What is self employed vs freelancer in Germany? You might wonder about the differences between these two types of work and how they affect your taxes, health insurance, and other aspects of your life.
Self-employed and freelancer in Germany is not just a matter of terminology. It also has legal and financial implications that you need to be aware of.
Depending on your type of work, income, and expenses, you might have to register with the German tax office to pay income tax, trade tax, social security contributions, and health insurance.
In this article, we will provide you with a comprehensive guide on self-employed vs. freelancer in Germany, covering each option’s definitions, advantages, disadvantages, and requirements.
Understanding Self-Employment and Freelancing
One of the first things you need to know about self-employed and freelancers in Germany is that they are not the same thing. They are different categories of work that have different legal and tax implications.
The German tax office (Finanzamt) has specific criteria to determine if you are self-employed or a freelancer, and you need to follow them to avoid penalties and complications.
Self-Employment in Germany
Self-employment in Germany involves running your own business, offering goods or services, and having a high degree of autonomy and responsibility. Self-employed people can have employees, a fixed location, and multiple clients.
They need to register their businesses, pay taxes, social security contributions, and health insurance or deduct their business expenses from their taxable income.
Steps to Register as Self-Employed in Germany
If you want to become self-employed in Germany, you need to follow these steps:
1. Determine if your activity is considered self-employment or freelancing by the German tax office.
As we explained in the previous section, not all professional or artistic services qualify as freelancing in Germany. If your profession is not on the list of chamber freelancers, you might have to register as a self-employed person instead.
2. Register your business with the local trade office (Gewerbeamt).
You must fill out a form and pay a fee to obtain a trade license (Gewerbeschein). This will allow you to operate your business legally and receive a tax ID (Steuernummer) from the local tax office (Finanzamt). You also need to inform your professional chamber or association if you belong to one.
Here is a list of the documents required to register as self-employed in Germany:
- Completed Application Form: You will need to fill out an application form to register your self-employment.
- Valid Passport: You will need to present a valid passport as proof of identification.
- Tax Registration Questionnaire: You will need to fill in a “Fragenbogen zur steuerliche Erfassung” (Questionnaire for Taxation) and submit it to your local tax office.
- Proof of Residence: You may be required to provide proof of residence in Germany.
- Business Plan: If you are applying for a residence permit for self-employment, you may need to submit a business plan that demonstrates commercial interest or regional demand for your products or services, as well as the positive impact your business will have on the German economy.
- Financial Documentation: You may be required to provide evidence of financing for your business, such as capital or a loan commitment.
- Proof of Clients or Invoices: Freelancers applying for a residence permit may need to demonstrate that they already have clients set up in Germany. This can be done through letters of intent from companies wishing to hire you or invoices for businesses you have already worked with.
3. Choose your legal form and name for your business.
Depending on the type and size of your business, you can choose from different legal forms, such as sole proprietorship (Einzelunternehmen), partnership (Personengesellschaft), or limited liability company (GmbH). Each legal form has different advantages and disadvantages in terms of liability, taxation, and administration.
You also need to choose a name that is not misleading or confusing with other existing businesses. Here are legal forms of self-employment in Germany; you can start only one of them:
- Solo proprietor (Einzelunternehmen) – the most common type
- Society of Civil Law (GbR)
- Open trading company (OHG)
- Partnership Company (PartG)
- Limited partnership (KG)
- GmbH Co. KG
4. Open a business bank account and keep track of your income and expenses.
You need to separate your personal and business finances and keep accurate records of your transactions. Use an accounting software or hire a bookkeeper to help you with this task. You also need to issue invoices to your clients and keep copies of them for tax purposes.
5. Calculate and pay your taxes.
As a self-employed person in Germany, you need to pay income tax, trade tax, social security contributions, and health insurance. You also need to pay value-added tax (VAT) if your annual turnover exceeds 22,000 euros, according to Germany-VISA.org.
Use an online calculators or consult a tax advisor to estimate your tax liability and deductions. You need to file an annual income tax return (Einkommensteuererklärung) and a trade tax declaration (Gewerbesteuererklärung) with the local tax office.
Aside from that, make quarterly advance payments for income tax and trade tax based on your estimated income.
