Tax advisor in ... with For whom: Freelancer

When it comes to becoming self-employed, the paths are different for tradespeople and freelancers. While registering a business involves more effort and taxes, freelancers enjoy some tax simplifications. However, it is not always clear which work counts as freelance work. A tax advisor can give you advice on this before you register your business, but the final decision lies with the tax office.

What taxes do freelancers have to pay?

Anyone who wants to become self-employed through freelance work is still considered an entrepreneur. The most important difference between freelance work and normal activities is that as a freelancer you do not have to register a business and therefore do not have to pay trade tax. The status of a freelancer is therefore usually an advantage; and if you become self-employed in a suitable industry, you should strive to be classified as a freelancer.

Who counts as a freelancer?

The Income Tax Act defines the term “freelance work” in Section 18: this includes “scientific, artistic, literary, teaching and educational activities”. In particular, a list of freelance professions is then given, which can also be found in the Act on Partnerships of Members of the Free Professions (PartGG), with individual additions:

• Doctors , dentists , veterinarians, alternative practitioners, dentists, physiotherapists, midwives, massage therapists, qualified psychologists
• Lawyers , notaries, patent attorneys, auditors, tax consultants, consulting economists and business economists, sworn accountants, tax agents
• Engineers , architects, surveyors, commercial chemists, pilots, full-time experts
• Journalists, photojournalists, interpreters, translators

These activities are also referred to as catalogue occupations because a direct answer is possible if your visit appears in this catalogue of freelance occupations: in this case, you are almost certainly classified as a freelancer. However, both legal texts also add that similar occupations are also considered freelance activities. Unfortunately, the interpretation of what similar occupations are is not entirely clear. In principle, only your tax office can provide reliable information about your specific business model. However, an advisory discussion with a tax advisor helps freelancers to clearly define their business activities in order to be granted freelance status without any problems.

Freelancer or business owner?

If your profession is not one of the listed professions but can be found in similar industries, you must check for yourself whether your independent work can be classified as freelance work. A typical criterion for a freelance profession is that it is based on a special professional qualification or creative talent and that it enables you to practice the profession independently and professionally. The qualification can be acquired through study or training, for example, but even this is not always necessary. Professionally independent practice allows you to hire employees yourself to support you in certain work steps. However, it is important that you can check the professional suitability of your employees yourself and monitor their performance.

Conversely, you can also ask whether your activity has the characteristics of a business: The hallmark of a business is participation in general economic activity; in particular, this includes commercial transactions, i.e. the buying and selling of goods. For example, if you teach students as a private tutor, this is a teaching activity that could be classified as a freelance profession. However, as soon as you sell teaching materials or sample solutions to your students, you are conducting commercial transactions and thus meet the criteria to have to register a business.

Separation between freelance and commercial activities possible

In some circumstances, it may make sense to split your business into a commercial business and freelance work. The tax office can treat expenses and profits from both parts separately, provided your accounting allows a clear division. If this is not possible, so that there is an indissoluble connection between the two branches of the business, both activities are automatically classified as commercial.

Tax treatment of freelancers

Since freelancers do not have to register a business, no trade tax is payable. However, freelancers must pay sales tax, which applies to both traders and freelancers. However, there is an exception for small businesses, i.e. all self-employed people whose annual turnover is below 17,500 euros and who are exempt from sales tax. If your turnover is above this, you must also make advance payments for the expected sales tax. The turnover from the previous financial year serves as the basis.

You must also declare the profits from your self-employment in your income tax return. As a freelancer, you must prepare an income statement for this purpose, unless you voluntarily opt for a detailed balance sheet and profit and loss statement. A tax advisor can also help you prepare the sales tax return and income statement or the annual financial statements. Due to his business knowledge, you can also ask him specific questions about your bookkeeping.

Freelancers and partners – is that possible?

If you would like to join forces with other freelancers to form a joint business, this is possible in the form of a partnership. In this form of partnership, you each retain your status as a freelancer, so formally there is little difference to freelance work as a sole proprietor. However, if one of the co-entrepreneurs carries out work that is not considered freelance work, the entire company is classified as a commercial enterprise. As a trader, you are no longer able to set up a partnership; instead, you can open a GmbH, for example.

Sources

1. https://www.gesetze-im-internet.de/estg/__18.html
2. https://www.gesetze-im-internet.de/partgg/BJNR174410994.html
3. https://www.existenzgruender.de/DE/Gruendung-vormachen/Gruendungswissen/Freie-Berufe/content.html
4. https://www.hk24.de/produktmarken/beratung-service/recht_und_steuer/steuerrecht/real_kommunale_steuer/ablimitung-gewerbebetrieb-frei-berufe/1157144
5. https://www.gulp.de/knowledge-base/recht-und-steuer/unternehmen-selbststaendiger-oder-freiberufler.html