What is the most overrated thing about freelance work
Taxes, pensions and further training as a freelancer in the IT industry
Part 3 of our freelance series: the legal basis and safeguards
The number of people who work as freelancers is continuously increasing. Often freelancers are equated with freelancers, this is not necessarily correct.
What can you expect in terms of taxes, retirement provision and further training?
A freelancer is someone who is a freelancer. This term has established itself especially in the newer, technical sectors, i.e. among media professionals or in the IT sector. Many creative people, such as free musicians or advertising professionals, call themselves freelancers. They offer their knowledge and skills on the open market.
The freelancer carries out assignments for a company, but is not employed. Companies often look specifically for freelancers. This eliminates personnel and organizational expenses as well as ancillary wage costs. Freelancers, however, are doctors, lawyers and other professional groups that are defined in a catalog in the Income Tax Act.
As an IT freelancer, what do you have to consider in relation to taxes?
For the freelancer, the duty to pay income tax applies, as for all other natural persons. For freelancers this means in plain language that the income tax is determined on the basis of the various personal sources of income. More precisely, sales minus costs - i.e. profit - are taxed. In Germany there are progressive tax rates for income tax. As profits increase, the personal tax rate increases.
Tip for freelancers: self-employment must be registered with the tax office. The future freelancer shouldn't make the mistake of being overly optimistic about the expected earnings. Because on the basis of this information, the input taxes to be paid are determined, which must be paid in advance.
Business start-ups usually have to register a business. The freelancer is usually exempt from this. So he does not need to pay any business tax. The demarcation to trade is not always unambiguous and clear. The following applies: scientific, educational, artistic or writing activities are not subject to the trade regulations.
Commercial activity and work as a freelancer
As a freelancer, you can also generate income from a commercial activity. You will not lose your freelance status as long as you make sure that commercial and freelance activities do not mix (for example, an IT consultant who sells PC software or e-books on the side). If commercial activity plays a stronger role, the tax office may classify all activities, including freelance work, as commercial. In this case, you should inquire about possible leeway and allowances directly from the tax office. It is best to find out more from your personal advisor.
The sales tax is added to the invoice amount
In addition to income tax, sales tax plays an important role for freelancers. In our country it is applied to all services and goods. From an economic point of view, it is a value added tax, which is colloquially known as such.
Sales tax is only levied on sales made in Germany. In Germany, the rate is currently 19 percent; the reduced rate of 7 percent applies to most groceries and books.
The freelancer charges the sales tax of mostly 19 percent on his services by adding them to his invoice amount. As a freelancer, you have to pay this additional amount directly to the tax office.
The counterpart to sales tax is input tax. The freelancer who collects the sales tax offsets this against the input tax. All expenses incurred for self-employment include input tax.
In order to provide services, goods or services are mostly bought. For this you will be charged the sales tax. You can offset this amount as input tax against the sales tax you have to pay. The advance tax payment is an advance payment that is paid to the tax office in the course of the year.
If the freelancer has less profit than forecast, he will get a repayment otherwise he will have to pay back.
Tax revenue surplus
Freelancers can usually use the income-surplus-calculation (EÜR). This is a simplified method of determining profits. Companies that are not registered in the commercial register can generally use this method. Profit = Income-Expenditure. An example: A freelancer earned around € 40,000 in services and project work in the 2019 financial year. This income is offset by € 15,500 in expenses - but € 11,150 is not paid for sales tax. The remaining € 4,375 was paid for work materials, travel expenses and accommodation. This results in a taxable profit of € 24,500.
Prevention is better than aftercare: what about retirement provision?
Very few self-employed people in Germany have statutory pension insurance. For freelancers, retirement provision is not required by law. Since business success and order utilization are usually not constant, income fluctuates and thus the savings rate for retirement. Those who do not take precautions are at risk of old-age poverty. You can make voluntary contributions to the German Pension Insurance, currently € 84 to € 1,209 (as of 2018) can be paid in voluntarily. And it's worth it far more often than you think. Due to the trend towards higher income, old-age provision should by no means be neglected.
In addition to retirement provision, health insurance usually gives the freelancer a headache, as it is quite expensive. Alternatively, you can look around for an employer who will hire you as a midi jobber (not a mini jobber!). The wage is between 450.01 and 850.00 euros per month. For 450.01 euros you get health and unemployment insurance as well as pension insurance, which gives you the right to rehabilitation and disability pension.
Lifelong learning: how should I continue my education?
Lifelong learning is usually urgently needed for freelancers. Those who are qualified get more jobs. Whether the training takes place through courses, internet research or learning while doing depends on the activity and personality - proof can usually only help. An exchange of knowledge that should not be underestimated takes place at events, such as the meeting of the digital nomads, or through pure project work. It is not for nothing that freelancers are often referred to as highly qualified people with expert knowledge.
Is freelancer a dream job for you? That can be a good thing, because taxes, retirement provisions and insurance (s) should not be an obstacle and are often overrated in their complexity. Nevertheless, remember that in addition to the brilliant business idea, some things such as the tax question, pension provision, health insurance and your own further training must be checked in advance. Plan enough time to do the regular things like tax returns, insurance payments, invoicing or bookkeeping. But don't let that put you off - the bottom line is that you can be very successful as a freelancer.
It continues with the 4th part: Freelancers in the IT industry: Salary and prospects - Part 4
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