6. Hire a tax consultant or advisor if you need help with your taxes.
Taxes can be complicated and confusing for self-employed people in Germany, especially if you are unfamiliar with the German tax system or language.
A tax consultant or a tax advisor can help you with your tax obligations and deductions and advise you on how to optimize your tax situation. You can find a tax consultant or a tax advisor online or through referrals from other self-employed people.
Before you take any action, read this article on all expenses related to self-employment and business in Germany.
Benefits and Challenges of Self-Employment
Self-employment offers a range of benefits, but it also comes with certain challenges, particularly when it comes to managing taxes and legal obligations. Here’s a look at some key phrases related to the benefits and challenges of self-employment:
1. Flexibility: Self-employed professionals, such as those in web development agencies or medical professions, often enjoy greater flexibility in their work schedules, allowing them to balance personal and professional commitments.
2. Ownership: Self-employed individuals are business owners, giving them control over their own practices and decision-making processes.
3. Tax Consultation: While self-employment can involve complex tax situations, tax consultants can provide guidance on tax optimization, helping freelancers pay accurate income taxes and reduce their tax liability.
4. Limited Liability: Certain business structures like limited liability companies (LLCs) or joint stock companies offer legal protection by limiting the business owner’s personal liability for company debts.
5. Independence: Self-employment in Germany, or any country, empowers individuals to work independently, pursue their passions, and develop their own business strategies.
6. Potential for Higher Income: Successful self-employed professionals can potentially earn more than salaried employees, especially if they manage their finances effectively.
1. Tax Obligations: Self-employed professionals are responsible for paying taxes on their own, including income and trade taxes. They must navigate the complexities of tax law and declare their income accurately.
2. Trade Tax and Business Registration: Freelancers and trade tax freelancers need to pay trade tax based on their business’s earnings. Registering the business with the trade office and obtaining a tax ID (business’s tax ID) are crucial steps.
3. Commercial Law: Self-employed individuals must adhere to commercial law regulations, such as submitting tax declarations and reports to the local tax office.
4. Value-Added Tax (VAT): Depending on their business type and income, freelancers might need to pay value-added tax (VAT) on their goods and services.
5. Unemployment Insurance: Unlike employees, self-employed professionals might not have access to unemployment insurance, which can pose a financial risk during lean periods.
6. Surplus Income Statement: In Germany, self-employed professionals must submit a surplus income statement (Einnahmen-Überschuss-Rechnung) for tax purposes.
7. Complex Registration Process: The registration process for self-employment, especially for medical professionals or trade supervision freelancers, can be intricate and time-consuming.
8. Fluctuating Income: Self-employment income can be unpredictable, leading to challenges in budgeting and financial planning.
9. Understanding Tax Law: Self-employed individuals need to have a grasp of German tax law and its nuances to ensure compliance.
My opinion: Self-employment in Germany presents numerous opportunities for autonomy and financial growth, but it also demands a strong understanding of tax regulations, legal obligations, and financial management. Seeking tax consultation and staying informed about changes in tax law are crucial for navigating these complexities successfully.
Freelancing in Germany
Freelancing in Germany is a form of work that involves offering professional or artistic services that require a high level of expertise and creativity. Freelancers do not have employees, a fixed location, or a work contract.
They usually work for one client at a time and have a limited number of clients per year. Freelancers do not need to register their businesses but still pay income tax and health insurance. They can also deduct their business expenses from their taxable income.
Best websites to find a job as a freelancer in Germany:
If you want to do freelance work on the side of your full-time job, read this article.
Process of Freelancer Registration
The process of freelancer registration in Germany is more straightforward and accessible than for the self-employed. Here are the five steps you need to follow to register as a freelancer in Germany:
1. Determine Your Category
Understand whether your qualifications fall under Freiberuf (free profession) or Gewerbe (trade). Freiberuf refers to professions that involve intellectual, artistic, or creative services.
Individuals in these professions typically have specialized knowledge or skills.
You only need to register with the tax registration office if you’re in a free profession. Otherwise, you must register a Gewerbe and pay trade tax accordingly. The following are examples of activities that are considered Freiberuf:
- Medical Professions: This includes doctors, dentists, pharmacists, and other healthcare practitioners.
- Legal Services: Lawyers, notaries, and legal consultants are part of this category.
- Consulting Services: Individuals providing business, financial, tax, and management consulting.
