LIVING IN GERMANY
[Part1] 10 Things About Freelance in Germany: the Ultimate Guide
Difference to employment, registration, money, downsides, and taxes
Want to earn 10k Euro per month after taxation? Doable! But going on your own and switching to an all-by-myself model can be a big challenge. Here are the 10 things you absolutely must know before you start freelancing in Germany.
Make sure you check out my guide on employment in Germany before you read this.
1. Difference to Employment
First and foremost: freelancing is different from employment in many ways. You are responsible for your own actions, the amount of work you will, want, and able to do, and learning to balance those three things. Freelance gives you much bigger freedom and burdens you with many responsibilities you wouldn’t have if you worked for someone as an employee. Freelancing is not for faint-hearted and those who can’t stand paperwork. Freelancing is all about the paper in Germany.
In terms of law, freelance is not “sozialversicherungspflichtige Beschäftigung,” meaning you are not obligated to pay the social payments. No obligatory payments for retirement and unemployment insurance anymore.
Not all visa types allow freelance working in Germany. Your appendix to the visa (“Zusatzblatt”) must explicitly allow it. You would look for something like “selbständige Tätigkeit / Erwerbstätigkeit gestattet”.
2. Registration
Registering with the Finanzamt
Like everything in Germany, you have to go through the bureaucratic hell first before you even start doing anything. Freelance is not an exception.
Look up the “webpage” of your local community; this is one for Berlin Prenzlauer Berg. There is an English version of it, but those are very frequently outdated, and wrong information on the “website” won’t excuse you in the eyes of the bureaucrat.
Starting from 2021, you can finally apply using any taxpayer's nightmare — ELSTER. ELSTER is a pearl of Deutschtech, ugly and confusing, overloaded with details and forms, literally mirrors the exhausting endless forms and declarations of the finanzamt, offering you no relief in the most sadistic representation.
Different legal forms
If you only start as a freelancer, you can consider two forms: “free professional” (actually literally freelancer, Freiberufler) and one-person business (Einzelunternehmer). The former is a declared list of professions from the middle age, freeing you from the trade tax (Gewerbesteuer, see below) and further bureaucratic SM procedures. Still, IT-related jobs are logically not a part of the list.
Tax number
The point of the paper crusade is a tax number in the format (Steuernummer) XX/YYY/ZZZZZ. This one is the local tax identifier, and it changes absolutely conveniently every time you change your status: changing the tax authority or marry (suddenly). And while writing this article, I found out:
Those numbers are the number of the tax authority / department / and… a room number. So if Clara moves to another room, your tax number will change, out of the blue. This is German to the backbone.
There is a global identification system called tax ID number, so you can surely get absolutely confused. This one has the format: XX XXX XXX XXX.
FSM help you on your journey. The good news is that you only need to do it once (almost).
3. Money
Once you are a registered freelancer, you can start offering your service to customers and issue invoices. And here is the best part of it: as a freelancer, you can charge companies a lot more, as you could do as an employee.
In my case at the beginning of my freelance path I charged the intermediate company with a thrice as much hourly rate as I had on my last employment position.
Let it sink in :D
Not all of that money will be yours, most of what you will pay to the state is the income tax, but once you know how it works, it gets controllable. With a typical 80 to 120 Euro/hour full-time, your turnover will be around 15–20k/month, 7–10k of which will be your income.
The other part of the game is that you will need an intermediate hiring company if you want an 80–120 Euro/hour hourly rate. Rare small companies can offer you that rate, so they are quite hard to find. On the other hand, the corporates don’t hire freelancers directly because of the following reasons.
Bogus freelance
One of the problems the freelancers and companies have is so-called “bogus” self-employment (try to say it 10 times in a row “Scheinselbständigkeit”), a term for determining that you have been working for a single client for a long time, so the bureaucracy sees it as actual employment eligible for all the money the state thinks it has right on (Sozialversicherungspflichtige Beschäftigung). This mechanism was invented to“protect” the workers' rights and prevent the companies from hiring people as freelancers and reduce the obligatory social payments.
The interpretation of what the “bogus” self-employment differs from Bundesland to Bundesland, in Berlin, for example, it’s alright to work a single for two years in a row, in Bavaria the land of happiness and Ordnung. You can get in trouble after 6 months already (heard from the chitchats).
Hiring companies
No one wants to fight the state, corporates included, so they hire intermediate companies. The bigger companies don’t have to deal with the supervisory, and no tracks are on paper for whom you are actually working. Everyone is happy, but this will cost you 20 to 30 % of your honorary.
