Freelancing is rapidly gaining popularity in many organizations as it provides a flexible option for getting workers for the employer and a flexible way of working for the employee.
In Germany, a freelancer or independent contractor (known as “Freiberufler” or “Selbstständiger”) is defined as a self-employed individual who provides services to clients without being integrated into the client’s organization as an employee. Freelancers operate under their business structure and are responsible for managing their work, including setting their hours and determining how to complete their tasks. Unlike employees, freelancers do not receive benefits such as health insurance, paid vacation, or unemployment insurance, and they can be terminated by clients without notice or reason.
Despite the nature of their operation freelancers still have to fulfill different tax obligations such as Self-Employment Taxes:
- Freelancers pay income taxes and social security contributions directly rather than having an employer make deductions.
- This includes payments for health insurance, pensions, unemployment, and long-term care insurance.
Here’s a comparison of the tax brackets and obligations for freelancers and other categories of workers in Germany, including employees and self-employed individuals:
| Category of Worker | Taxable Income Range (EUR) | Tax Rate (%) | Tax Obligations |
| Freelancers | 0 – 11,604 | 0% | Responsible for own income tax and social security contributions. |
| 11,605 – 66,760 | 14% to 42% | Must register with the tax office and file annual tax returns. | |
| 66,761 – 277,825 | 42% | Pay income tax in quarterly installments based on estimated income. | |
| Over 277,826 | 45% | ||
| Employees | 0 – 11,604 | 0% | Income tax is deducted at source by the employer. |
| 11,605 – 66,760 | 14% to 42% | Employers handle social security contributions. | |
| 66,761 – 277,825 | 42% | ||
| Over 277,826 | 45% | ||
| Self-Employed | 0 – 11,604 | 0% | Similar to freelancers; responsible for their taxes and contributions. |
| 11,605 – 66,760 | 14% to 42% | Must register with the tax office and file annual tax returns. | |
| 66,761 – 277,825 | 42% | Pay income tax in quarterly installments based on estimated income. | |
| Over 277,826 | 45% |
Key differences
- Tax Deductions:
- Employees have taxes deducted automatically, but freelancers must handle all tax payments themselves.
- Social Security Contributions:
- Employers arrange social security payments for employees, while freelancers make their contributions.
- Quarterly Payments:
- Freelancers/self-employed pay estimated taxes quarterly, employees do not have this added responsibility.
Social Security Contributions:
Freelancers are required to pay around 20-30% in contributions for health, pension, unemployment, and long-term care insurance.
- Health Insurance:
- The normal rate is 14.6% with half paid by a freelancer, and half by the employer if applicable.
- Some freelancers may qualify for reduced rates based on their income or coverage.
- Pension Insurance:
- The normal rate is 18.6% split equally between freelancer and employer.
- Freelancers can opt for a reduced rate if eligible.
- Unemployment Insurance:
- The normal rate is 2.4% shared equally between parties.
- Self-employed often can’t access reduced rates.
- Long-Term Care Insurance:
- The normal rate is 3.05% of income split between parties.
- Reduced rates may apply based on criteria.
- VAT:
- Registration is required if earnings exceed €22,000 annually.
- Rates are 19% standard, and 7% reduced for eligible services.
- VAT Filing Process:
- File returns monthly/quarterly depending on VAT owed.
- An annual reconciliation return is also needed.
Bookkeeping Requirements:
Freelancers are required to maintain accurate records and receipts for audits. Freelancers can use cash-basis accounting (EÜR) or a comparative balance sheet, depending on their income level and business structure.
Common Bookkeeping Programs in Germany
Freelancers often use various software programs to manage their bookkeeping, including Lexware, DATEV, WISO, and Debitoor.
Annual returns are due by July 31 of the following year, or December 31 with an advisor. Returns include income statements, receipts, and tax forms. All income and applicable taxes must be reported fully and accurately.
Freelancers pay quarterly estimated taxes on March 10, June 10, September 10, and December 10. These payments are calculated based on the freelancer’s previous year’s tax liability or their estimated current-year income. Making timely estimated payments throughout the year can help reduce penalties and interest accrued.
Penalties for Late/Missed Filings or Payments: Late filings are subject to up to a 10% fine on the unpaid tax amount. Interest also accrues on any missed estimated tax payments, usually around 1% per month. Paying taxes late or missing deadlines can result in avoidable costs that deplete funds. It is highly recommended for freelancers to consult a tax advisor for personalized guidance specific to their circumstances and work.
An advisor can help take advantage of deductions and ensure proper classification of income and contributions. Do-it-yourself tax preparation risks overlooking opportunities. Deadlines and requirements are crucial for tax compliance and financial health. Consulting a specialist can provide peace of mind.