Freelancing: About Registering, Taxes and Social Security

Definition, Explanation

Exerters of “freiberufliche” professions according to German income tax law do not have to register a trade when starting their activity, but only inform the revenue about the date of the beginning. Compared to tradesmen, they have a lot of fiscal advantages.

Registering of the activity
What it takes to register a freiberufliche profession is a simple notice letter to the revenue office near the residence of the worker, saying e.g. “Ich habe am 01.01.2008 die Tätigkeit als freiberuflicher Heilpraktiker aufgenommen.” The revenue then assigns him / her a tax number. Also they rate according to the kind of activity announced whether it is a freiberufliche or a sole-proprietor's activity. (This rating can be objected to and you can go to the Finance Court.) The worker must specify also whether he / she is exerting other (non-freiberufliche) earning activities or receiving other income (e.g. from renting). These facts decide which kind of tax declaration the worker will have to file
Income tax
Liberal professionals (Freiberufliche) pay taxes as for income from independent work acc. to income tax law (EStG § 2 Abs. 1 Nr 3). They have to inform the revenue of the estimated expected turnover and profit for the current calendar year. From these, amounts of quarterly paid income tax (EStG), church tax (KiSt) and the solidarity surcharge (SolZ). For determination of taxable income, in freiberufliche acitivities, there is no bookkeeping obligation. Freiberufliche can choose either the net income method or balancing of accounts (latter is compulsory for tradesmen, except small trades). Net income method is easier and takes less time to do. It also allows for paying e.g. turnover tax at the date the money arrives, instead when the bill is handed out. In net income method, income and expenses are not booked on a main balance number but only written down one after the other. Record documents are collected and attached at the corresponding expense pages. From a profit of 17,500 € a year, the net income determination has to be written on printed forms, to be downloaded at the revenue including instructions. For profits below 17,500 Euros a year, a self-made net income determination is sufficient. Freiberufliche do not have to cash up, note down inventory costs, or take annual inventories (unlike tradesmen). Also, incoming and outgoing goods do not need to be listed.
Trade tax
Freiberufliche do not pay trading tax (GewStG § 2 Abs. 1)
Turnover tax (USt)
Freiberufliche and tradesman alike are not charged turnover tax if last calendar year's total turnover (including tax) did not exceed 17,500 Euros – and – will not, presumably, exceed 50,000 in the current year. Attention, business starters! For the lack of a last year's turnover, the first (current) calendar year's taxed turnover threshold is 17,500. Freiberufliche whose last year's turnover is over the 17,500 threshold, have to file monthly turnover tax declarations which, today, is mostly done digitally. Payers of turnover tax who offer servises or goods within Europe need a USt-IdNr (turnover tax ID No), to be assigned by the central tax office (online application: www.bzst.bund.de ), not by the local revenue office. Therefore, the USt-IdNr is not identical with the income tax number. The USt-IdNr must be specified in the address on all business mail and finance records and in the flag of the website. At present, amounts of turnover tax are 19% according in the general rate (since Jan 01 2007), on basically all services and goods. There is reduced turnover tax of 7% on food (except drinks), books, magazines and the lending of copyrights and movies acc. to UStG § 12. A few other activities mentioned in UStG § 4 are without turnover tax, e.g. health care professions like doctors and dentists.
Social security
Self-employed Freiberufliche and tradesmen are exempt from compulsory social insurance. They have to look after their social insurance contributions (e.g. health insurance and pension insurance) by themselves.
- Statutory health insurance
  Self-employed (who are not having a secondary job with compulsory health insurance) cannot use statutory health insurance in the normal way. Basic requirement is to have been registered there compulsorily – then they can be voluntarily insured on, only if they have had a long-lasting, uninterrupted period of compulsory insurance, before, meaning at least 12 months immediately before end of compulsory insurance or at least 24 months within the 5 years before.
- Private health insurance
  Those who cannot get into the statutory health insurance can insure themselves in a private one. Contributions, here, are fully self-provided. In fact, contributions to private health insurances may seem a bit lower than statutory ones at first, but consider that they do not as well e.g. automatically cover family members. Also, women's (for risk of pregnancy) contributions and the ones of people with pre-existing diseases and older people are higher.
- Nursing care insurance
  Statutory health insurance includes a nursing care insurance. For nursing care insurance, self-employed pay 1.2% of their income. Those who are privately health insured have to have a separate nursing care insurance.
- Disability insurance and pension
  These complex topics can only be sketched, here. Personal advising by an expert who is not, preferably, at any insurance is very important. Information from the web, see links below – Stiftung Warentest probably helps finding objective information. To insure one's manpower, a Freiberuflicher should contract a disability insurance including a life insurance (as “Rürup-Rente” or eventually as “zulagenfähige Riester-Lebensversicherung”). Retirement Income Act (AltEinkG), enacted in 2004, allows self-employed with no statutory insurance to be government-supported in their pension via Rürup-Rente. Self-employed in statutory health insurance are allowed the “Riester-Rente” (SGB VI §2 Nr.1 bis 9). Still, an independent pension insurance is very important for self-employed.

Tips, Checklist

When you start an independent activity, you must reserve the money for tax, from the very first. If you fail to do this, there will be huge sums to pay at once when you file the first tax declaration
In the accountance sheets of the net income method for determination of taxable income, it is advisable to stick to the way of writing it as it is in the official forms. This saves time later when you copy own income and expenses and you do not have to restructurize the numbers
Freiberufliche should mind that their status as such is lost as soon as employed more than a certain number of people with professional pre-education. Temporary manpower, however, can be employed limitless
Those have cheap social security who exert, in addtion to their freiberufliche activity, a second one in which they are paid more than 400 Euros a month and in which social security insurance is compulsory: These people are insured, then, via their second job with health-, pension-, nursing care- , and unemployment insurance. Also as an unemployment benefit II-receiver you are insured at the social insurance, wich is advantageous when you start up a new business
Before you sign private health insurance contracts, compare different conditions and what is covered by benefits, thoroughly in detail. What benefits are offered under what conditions for what price? Get help at consumers advice centres and online guides. Private health insurances are also found under private health insurances association www.pkv.de

Last update: 09/27/2010

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