Freelance designers pay taxes
Everything you need to know about taxes as a freelancer
Freelancer & Taxes: Target and actual taxation
When paying sales tax, a distinction is made between target and actual taxation. The debit taxation means that you have to pay the sales tax for partially or fully rendered services to the tax office, even if you have not yet received the service. Since, as a freelancer, you also have to wait a little for your bills to be paid, this means that you have to advance payment of the sales tax - which would be a not insignificant amount for some jobs.
Therefore there is the possibility to apply for the actual taxation. Here sales tax is only paid if the corresponding invoice has already been paid. The prerequisite for this is, among other things, that the net sales of the previous year did not exceed € 500,000.
Freelancers & Taxes: The advance VAT return
So that the tax office does not have to wait so long for tax income from entrepreneurs, the advance VAT return has been introduced. In the two-page document, the monthly income - and expenses - from sales tax must be stated. This also has advantages for entrepreneurs. On the one hand, the tax liability is not spread over a whole year, which creates a better overview of tax expenses and avoids bottlenecks in payment at the end of the year. On the other hand, the sales tax paid on purchases can also be reclaimed on a monthly basis.
The deadline for submission and payment is always the 10th of the following month, i.e. for April, a sales tax return must be made by May 10th at the latest. The submission must be made online using the ELSTER control software. The monthly payment applies for the first two years when starting a business and if the monthly tax liability from sales tax is more than € 7,500. If the tax liability is less than this amount, the pre-registration can be submitted quarterly.
However, this does not apply to all occupational groups. For example, medical professions are exempt from paying the advance VAT return. And even entrepreneurs whose sales tax was less than € 1,000 last year only have to submit a sales tax return once a year.
And finally, small business owners can completely avoid paying the sales tax and regular sales tax returns if they make use of the small business regulation.
Freelancers & Taxes: The Small Business Regulations
As a small business owner, you have the option of making use of the small business regulation and thus exempting yourself from paying sales tax. This makes sense for you, among other things, if you do not have any major purchases for your freelance work and therefore cannot recover the sales tax you have paid. Furthermore, you of course save the time that you would have to spend on bookkeeping and pre-registration.
You are a small business owner if your profit from the previous entire year was no more than € 17,500. In addition, your income in the current year may not probably exceed the limit of € 50,000. If they do, you will no longer be a small business owner from the following year and you will have to pay sales tax on your self-employed activity.
Freelancers & Taxes: The trade tax
Depending on your chosen legal form, you also have to pay trade tax. This applies to sole proprietorships, partnerships and corporations, i.e. all self-employed who account for their income using a trade license.
Freelancers alone are usually exempt from this. The distinction between a trader and a freelancer is often a tightrope walk. Doctors, naturopaths, lawyers, midwives and architects are clearly freelance workers. Professions with an artistic, educational or literary activity also fall into the category of liberal professions. That leaves more room for interpretation and often all that matters here is the correct formulation towards the tax office. Because in the end it will be decided exactly there whether you will be classified as a freelancer or a trader.
Sole proprietorships and partnerships can offset the annual tax exemption of € 24,500 against trade tax. This means that you only pay trade tax if your profit from freelance work is higher than € 24,500. Even then, you only have to tax the profit you made minus the tax exemption.
The amount of the trade tax to be paid is determined by the municipality in which your place of work is located. In addition, the amount depends on your income. The trade tax must be submitted annually together with the income and sales tax return. In advance, the expected trade tax, calculated down to a quarter, must be made as an advance payment. The deadlines for this are always February 15, May, August and November.
Calculation example trade tax
Paul is a sole trader, so he can deduct the business tax allowance. If we again assume his (pre-tax) profit of € 50,000, he only has to offset the trade tax on the remaining € 25,500. This value is now multiplied by the standard trade tax rate of 3.5%.
25,500 € profit * 3.5% trade tax rate = 892.50 €
This sum now has to be multiplied by the individual assessment rate (or percentage rate) of the municipality. Paul lives in Frankfurt, where a rate of 460 is susceptible.
€ 892.50 * 460 rate for Frankfurt / 100 = € 4,105.50 trade tax
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