How to become Self-Employed in Germany
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Whether you are self-employed or employed on a salary, we all basically want the same thing. A comfortable life, with a reasonable income that allows us to do the things we enjoy without worrying too much about money.
Granted, many employed people achieve that, but many don’t and dream of a better way of life. But how do you realize that better life? Well, for many, it seems, believe being self-employed is the route to a better work-life balance and a better income?
Is it for You?
It’s true, there are a lot of benefits to being self-employed, and when you’re an employee chained to a desk, the grass can look very much greener on the other side of the fence.
But there is a lot to consider before taking the plunge, the first of which, can you afford to go self-employed? Starting out on your own means starting from the bottom of the pile, and working up, with little or no income initially. Do you have enough savings to survive this period? What happens if you cannot make enough as self-employed? Can you quickly go back to your old job?
Many people will start working as self-employed in their own time, initially to make a little extra, and sometimes this can then transform into a full-time self-employed career. This is an excellent way of starting out on the freelancer journey, as you can learn the ropes as you go along, safe in the knowledge that you are still earning enough to keep the roof over your head.
Banking is an important consideration at this point to keep your income streams separate, and Penta has got you covered. Open a Penta business account today.
But at some point, as your freelancer work grows, you’ll need to decide between being employed or self-employed.
It’s a big step to take. Being employed by a company has a lot of advantages, such as a steady income, regular working hours, company benefits. Your tax liabilities are also taken care of by the company, except for any second income you may have, and if you are sick or on holiday, you still get paid.
Of course, taking the freelancer route has its own benefits, and for many working people working for themselves, they will never consider taking an employed role ever again.
Benefits of being Self-Employed
- You are the boss – yes, it all comes back to you, and you can decide what you do. It can be a real feeling of freedom and very uplifting.
- Flexible hours – you can choose to fit work in around your life. You decide when work gets done, in most cases.
- You choose what job you do – depending on how busy you are, you can pick and choose your work. This also means you can pick and choose your clients. Have a lousy client that is taking you for granted and causing you stress. You have the power to say no.
- You can grow your business – if you want to earn more, you have the opportunity to grow your business and eventually employ staff if you wish.
Drawbacks of being Self-Employed
- You are the boss! – the buck stops with you. Yes, this is both a good and bad point. When it all goes wrong, there can be no one else to blame except yourself. However, as a self-employed, you should quickly learn from your mistakes and not make the same mistake again.
- No colleagues to turn to for help – when you’re stuck and unsure what to do, you don’t have colleagues that may be able to help. Yes, you can turn to friends and family, but they are unlikely to have the business knowledge you need.
- No company benefits – unless you create a company and employ yourself, then there are no company benefits.
- Mortgage applications – applying for a mortgage can sometimes be challenging for the self-employed. There are specialist companies that can help, but there is usually a higher cost.
- No sickness or holiday pay – if you take some time off work for illness or go on holiday, there is no one to pay you while you are away. This can really be problematic and relates to the next point of work-life balance.
- Work-life balance – many self-employed find they are working longer hours for the same money or less than if they were still employed.
- You are responsible for everything – so you are great at what you do. But what about the tax returns? VAT returns? Legislation and regulations that relate to your job? You either have to do this as well or pay someone to do it.
- Self-discipline is essential – if you don’t have self-discipline, then working as a self-employed person may not be for you. There is no one to set your hours and phone you when you are late for work! It is one of the things many self-employed find the most difficult.
- Job security – You make your own job security by finding more work. But that can be challenging, and you are bound to have a lot of competition.
So You’ve decided to go Freelance or Self-Employed
You’ve weighed up all the pros and cons and decided to take the plunge and become self-employed as a freelancer. But where do you begin?
We are going to assume that you have chosen the type of work you’d like to do, checked the market to make sure there is demand, and have the appropriate skills. The focus here is on the legal and regulatory aspects of how to register as self-employed.
Do You qualify as a Freelancer in Germany?
The term freelancer (Freiberufler) in Germany is a specific type of self-employment and relates to work that does not involve the building trades or selling goods. Generally, people selling services, whether professional, such as lawyers and architects, or creative, such a journalists or website designers, can be considered as freelancers.
If you are a tradesman, craftsman, or selling products to the public, then you can’t be classed as a freelancer, and you will have to register a business, known as Gewerbetreibende, in German.
Why is this definition important? Because freelancer registration is much simpler than registering a business.
Register as a Freelancer in Germany
To register as a freelancer in Germany, you need to complete a single form, the Fragebogen zur steuerlichen Erfassung, and take it to your Finanzamt. The form is a simple questionnaire that tells the Finanzamt what you intend to do as a freelancer. Once the form is checked and approved, you will receive your tax-ID or Steuernummer. This number must be used on all your client invoices.