Different hiring companies specialize on different fronts. From my own experience, here are a couple of things I have learned from the process:
- Many of the British hiring companies don’t have the contract yet. Unlike German, which would only contact you if they already have the inquiry, those do it vice versa and contact the customer with you as an offer. Quite a dirty way of doing business, and it has never worked out for me.
- Hays is one of the biggest, but most of the projects they work with are Deutschtech.
- Things to look at in the contract: noncompetition length in months (12 months tops), payment term (30–45 days are okay, try to reduce it), try to sign off any extra obligations like ongoing or round up reporting.
- Germans don’t bargain. If the client offers X Euro/hour, and you are further than 5 Euros from that, they won’t work with you. So try to start high, but not that high.
- Oh, and never sign anything but times and materials because if the thing fucks up, the smallest is always busted.
4. Second class citizen
Like all other good things, freelance comes with downsides. First and foremost: you become a second-class citizen.
Germany is the country with one plan of action. If this one doesn’t work for you, you don’t exist. It works on all levels, from big to small, in the government sector or commerce, public transport or ordering food. There is only one way to do it, and if you are not that, you are in danger, girl.
Everything here is tuned to the fact that you have an employer. Even if you are a CEO or you have your own business, people will constantly request your payslip and whatnot. And if you don’t fit in this framework, you will constantly need to fight the system. If you freelance as a software developer like me, you won’t fit even more: there are plenty of people out there doing it as employees; why would you switch? Freelancer for them is somebody baking cakes, for example. The system will be choking and glitching on you all the time.
Applying for an apartment requires three payslips; your application might just be ignored if you are a freelancer. So you better stimulate the deal for your partner to fit better in the system.
Applying for citizenship was a real struggle for me because I switched to freelance. The process stopped when I had to prove my financial independence and didn’t have a tax advisor (Steuerberater). The lady in authority couldn’t believe I exist.
Mortgages and credits will become an unreachable good for you. Banks will see it as high risk and won’t offer you a credit or offer you harsher conditions than regular employees.
Statutory health insurance for employees limits the timeframe when you can change the insurance provider, and you can apply to be a part of it too on “free will” (freiwillig). You then will be requested on paper, every time your contract is changing (which will happen a lot), to estimate your income. You can see the people who created this process have never worked in commerce for a single day. Especially as a freelancer: you can’t predict anything when you are the smallest fish in the tank. You won’t have these problems with private insurance, as your relations with the company don’t rely on your income.
And the biggest downside of that all is: you will be there on your own. The corona crisis shows how nobody cares for the smallest, and this will be you. No Kurzarbeit, no governmental help (the chaos with that one deserves a separate story), your business will die because the country is ruled by the old farts in their 70s not knowing how to spell the word “smartphone,” with a political system built around a single person to maintain the status quo for decades. All you have built with your hands will dissolve in the air, and no one will give a shite. The only security you can have is your money and not caring in return. And here is how you do that.
5. Taxes
Unlike employment, you will be paying the taxes afterward, so keeping track of which taxes and how much you owe to the state is crucial.
VAT
Value added tax (Mehrwertsteuer) is a universal tax paid majorly by the consumers. Usually, all the negotiations and payments are meant without it because, as an acting entity, you cannot keep it. There are several things you need to know about the VAT.
Figure whether you have to add it up to your invoices. Freiberufler (see above) is not obliged to do that, while the other forms like Einzelunternehmen are. At the moment, it is 19% or 7% of the amount of the invoice, depending on which business you are operating. 7% is usually invoked for so-called Grundbedarf, the goods and services ultimately required by the population.
Forward payment. Germany has tax prepayments, and VAT is one of those taxes. Regarding how much your turnover (>7.5k Euro per year VAT) is and for how long you have been operating your business (first two years monthly), the finanzamt can request you to pay those once a month or once a quarter.
The declaration must be submitted online in ELSTER, or your tax advisor can do it for you; usually, you would have 10 days after the end of the period. Many bookkeeping tools also have the integration; you might want to check out those (fast bill, lexoffice). All of them are ugly, and I hate them deeply, especially lexoffice. If you decide to pick any of those, think twice because it’s tough to switch afterward, and you can get hooked on peace of crap like lexoffice, like it was the case for me.
Many consumer goods include VAT in price, and if you buy something merely for your business, you can claim the VAT back. The difference between the amount of VAT you owe to the state and the state owes to you is transferred to you or from you to the state.
