As a self-employed person in Germany, do you know how much in tax you are expected to pay? This article will help you to know that, ways to save on taxes, and more. Tax payments are a significant part of running your trade or business. A Self-employed tax is not automatically subtracted from your paychecks and it is up to you to know how much in tax you have to pay and pay it all on time. Put simply, as a business owner in Germany whether a corporation owner or a self-employed freelancer, you are responsible for complying with tax law with respect to your business.
So, how much in tax do self-employed individuals pay in tax in Germany? Well, the exact payments depend on several factors. Here, you will learn how the tax burden is usually composed, which types are important for whom, plus the common or standard tax types, which self-employed individuals must expect. Also, you will know more about saving taxes.
Tax obligations in Germany and Tax for self-employed
Your business ‘legal forms will determine tax types, which you are expected to pay. For instance, partnerships or corporations have very different tax duties than those of freelance businesses and sole proprietorships. Here are taxes that apply to businesses in Germany:
- Income tax (Einkommensteuer)
- Solidarity tax (Solidaritätszuschlag)
- Corporation tax (Köperschaftssteuer)
- Church tax (Kirchensteuer)
- Value-added Tax/VAT (Umsatzsteuer)
- Capital gains tax (Kapitalertragssteuer)
- Trade tax (Gewerbesteuer)
The income tax relates to the earnings of sole proprietors, partnerships, and freelancers. Corporations don’t pay for this tax because they are valid entities. The corporate tax, instead, applies here and that will be well-explained below.
The income = profit – (business expenses + extraordinary charges + special)
The EStG (Income Tax Act) is the legal basis for this tax. It is levied or imposed from €9,984 (2022) annually income and this is a limit to basic allowance, which is tax free. When the earnings are slightly above basic allowance, tax rate is determined by the amounts between 6 and 42%. Below is how to calculate income tax in Germany.
Income tax burden = taxable income × the income tax rate
Solidarity surcharge is added on to corporation tax or income tax and the capital gains tax. Self-employed individuals are expected to pay this tax, solidarity tax. It amounts to about 5.5% of corporation tax or income tax. However, €972 (a tax-free threshold) applies to solidarity surcharge.
The corporation tax is paid by the corporations instead of paying income tax and the KStG governs the corporation tax. Any flat rate usually applies a 15% taxable income + a solidarity tax of about 0.825%. Allowance is not applied and so the amount of the income doesn’t matter. So, how do you calculate corporation tax?
Corporation tax which includes solidarity surcharge = taxable income × 15.825%
Self-employed individuals who are members of registered and recognized religious community must pay church tax plus capital gains tax and corporation tax or income tax. This tax is normally used to fund religious communities’ community work.
In Germany, every federal state has its law – it is regulated or managed at the federal state level. A huge number of federal states pay a tax rate of about 9%. In Baden-Württemberg and Bavaria, the tax rate is 8%. If you have a family with kids, note that the kid allowance will be considered and therefore, you will pay a slightly lower rate. Some of the religious communities that can levy this tax include:
- Catholic bishopric of the old Catholics in Germany
- Protestant Church in Germany
- Jewish communities
- Unitarian Religious Community Free Protestants
- Bishoprics of the Roman Catholic Church
- Freely religious communities
Kirchensteuer can be tax deduction as it considered as a very special expense.
Value-added & input tax
In Germany, a VAT tax is usually applicable to each service or product sold. Dealers collect it on sales and the consumers borne it. The enacted basis for this tax is VAT act. 19% is the normal tax rate. A decreased rate of about 7% may apply to certain class of services and goods. They include:
- Magazines, books, and newspaper
- Mixed milk drinkables and milk
- Accommodation in campsites, hostels, and hotels
- Transfer of copyrights
- Public transport (distances that are less than 50 kilometer)
- Activities – dental technician
- Showman activities and circus performances
- Tickets for museums, concerts, and theatres
- Rental of the living space
Below are the rates that apply to forestry and agricultural products – they are not included in the standard taxation rate
- Forestry products have 5.5%
- Agricultural products have 10,7%
Other services and product groups are exempted from value-added tax. They include:
- Credit brokering
- Foreign deliveries
- Air and sea transport
How are sales tax calculated?