- Artistic and Cultural Professions: Writers, artists, musicians, architects, and similar creative professionals.
- Scientific Research and Teaching: Professors, researchers, and educators in scientific and academic fields.
2. Obtain Tax ID
Complete the Tax Number Registration Form (Fragebogen zur steuerliche Erfassung) and submit it to the local tax office (Finanzamt). Once processed, you’ll receive your unique Tax ID, which you’ll use for invoicing clients and paying taxes.
3. Register with Sorted
Consider using an online platform like Sorted, recommended for all freelancers and self-employed individuals. This platform can simplify the process of registering as a freelancer in Germany and managing your taxes. It streamlines tasks like tax declarations, tax returns, and reporting.
4. Understand Tax Obligations
Familiarize yourself with your tax obligations as a freelancer. Freelancers pay income taxes based on their earnings. Depending on your category, you might also be required to pay trade and value-added taxes (VAT). Consult tax consultants or experts specialising in German tax law if necessary.
5. Maintain Records and Reporting
Keep accurate records of your income, expenses, and any tax-related documents. As a freelancer, you’ll likely need to provide the tax office with a surplus income statement (Einnahmenüberschussrechnung).
Stay informed about changes in tax rates and regulations. If you’re in a regulated profession, such as the medical profession, ensure compliance with trade supervision requirements.
Pros and Cons of Freelancing
Here are the pros and cons of freelancing:
Pros of Freelancing:
1. Flexible Working Time: Freelancers can set their own working hours, improving their work-life balance.
2. Independence: Freelancers are their own bosses, making decisions about their work and clients independently.
3. Variety of Clients: Freelancers can work with diverse clients and projects, keeping their work engaging and dynamic.
4. No Commuting: Freelancers often work remotely, reducing the need for commuting and associated time and costs.
5. Liberal Profession: Those engaged in a “liberal profession” like consulting or alternative medicine can practice their expertise without strict regulations.
6. Control Over Projects: Freelancers can choose projects aligned with their skills and interests, leading to a more fulfilling work experience.
7. Tax Benefits: Freelancers can claim tax deductions for business-related expenses, potentially reducing their tax burden.
8. Higher Earning Potential: By leveraging their specialised skills, Successful freelancers can earn more than traditional employment.
9. Autonomy: Freelancers can make decisions quickly without navigating through layers of bureaucracy. They can do their freelance activity without relying on other businesses.
Cons of Freelancing:
1. Irregular Income: Freelancers may face inconsistent income due to fluctuations in client demand and payment delays. Also, limited companies are offering this type of job.
2. Self-Employed Tax Burden: Freelancers are responsible for their own taxes, including income tax and potentially higher self-employment taxes.
3. Business Registration: Setting up and maintaining a freelance business involves administrative tasks such as business registration and record-keeping.
4. Lack of Benefits: Freelancers often miss out on employee benefits such as health insurance, retirement plans, and paid leave.
5. No Employer Protections: Freelancers, such as unemployment insurance, lack legal protections and rights afforded to traditional employees.
6. Client Dependence: Relying on a limited number of clients can be risky if they reduce their workload or discontinue projects.
7. Uncertain Workload: Freelancers might experience periods of high demand followed by quiet spells, leading to uncertain workloads.
8. Isolation: Working independently can lead to isolation and loneliness, especially if the freelancer works from home.
9. Legal Challenges: Freelancers might face legal challenges related to contracts, intellectual property, or client disagreements.
10. Client’s Office: Depending on the nature of the work, freelancers might need to work at the client’s office, limiting the flexibility of remote work.
It’s important for individuals considering freelancing to weigh these pros and cons based on their skills, preferences, and circumstances. Seeking legal help and financial advice can be valuable when navigating the complexities of freelancing, including taxes, contracts, and business registration.
Differences Between Self Employed and Freelancers In Germany
There are several differences between self-employed and freelancers in Germany, both in terms of legal and tax implications. Here are some of the main differences you need to know:
Self-employed people run their own businesses, offer goods or services, and have high autonomy and responsibility. Freelancers offer professional or artistic services that require a high level of expertise and creativity.
Self-employed people need to register their business with the local trade office (Gewerbeamt) and obtain a trade license (Gewerbeschein). Freelancers do not need to register their business, but they still need to obtain a tax number (Steuernummer) from the local tax office (Finanzamt).
