*This article is a collaboration between BBA and Accountable.
For many, freelancing means more flexibility, independence, and a chance to pursue one's passions. In recent years, the number of freelancers in Germany has been steadily increasing, reflecting the changing nature of work and the desire for a more flexible lifestyle.
But what do you have to do exactly to become self-employed in Germany? What do you have to know about legal implications, how do taxes work and what resources are there for financial support?
We provide an overview of the five steps you have to think about before embarking on your freelance journey in Germany.
And if you end up wanting to create an an account with Accountable, click here.
Step 1 - Register as self-employed
You've decided you want to become self-employed? That’s great! Now it’s time to start with the so-called ‘Fragebogen zur steuerlichen Erfassung’. It’s the form everyone has to submit to the Finanzamt in order to officially register your work and to receive your Steuernummer (tax number). It’s also required if you just want to start a side-gig next to your job as an employee.
You can fill in the form via ELSTER or via the free form provided by Accountable in English.
To do so successfully, you should know one or two things before you start. Most important, will you register as freelancer or Gewerbetreibende (trade)?
Freelancers are those who provide services that require a certain level of expertise and are not considered commercial activities, such as consultants, artists, and writers.
Gewerbetreibende, on the other hand, engage in commercial activities such as selling goods and are subject to slightly different regulations.
So, if you start a Gewerbe, you also need to register with the local Gewerbeamt (trade office) and need to pay the registration fee, between 20€ and 70€, depending on your Gewerbeamt. Once you completed the registration it takes around three weeks until you receive your Steuernummer via letter. Then, you can start to work officially and send invoices.
Step 2 - Calculate how much money you need to earn
Before diving headfirst into self-employment, you should understand the financial implications that come with it. While the actual registration is relatively cheap, you need to consider how much money you need to build a solid financial cushion to cover living expenses, taxes, health insurance, and potential business-related costs before venturing into self-employment.
In order to calculate what your monthly income should be, determine your yearly working days. It will be around 216 days, after subtracting weekends, sick days etc. Then, consider how many hours you will work per month, let’s say 100. You can now divide your monthly costs by your working hours (costs/working hours = hourly wage). Your hourly rate would then have to be at least €60 net to avoid making a loss. However, since you want to make a profit, you should add approx. 10% to your hourly rate.
Step 3 - Apply for founder grants if needed
The initial capital required to start a self-employed venture in Germany varies, but it should be sufficient to cover your initial business expenses such as registration fees, office space, living expenses, and taxes. Fortunately, there are numerous options and potential sources of funding and support available. These include government grants specifically designed to assist new businesses, as well as financial aid programs offered by chambers of commerce and industry associations. Additionally, crowdfunding platforms and startup incubators can provide valuable resources and funding opportunities. These are some potential sources of funding and support:
Gründerzuschuss: Should you currently be receiving unemployment benefits (Arbeitslosengeld I), you might qualify for this entrepreneurial subsidy. It offers financial assistance, depending on your individual circumstances.
KfW Start-up Loan: The KfW Bank Group provides various financing alternatives for entrepreneurs and small enterprises, encompassing low-interest loans and equity investment opportunities
EXIST Business Start-up Grant: Should your business concept revolve around technology, the EXIST program could help in the initial stages of your startup by providing funding, mentorship, and networking opportunities.
Local Grants and Support: Entrepreneurs may have access to regional support programs depending on their location within Germany.
Step 4 - Choose health insurance and pension contributions
Freelancers in Germany are responsible for their own health insurance and pension contributions. Health insurance is mandatory for all residents in Germany, and freelancers can choose between private health insurance (private Krankenversicherung) and statutory health insurance (gesetzliche Krankenversicherung). Private health insurance is generally more expensive but offers more flexibility and better coverage, while statutory health insurance is based on a percentage of your income and provides basic coverage.
Some freelancers are also required to contribute to the statutory pension scheme (gesetzliche Rentenversicherung), this applies to craftsmen, teachers, midwives, educators and care workers, artists and publicists. All other self-employed professionals can apply for compulsory pension insurance voluntary.
If you don’t want to choose statutory health insurance, there are other options to provide for retirement, e.g. Rürup-Rente, life insurance, stock investments or the mentioned private health insurance.
Step 5 - Be aware of your tax obligations as a self-employed professional
Everyone who's self-employed in Germany needs to file their income tax return (Einkommensteuererklärung) at the end of the year to report their income and deduct business expenses. The income tax rate varies depending on your income level, with a progressive tax rate ranging from 0% to 45%. It’s crucial to roughly know how much income tax you will need to pay, in order to set this money aside and avoid bad surprises.
Your income tax return also includes the EÜR (profit & loss statement) and the yearly VAT return.
If you had to register a Gewerbe for your profession, you are also required to file a yearly Gewerbesteuer (trade tax return).
As a freelancer in Germany you may also be subject to VAT (Umsatzsteuer) depending on your annual income. If your annual revenue exceeds a certain threshold (€22.000 in your first year), you are required to charge VAT on your invoices. However, if your annual turnover is below this threshold, you may opt for the small business regulation (Kleinunternehmerregelung) and be exempt from charging VAT. In that case, you don’t need to file regular VAT returns.
In order to file all your tax returns, you can either hire a tax advisor, use the free ELSTER platform or work with a tax software like Accountable, that provides all you need in order to take care of your bookkeeping and your tax returns.
Go forth and build your business!
In conclusion, if you prepare and plan well, becoming self-employed in Germany will be an exciting journey for you.
It’s important you understand and comply with the regulations and to set aside funds throughout the year to cover your tax liabilities and avoid any unexpected financial burdens.
By registering your business, fulfilling your tax obligations, and securing health insurance and pension contributions, you can ensure a smooth and successful freelance journey in Germany and focus on what really matters - growing your freelance business with confidence and success.
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