Working as a freelancer
Becoming a freelancer or business owner in Germany can seem like a complicated process but these steps will set you up as a self-employed worker in Germany. Setting up as a freelancer can seem like a long and complicated process. In this guide on freelancing in Germany we lay out the steps you should take for beating the bureaucracy and transforming yourself into a self-employed person. Working as a freelancer in Germany means not only discovering how German business works but also discovering German law and bureaucracy.
Freelancers do not have to be registered at the Commercial Registry. They are not obliged to become a member of (or contribute in anyway to) the local Chamber of Commerce. Freelancers don't need to prepare annual financial statements for taxation purposes; a simple profit-and-loss assessment is sufficient. And last but not least', freelancers do not have to pay trade tax.
According to German income tax law ('Einkommensteuergesetz'), a freelancer can be described as a self-employed person whose business is either in the artificial (i.e. painter, musician), scientific, authorial (professional writing), teaching or educational sector, or if their work is determined by his or her personal knowledge of particular profession. This includes physicians, dentists, journalists, translators, lawyers, business consultants, etc. These are professions which are listed in the German income tax law as typical freelancer's professions. But it is worth pointing out that as a result of case law other professions are accepted as freelancers, too, although not mentioned in the German tax law. This includes IT-consultants, masseurs, nurses and more.
When setting up a business as a freelancer in Germany, one of the first hurdles that freelancers face is often the registration procedure.
They need to register at :
_the local tax authorities
_the responsible professional association
_the responsible accident insurance company (if they employ people).
While the registration at the professional association and the accident insurance company might require a somewhat more formal process, (i.e. completion of official forms and lodging documents setting out qualifications), registering at the local tax authorities is relatively straightforward and can be achieved with an informal letter.
Once you have registered, the tax authorities will then send you a questionnaire asking for personal details, your estimated income in the current tax year and if you want to opt for VAT (more about that later).
Based on the estimated income the tax authorities will assess income tax instalment payment
Freelancer Social Security
Unlike normal employees, freelancers are in general not liable to the German social security system.
Therefore, freelancers do not need to contribute to the governmental healthcare, unemployment and pension insurances. However, they should consider making their own arrangements. In particular, this includes for:
Health insurance which also covers the risk of illness and the loss of income should you become sick
Disability insurance to cover the risk of monetary loss if you are unable to continue working due to illness
Life insurance is also an option to supplement the retirement income
Please note that since 2009 it is mandatory for any individual living in Germany to have a health insurance. While freelancers are in general not required to make contributions to the German social security system, one group of freelancers - artists and journalists – are required to contribute to the government-backed social insurance system, covering pensions, a contribution to health insurance and so-called care insurance for old age nursing care.
The contributions are based on income. There is also a ceiling on the total annual income that those contributing to the 'Kuenstlersozialkasse' are able to make.
The ceiling is amended each year. Like employees, freelancers need to pay 50 percent of the total contribution. In 2012, the total contribution rates for 'Kuenstlersozialkasse' members are:
Pension insurance: 19.6 percent. The 2012 annual income ceiling is: EUR 67,200 (2011: EUR 66,000)
Health insurance: 15.5 percent. The 2012 annual income ceiling is EUR 45,900 (2011: EUR 44,550)
Care insurance: 1.95 percent (for parents) or 2.20 percent (for childless individuals). The 2012 annual income ceiling is EUR 45,900 (2011: EUR 45,550)
The income from freelance business needs to be shown in a simple profit-and-loss assessment. However, the profit-and-loss assessment needs to be based on the German tax rules. This will determine the type and rate of depreciation, the amount of deductible gifts to business partners, etc. After adding income from other sources and deducting special expenses, extraordinary expenses and child allowances, the result is your taxable income, on which your income tax is assessed. Germany has a progressive income tax system. There is an annual tax free exemption of EUR 8,004. Above this amount, the tax 2012 rates start at 14 percent, rising to 45 percent.
On the assessed income tax, a solidarity surcharge of 5.5 percent is also based. This is to help to fund the rebuilding of eastern Germany. Married couples can lodge a joint return, which in most cases will reduce the overall income tax burden. Revenue generated by freelance work is in general taxable for 'MwSt' purposes, unless the work or activities are derived outside of Germany. Revenue can be 'MwSt' free such as medical or dental services. Depending on the kind of service provided by the freelancer the full 'MwSt' rate of 19 percent or the reduced rate of 7 percent has to be added to the invoiced amount and has to be shown in the invoice.
Freelancers who establish a business in Germany need to file monthly 'MwSt' declarations for the first 2 years after opening their business. After this two years period, the period of filing 'MwSt' declarations is determined by the 'MwSt' of the prior year:
• If the 'MwSt' for the prior year was less than EUR 1,000, you don’t need to prepare 'MwSt' declarations in the future but you need to declare all revenue and 'MwSt' in your annual 'MwSt' return (umsatzsteuererklärung).
• If the 'MwSt' for the prior year was less than EUR 7,500, you need to prepare quarterly 'MwSt' declarations.
• If the 'MwSt' for the prior year exceeded EUR 7,500, you need to go on preparing monthly VAT declarations.
If you operate a small business with annual revenue below EUR 17,500 you can opt if the revenue will be subject to 'MwSt' or not.