Self-employed people can choose from different legal forms for their business, such as sole proprietorship (Einzelunternehmen), partnership (Personengesellschaft), or limited liability company (GmbH). Freelancers usually operate as sole proprietors unless they partner with other freelancers or self-employed people.
Self-employed people need to pay income tax, trade tax, social security contributions, and health insurance. Freelancers need to pay income tax and health insurance, but they do not need to pay trade tax or social security contributions unless they are members of a professional chamber or association.
Self-employed people can deduct their business expenses from their taxable income, such as equipment, software, travel, advertising, etc. Freelancers can also deduct their business expenses from their taxable income, but they have some limitations on what they can deduct, such as rent, utilities, internet, etc.
Self-employed people need to file an annual income tax return (Einkommensteuererklärung) and a trade tax declaration (Gewerbesteuererklärung) with the local tax office.
Freelancers need to file an annual income tax return only. Both self-employed and freelancers need to make quarterly advance payments for income tax based on their estimated income.
Self-employed people need to pay value-added tax (VAT) (Umsatzsteuer) if their annual turnover exceeds 22,000 euros. Freelancers must also pay VAT if their annual turnover exceeds 22,000 euros unless they are exempt from VAT due to their profession or service. For example, doctors, lawyers, teachers, and writers are exempt from VAT in Germany.
Self-employed people have more freedom and flexibility to choose their work hours, location, clients, projects, and rates. They also have more opportunities to grow and diversify their income. However, they also have more responsibility and risk for their business. They also have more costs and obligations for their taxes, social security contributions, and health insurance. They also have less stability and security for their income and career.
Freelancers cannot choose their work hours, location, clients, projects, and rates. They also have fewer opportunities to grow and diversify their income. However, they also have less responsibility and risk for their business. They also have fewer costs and obligations for their taxes, social security contributions, and health insurance. They also have more stability and security for their income and career.
Understanding The Tax Differences
Understanding the tax differences between freelancers and self-employed individuals in Germany is crucial, as it impacts their financial obligations and reporting requirements. Both categories involve self-employment, but there are distinct tax considerations based on the nature of the work and the legal classification.
Freelancers, particularly those engaged in liberal professions like writers, artists, and consultants, have specific tax advantages. They often benefit from simplified tax reporting and lower administrative burdens compared to businesses engaged in commercial activities. Freelancers are subject to income tax (Einkommensteuer) based on their earnings.
They also need to consider potential value-added tax (VAT) obligations, depending on their annual turnover. Freelancers are not typically required to pay trade tax (Gewerbesteuer) since they are not engaged in commercial activities.
Self-employed individuals who operate businesses, such as web development agencies, are considered business owners and need to fulfil more extensive tax obligations. They are subject to income tax, trade tax, and potentially VAT. Self-employed business owners must also maintain accurate tax reports and financial records to ensure compliance with tax authorities. Additionally, they are responsible for their pension insurance contributions.
Example – Web Development Agency:
Consider a scenario where a web development agency is providing services in Germany. If the agency is legally registered as a business, it falls under the self-employed category. The agency is subject to income tax, trade tax, and potential VAT as a business owner. If applicable, the agency must file detailed tax reports, maintain financial records, and make pension insurance contributions for its employees.
Let’s contrast this with an individual web developer offering freelance web development services. If the web developer’s work is considered a freelance activity within a liberal profession, they enjoy simplified tax reporting.
They pay income tax based on their earnings and might need to pay VAT depending on their turnover. Trade tax is generally not applicable to freelance activities, providing the developer a tax advantage compared to the business owner.
Final Thoughts About Self Employed And Freelancer in Germany
In conclusion, the decision between becoming self-employed or a freelancer in Germany is significant, with distinct legal, financial, and lifestyle implications. While self-employment offers greater autonomy and potential for growth, it comes with complex tax obligations and responsibilities.
Freelancing provides flexibility and focuses on specialized skills but may lack certain benefits and stability. To make an informed choice, individuals should carefully consider their profession, financial goals, and willingness to navigate legal requirements.
To delve deeper into this topic, explore the provided links and ensure you’re well-prepared for your entrepreneurial journey in Germany.