Self employment and working freelance in Germany: what's the difference?
Being self-employed and working freelance in Germany is effectively the same thing, right?
In Germany, no, it isn’t.
The differentiation comes from the way German tax law treats the two separately. There is an important difference here which you need to know if you are considering starting out on your own two feet in Germany rather than taking the normal route of regular employment.
Working freelance in Germany has a subtle and very important different definition to the way we understand the term in English, and this is driven by German tax legislation. There are a certain set of professions known as the Freie Berufe, roughly translated into English and referred to from hereon in as the freelance professions, which are not subjected to certain rules and regulations of German tax law that other trades must comply with.
This can have a whole range of consequences, ranging from:
- the registration process of your business
- the amount of tax you pay
- whether you must join your local Chamber of Industry and Commerce
- the documentation you have to submit with your tax return
- and finally, but extremely important for those who are not EU/EEA citizens (so called Third Country nationals), and are dependent upon their freelance or self-employment activity for their residence permit: This can also impact the amount of time taken to grant your visa and the type of visa you will be granted.
We do not cover the freelance / self-employment visa application process in this article. There is a lot of inaccurate information out there too, so beware. Some particular gems I found were that the freelancer visa is only available in Berlin (absolute rubbish) and that German income tax for the self-employed is 19% (completely untrue). The best 2 articles recounting personal experiences which I could find were this one on self-employment and this one for freelancing, both written by Americans who have been through the process, as well as this more detailed walk-through of the process.
We will be putting together some detailed content on visas in future because this is a frequently asked topic, so clearly we need to fill the knowledge gap!
What Are The Advantages Of One Form Over Another?
Without going into a lot of detail involving complex and boring legal stuff, the Freie Berufe in general are treated more advantageously than other business forms.
Firstly, freelance professions do not have to pay the locally administered trade tax. Each municipality in Germany is responsible for collecting this, and the amount levied varies from municipality to municipality. How much each self-employed entrepreneur or sole trader pays is a complex calculation (limited companies, partnerships and joint-stock companies are all subjected to this tax too). All you need to know at this stage is, the advantage of not having to pay it i.e. by registering as a profession which qualifies as working freelance in Germany, and thus being exempt, can amount to several thousand Euro if you are running a six-figure business.
Secondly, the registration process is somewhat more straightforward, as we explain below. The step of having to register with the Gewerbeamt does not apply to freelance professions.
Thirdly, freelance business are not required by law to automatically join their local Chamber of Industry and Commerce (German: Industrie und Handelskammer, or IHK for short). Whereas for sole-trader businesses, membership of the IHK is mandatory. The cost is affordable though: Depending on business turnover, annual membership is likely to only be around EUR 200 maximum unless you are well into 6-figure turnover territory!
Does What I Do Qualify As Working Freelance In Germany?
So, let’s take a look at some of the job titles and descriptions covered under the definition of freelance professions, according to the Institut der Freien Berufe.
- Medical professions i.e. doctors, dentists, midwives, practitioners of alternative medicine, psychologists, physiotherapists and occupational therapists
- Authorised experts – for example quality auditors, health & safety inspectors
- Tax advisors
- Lawyers and Notaries
- Engineers – this can also include IT-related professions under certain conditions
- Teachers (including Kindergarten / Nursery)
- Translators and Interpreters
- Authors, writers and journalists (including bloggers, as long as you do not sell other products and services on your website which could be considered as general e-commerce / webshop)
- Graphic designers
Essentially, anything which is not covered under these professions is not considered as working freelance in Germany. Instead, it is classed as a “standard” trade, and must be registered as a Gewerbe, or sole-trader business, rather than a freiberufliche Tätigkeit.
What Are The Different Paths To Register My Business?
Whereas something which falls under a freelance profession can be registered easily at the local Finanzamt by filling out a 6-page form, registering a sole-trader business requires a slightly different (and more protracted) route. Provided you can understand German or get a friend to help you complete the forms, registering a freelance business is relatively straightforward. After submitting these to the Finanzamt, you will then receive a unique tax ID for your business usually a couple of weeks later. That’s all – you’re good to go from that point on, unless you are obliged to register with any professional bodies depending on what your line of work is.
A sole-trader business is registered with the Gewerbeamt in the respective municipality (at city / or district level). When these forms have been submitted, the Finanzamt will then (usually) subsequently send you the forms they require to be filled out. These are similar to the forms which are filled out for Freiberufler – the only difference being that for sole-trader businesses you cannot do this until you have registered your business with the Gewerbeamt.
It is extremely important to note that neither of these types of business formation are limited liability companies. Both freelance professions and standard sole-trader businesses do not enjoy the advantages of being a limited company owner / director.
The most obvious two examples of this are that you cannot pay yourself a dividend as a tax-effective way of avoiding social security contributions on your salary. More importantly, however, you are fully liable for any claims against your business, and is therefore essential that you take out the necessary liability insurance to cover you against any losses which your private estate would otherwise be liable for.
Side note – setting up a limited liability company (GmbH) in Germany is considerably less straightforward than in the UK, US and many other European countries because of the amount of starting capital required to do so. Which is why most people decide against it. However, if you are providing B2B services to more traditional businesses, they may well view a GmbH as being somehow a more “credible” and established business.
Both freelance and sole-trader business formations are also subject to collecting and administering VAT. This is known in German as Mehrwertsteuer (MwSt) or the other common term Umsatzsteuer (USt). VAT exemption is permitted if the annual turnover of a business was less than EUR 17,500 in the previous year of trading (or projected to be in the first year, in the case of a new business). This in reality is only likely in year 1 of trading, unless the business is run as a part-time, side business or hobby and is not someone’s main source of income.
This is meant to serve as an overview only and deliberately does not go into detail regarding the different steps taken to start a business in Germany. This is a much more detailed topic and is beyond the scope of this article.
What we hopefully have explained here is the subtle difference in the way that German tax and business formation legislation treats certain professions. In that regard, the professions which are granted a more favourable status through being defined as Freie Berufe mean less bureaucracy and also lower tax bills.
Disclaimer: This article should only be considered general information. If you have specific questions on what type of business form you need to register as, we strongly recommend you seek out a lawyer or tax advisor. Live Work Germany is not qualified to consult and advise on these matters.