making money from clients who are based in a different country. And it gets even more complicated if you have to charge VAT!
So you might want to get some help, at least for your first year of freelancing in Germany.
What happens if I make a mistake in my tax return?
Mistakes happen to the best of us, so don’t panic if you realise that there is something wrong with your tax return. However, you can’t claim ignorance with the tax office, and big mistakes might lead to big consequences.
Generally speaking, the tax office differentiates between two categories of mistakes:
Mistakes that are beneficial to the tax office (aka you paid too much)
If you have transferred too much money, e.g. by not claiming all your business expenses, you can submit a request to change your tax assessment. Usually, the tax office will then allow you to make your changes and submit an updated version of your income tax return.
Mistakes that are beneficial to you (aka you didn’t paid enough)
If you didn’t list all your income or made another mistake that led to you not paying enough, you should probably get in touch with the person responsible for filing your tax return at the tax office. You can usually find their contact details on the letters you get from the tax office.
Generally, you have three ways of correcting this type of mistake:
- If you have already been mailed your faulty tax assessment, you can ask for a correction. You will usually get a new deadline for the corrections.
- Alternatively, you can object to your tax assessment within the first four weeks of receiving it. If your objection is found to be reasonable, you will receive a corrected tax assessment.
- If you haven’t received your final tax assessment yet, you can contact the tax office directly and ask them to stop processing your tax return. You will then get some time to correct your mistakes and hand in a new tax return.
Good to know: The tax office can prosecute faulty tax returns up to 10 years after the fact, so make sure to correct your mistakes and don’t just hope that no one will find them.
What do I need to know about letters from the tax office?
When you start working for yourself, you not only start a whole new relationship with yourself, but you will probably also have a closer relationship with the tax office. Currently in Germany, this will be most commonly done via letters.
While many freelancers dread opening their mailbox and finding a letter from the tax office, more often than not, these letters are actually there to help you by reminding you of deadlines or informing you about changes to your tax status.
💡 Tip from Accountable: If you ever receive a letter from the tax office that you don’t understand, don’t panic! We have compiled a list with the most commonly sent letters, so you can make sure you understand what they mean. You can find the letters here!
What are tax prepayments?
One of the most common letters you will receive from the tax office is the letter to inform you about your tax prepayments. Prepayments are used to simplify calculating tax for freelancers, and also to ensure the government is regularly receiving income tax from people who run their own business.
As soon as you got more than 400 Euros back in your last tax return, you are eligible for tax prepayments for the next year. How much you will have to pay in advance is dependent on how much you earned in the year before.
Since it can be quite difficult to determine a reliable annual income as a new freelancer due to client and price fluctuation, you can ask to adapt your prepayments during the year. All you have to do is explain the reasons why your income will probably be lower – or higher – than the initial estimation.
💡 Tip from Accountable: With our free app, you can track your income and your expenses in real time and always stay on top of your finances.
How do I register officially for tax in Germany?
In order to officially register as a freelancer in Germany, you have to apply for a tax number. Even if you worked in Germany before as an employee, you will still need a new number for your new freelance business – and this can be done by filling out the tax questionnaire, or Fragebogen zur steuerlichen Erfassung.
➡️ Freelancing in Germany: Here’s what you need to know about tax numbers
In this form, you will have to name your new job, describe what you will be doing, and include an estimated income projection for the next year. The tax office will then check the questionnaire, and ultimately issue your new tax number.
💡 Tip from Accountable: You can apply for your tax number by using our simple online tool. After you have completed the questionnaire, we will send it directly to the tax office – and you will receive your tax number in the next 2-4 weeks. Apply for your tax number now!
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