Sales × Value-Added Tax rate = Value-Added tax
Pre-tax is related to VAT. It is defined in § fifteen VAT Act. Pre-tax is usually repaid after sales tax turn from the tax office. It is part of sales; which businesses pay for required investments.
Capital gains tax
Capital gains tax is a form of income taxation and not a tax. Corporations only pay it if distributions or dividends are made to shareholders. Like the income tax, EStG regulates capital gains tax. As with the income tax, solidarity surcharge &, if applicable, the church tax is added to capital gains tax burden. The tax rate is normally 25% plus solidarity taxes and church taxes.
Below is how to calculate the capital gains tax:
Capital gains tax = Investment income × Tax rate
If you run a business, you must pay the trade tax, which is regulated or managed in the tax law. For sole partnerships and proprietorships, €24,000 tax free threshold applies to all their revenue. The municipality determines the levy rate in trade tax. Also, a 3.5% fixed figure is added on to multiply. Below is how to calculate trade tax:
Trade tax = Trade income × the levy rate × 3.5%
Most freelancers don’t pay for the trade tax as they aren’t traders. However, any freelancer working in partnership or as a great sole-proprietor, where any commercial activity is carried out, he or she is a subject to the trade tax.
Declaration of tax for a self-employed individual
In Germany, self-employed individuals have been put under an obligation of submitting their tax returns to tax office in the electronic form since the year 2011. What you do is to fill out all the attachments, enter expenses and income into the accounting cash method attachment. You will find all the necessary forms either online in the ELSTER portal or in the standard tax declaration program.
Tips to save on taxes for a self-employed individual
You are following the regulations needed of a business owner and that means you are paying your business income taxes. Here are tips to help you make your self-employed tax burden lighter.
1. Special write-offs
Do your company’s assets amount to €235,000? Well, you can use special write-offs. Special write-offs work in an alike way to investment deduction amount – the deduction is normally made for a planned stake or investment, which is 20% of the expenditure. Be sure that the investment has been made to avoid making tax back payments.
2. IAB, Investment deduction amount
The investment deduction amount is a gain-reducing reserve. A self-employed person with this profit-reducing reserve can record a stake, which he or she has planned within the next 3 years. Nevertheless, most assume that they will make the stake during that specified period. You have to pay back the tax office the tax savings with a 6% interest.
3. GWG, Deduction on low-value assets
To decrease profit, you can specify low-value assets as well. Deduction on low-value assets means purchases whose profit is slightly less than €410 + value-added tax. The purchases aren’t used up as they gradually worn out. The best bit is that you can write off the deduction on low-value assets in the year of purchase if you keep using them in the next few years.
4. Tax deducting business vehicles
Business expenses or costs can reduce tax liability in a great way. For instance, do you have a company vehicle? If yes, you can use the car commercially. Doing that will allow you subtract costs that are usually associated with a vehicle from your personal car taxes. Although, if you use the company vehicle privately, you should closely monitor your utilization or usage.
What you do is to purchase a unique logbook and use it to record whenever you’re on business trips and on personal time. Tax office will check the logbook for stability with the right and real conditions. Additionally, it is great to continue keeping evidence of vehicle costs, including toll receipts and fuel. The recording method is worthwhile to a business owner who travels not less than 60 km\working days.
Also, you can consider making use of the 1% by-laws – it requires you to use the business vehicle at a minimum 50% commercial usage,
Use the small business regulation
If you do not have much turnover, consider using small business regulation. With a turnover of a minimum of €17,500 per year plus a planned turnover of €50,000 in the next year, you have high chances of waiving the value-added tax. Also, you can have the value-added tax refunded for the business.
The expenditure and revenue associated with value-added tax must be reported to the finanzamt quarterly or even monthly. One of the drawbacks of the small business regulations is that the tax office does not refund back the input tax – this is because it wasn’t collected. Simply put, if you use the small business regulation, you pay more.
Was this article about how much self-employed tax you are expected to pay helpful? We believe that you now know what your tax burden in Germany is. The key to being always prepared for tax obligations is to continue keeping track of your expenses throughout the year. Do not wait until the last minute to start adding up all your business expenses. Also, make use of the tips to save on taxes.