Annual declaration. In addition to your income tax declaration, you would need to submit the VAT declaration yearly, resulting in the final numbers of VAT to be transferred.
Hoarding VAT can increase your liquidity but be careful; this is not your money.
Income tax
This one is the biggest trouble and a pest. And again, there are a couple of things you absolutely need to know.
Profit prediction. Try to figure how many percent of the income you will need to save up, do you don’t go bankrupt when the state wants its money. The income tax will be paid from the profits, and there are two ways to calculate profits in German law: the balance (Bilanz) and the income/outcome difference (EÜR — Einnahnmenüberschussrechnung). Balance is a more complex way of tracking the money flow and is more for the big guys — you are only obligated to use this one once your annual turnover is more than 600k Euro.
Income/outcome is a simple difference of your income summer up minus the overall costs in the period of time. Most of the software out there will track this for you and let you submit the declaration to ELSTER.
The calculated profit will be your tax calculation base; you can then treat it as your salary and use tools like the brutto-netto calculator to figure out how much you would approximately need to pay. The rule of thumb: lay back 40% of your invoices in the first year (without VAT) somewhere else to avoid nasty surprises afterward.
Forward payment. As with any other tax, the finanzamt will want you to pay the income tax in advance.
In the first year, the finanzamt will ask you to estimate (while registering, see above) your profits and then derive the quarterly payments from this amount. So estimate as pessimistic as you can: it will take a while for you to figure out how much of a clear profit comes out at the end. If you estimate too high, the forward payment will destroy your liquidity.
Once the first tax assessment (Steuerbescheid) — the final decision about the amount you owe is there, the finanzamt will estimate your due payments based on the last year. So if you are sick, tired, or don’t want to work anymore because you’ve had a good year, you won’t fit in the flowchart.
If for whatever reason you can’t pay the forward payments anymore, whether you’ve made the estimation mistake or your profits are not predicted to be as high as in the last years, you can apply for correction.
You can actually do it in ELSTER, and you will need to come up with an explanation.
Private vs. Business. As your profits will be the base for any tax estimations, you would want to keep that amount as low as possible. When you are a solo freelancer, many things are pretty indistinguishable from the private costs. You might be an app developer, and you buy test smartphones for testing. You might be a game developer and need some hardware to test it. You might need a new graphics card if you are cutting videos.
You might want to visit conferences or meet possible business partners all around the world, and all of that is business costs. There is a whole complex system of what and what is not directly deductible, but the rule of thumb is: if you can somehow justify the cost in the context of your freelance, it’s directly deductible. Google or ask your tax adviser if in doubt.
Tradetax (Gewerbesteuer)
This obscure tax is the nightmare of beginner freelancers. Most don’t (including me) or didn’t know about their obligation to pay it, so after the first tax declaration, the finanzamt ruled huge post-factum payments for the previous years of freelance activity.
Tradetax is not payed by freiberufler (see above), but payed by the rest. If your annual profit exceeds 24.500 Euro, you are obligated to pay it. That tax is directly subtracted from the tax base, meaning it reduces your income tax to almost the same amount. If you are not sure whether you have to pay this tax or not, speak to your tax advisor.
Tax advisor
German tax law is so complex that even private households and freelancers really require a tax advisor (but not legally obligated). The biggest benefit it gives you is that you have an advocate on your side. So what is a tax advisor and what not?
Tax advisors won’t give you any hints on reducing the tax burden, aside from the obvious cases. You still would need to educate yourself on that matter. Any question towards a tax advisor is an extra service to pay for, so although you can directly deduct that cost, you are still paying for it at the end, when even partially.
Tax advisors communicate with the finanzamt and keep you updated on the relevant legislation changes. They will prepare your annual tax declarations and probably prevent you from making stupid mistakes. They will also represent your interests in case of a dispute with the finanzamt, but be sure this will cost a lot.
Another advantage is that as long as you have a tax advisor, you will get multiple declaration term prolongation and file tax declaration correction for the years in the past. So, for example, you can file quarterly VAT forward payments a month later, annual tax declaration in February of the following year (so, for example, for 2019 until February 2021).
DISCLAIMER :D
All of that I had to learn from my own experience, I can’t guarantee the complete correctness of it, and before you use any of that in a legal context, make sure the data is still current. And in case of doubt, seek the help of a lawyer. Good luck!
Also, check out my recent articles:
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