Tax advisor in ... with For whom: Self-employed

Would you like to become self-employed so that you are no longer dependent on an employer? If your activity is a freelance profession, you can benefit from many simplifications and discounts, as you do not need to register a business. There are also exemptions from sales and trade tax for small companies. As the company grows, not only does the tax burden increase, but so do the demands on bookkeeping. Once you are registered in the commercial register, you are obliged to keep double-entry bookkeeping. A tax advisor can not only help you to deal with all the administrative procedures without any problems; he can also support you with bookkeeping.

Taxes for self-employment

Would you like to take the step of leaving your employment and generating sales and earning money on your own? Then you are self-employed. The term "self-employed" is used with different meanings depending on the context and is rarely clearly defined.

For example, the choice of terms in the Income Tax Act (EStG), in which the various types of income are listed and differentiated, causes confusion. Section 8 d) defines income from employment. This is the salary that employees receive in an employment relationship. In contrast, there is income from self-employment (EStG 8 c), which is largely equated with income from freelance work. However, the Income Tax Act also provides categories for income that is neither self-employed nor dependent: in particular, income from a commercial enterprise. [1]

Which self-employed people are freelancers?

According to the classification of income in the Income Tax Act, independently performed scientific, artistic, literary, teaching and educational activities are considered freelance activities . In particular, doctors and alternative practitioners, lawyers and tax consultants, architects, engineers, journalists and translators are among the freelance professions. The employment of professionally trained workers is permitted as long as the activities are based on the person's own specialist knowledge.

Which self-employed people have to register a business?

A key feature of freelance professions is that you do not have to register a business to practice them. The opposite is also true: if you do not meet the criteria for freelance work, you must register a business. As a trader, you must generally pay trade tax on your profits, but only above an allowance of EUR 24,500. While freelancers are only required to keep simple bookkeeping and may attach an income surplus statement to their tax return, tradespeople may also be required to keep double-entry bookkeeping and prepare more detailed profit and loss statements. This is always the case as soon as an entry has been made in the commercial register and the bookkeeping must be carried out in accordance with the rules of the Commercial Code.

What is a small business and what are the advantages for small businesses?

The term small business owner is defined in Section 19 Paragraph 1 of the Sales Tax Act: according to this, entrepreneurs with an annual turnover of less than 17,500 euros are considered small businesses. Accordingly, commercial enterprises that are subject to the small business regulation are also referred to as small businesses. As a small business owner, you are exempt from VAT. This exemption from VAT applies to both traders and freelancers. If you have registered a business, you also do not have to pay trade tax up to an annual profit of 24,500 euros. [2,3]

When you register a business activity - whether as a freelancer or a tradesman - you are considered a sole proprietor, unless you have consciously chosen a different legal form. Setting up a sole proprietorship is therefore extremely easy because no start-up capital is required. As such a sole proprietor, you have complete control of the company; however, you are also fully liable for any losses incurred by your company with your personal assets.

When does a self-employed person have to register in the commercial register?

As a self-employed person, you can run a commercial business without owning a company in the sense of commercial law. Because the company name must always be able to identify who the owner is, freelancers and tradespeople without an entry in the commercial register must include their own name in the company name. Only with the entry in the commercial register is the association between the company name and the owner outsourced, so that you can then choose a fictitious name for your company.

When you are entered in the commercial register, stricter accounting rules apply. As a small company, you are free to make this decision. However, as soon as the size and complexity of your company has grown too much and requires commercial operations, you are obliged to register in the commercial register. How exactly this complexity threshold is defined varies greatly from individual to individual. An annual turnover of a few 100,000 euros is usually considered a rough guide. [4]

However, an entry in the commercial register can also have advantages: due to the stricter accounting requirements, a company is often a more trustworthy business partner than a small company. This can play a significant role when you are looking for investors. Because the company name is decoupled from the owner, you can also sell the company or pass it on to someone else without having to change its name.

Tax advisors help you take the step into self-employment

As a self-employed person, you are also responsible for correctly registering your activity with various authorities and declaring and paying any taxes that may be payable. There are many pitfalls here: even the assessment of whether you have to register a business for your profession or whether it is a freelance profession is not obvious in niche subjects. Based on your business plan, you can then usually come to an assessment yourself as to whether you are still a small business owner and whether you are liable to pay trade tax. Perhaps setting up a GbR or GmbH will pay off in the long term?

It is best to seek help from a tax advisor before you start your company, who can discuss all aspects with you and work through different scenarios. A tax advisor will also be able to show you how you can cleverly exploit tax allowances and thus keep taxes low, especially in the first few years of business. They will also be able to help you with registering a business or making entries in the commercial register. In the latter case, you should have a tax advisor prepare your tax return, including the annual financial statements and profit and loss statement, for at least the first year. This is a lot of bureaucracy and your mistakes can quickly be interpreted as attempted tax evasion.

Sources

1. https://www.gesetze-im-internet.de/estg/BJNR010050934.html#BJNR010050934BJNG001108140
2. https://www.kleingewerbe.de/steuerpflichten.htm
3. https://www.gesetze-im-internet.de/ustg_1980/__19.html
4. https://www.gulp.de/knowledge-base/recht-und-steuer/unternehmen-selbststaendiger-oder-freiberufler.html
5. https://www.gewerbe-anmelden.info/rechts Formen/einzelunternehmen.html