Register as Self-Employed in Germany
If you need to register a business because you don’t qualify as a freelancer, then you’ll need to visit your local trade office, the Gewerbeamt, before going to the Finanzamt. The simplest form of business to register is the Sole Proprietorship (Einzelunternehmer) and requires little paperwork.
Before you can register your business, you need to register your German address and obtain a certificate (Meldebescheinigung). Once you have done that, take the address certificate with you, along with a form of ID, such as your passport, the business registration form (available online on your city’s business website), and the registration fee to the Gewerbeamt.
If your business requires additional permits, such as health certificates, trade certificates, or a criminal record certificate, then you’ll need to get these in advance. Contact your local Chamber of Commerce for more information.
Tax requirements for the Self-Employed in Germany
Three main taxes will concern you as a self-employed person in Germany, the Mehrwertsteuer, the Einkommensteuer, and the Gewerbesteuer. Let’s take them in order;
This is VAT, which is payable in most countries and can be an entire article in its own right! First, if you earn under a certain threshold, currently €17,500, then you can choose to opt-out of the VAT system. By doing this, you do not charge VAT on your invoices, but you cannot claim back any VAT you have paid on your bills. Above the threshold, you do not have the choice and must charge and collect VAT.
If you want or need to be in the VAT system, then you will need to register for a VAT ID first. This is a Europe wide VAT number, and you can find more information on the VAT rules on the EU VAT website pages. The rules on VAT can be complicated, and you will need to submit your declaration to the Finanzamt monthly. If you paid more VAT than you collected, then the Finanzamt will issue you a refund of the difference. Otherwise, you must pay the difference.
Einkommensteuer (Income Tax)
In the vast majority of countries around the world, you must pay income tax on your personal income. In Germany, there is a personal allowance which is free of income tax, currently €9,408 in 2020. Above this limit, you must pay income tax, and there is more information in our recent Germany tax article.
Gewerbesteuer (Trade Tax)
This only applies if you had to register a business and only if your income is above €24,500, currently. The exemption level may change in future years, and it only applies if your business is registered as either a sole proprietorship or as a partnership.
You must produce invoices for your customers, and they must include specific information, such as;
- Your name and address details
- Customer name and address detail
- Date of invoice, and payment due date
- Unique invoice number
- Your tax ID
- Your VAT number if you have one
- Description of goods and services provided
- Item price and tax added, if applicable
- Total price
You will also need to include your payment methods, such as bank details or Paypal account.
There are numerous websites for producing professional invoices or use an accounting system that offers invoices.
You must keep accurate records of your customer invoices and expenses. It is possible to keep simple accounts in spreadsheets, but these can quickly become complicated and unwieldy, plus you cannot keep copies of small receipts and payments in the spreadsheet. The other advantage of using an accountancy package is that your accountant will be able to use it to prepare your tax declarations.
There are several free and cheap accounting packages available, and with a Penta Business account, you can automate much of your accounting process, saving you hours of work. We currently integrate with Lexoffice and Debitoor. Click here to find more information on Penta accounting integrations.
Banking – Separate your Income
This is an excellent place to point out the need to separate your business income and expenses from your personal finances. Doing this from the start makes the task of submitting your tax return much more straightforward.
Opening a Penta Business bank account can help you in many ways, as well as keeping your finances in order and automate your accounting.
Just as a business claims its expenses against its tax liability, as a self-employed person, you should do the same, so what is a deductible expense.
- The cost of running your business, such as stationary
- Your office space, even if it’s a home office
- Business lunches and meeting costs
- Internet and phone costs
- Contributions to pensions and health insurance
- Your accountant’s invoice
There are other allowable expenses, but the last on the list above is probably the most important point.
Accountant or Tax Professional
Tax returns, VAT returns, and the allowable expenses you can claim to reduce your taxable income change often. Keeping on top of all this information is your accountant’s job. It’s what he is the expert in doing, just as you are the expert in what you do.
As your business grows, your accountant becomes more crucial to the smooth running of your business. Still, even at the beginning, they can provide valuable advice and help you grow your business.
The cost of an accountant is well worth it, particularly as it’s an expense you can claim.
If you prefer, you can consult a tax professional instead of an accountant, if you prefer completing your own accounts.
So is Self-Employment for You?
In the end, if there is something you love doing, and there is a market for you to do it self-employed, then why not try it? Yes, there is a lot to do, particularly when starting up, but the satisfaction of being self-employed and running your own business is immense.
Take some professional advice at the very beginning. Although it will cost you money, it will save you far more in stress and costs in the future if you get it wrong.
What you will need is a bank account, and the Penta Business account would be perfect. Open a Penta business account today and remove a little bit of the self-employed stress.