IT industry: freelancers, trader and sole proprietors – what is the difference?
Let’s clarify some basic terms* from the beginning. Imagine you work in a company as a software engineer. Your employment called regular employed job. In German: nicht-selbständige Tätigkeit (literally “not self-employed”). In bureaucratic German it called sozialversicherungspflichtige Tätigkeit (something like: “working activity which requires social security deductions).
The opposite is self-employed work. This happens if you:
In cases A, B and C you do not have to make social security deductions. Thus it is self-employed work
In Germany, self-employment can be divided into two types: die freien Berufe (freelance professions) and Gewerbe (trade). Therefore, you may be a Freiberufler (freelancer) or a Gewerbetreibender (trader). (Sole)traders are often called (Einzel)unternehmer, which means (sole) proprietors.
Einzelunternehmer (sole proprietor) is the very common legal form, at least among self-employed IT professionals. So I will use the term sole proprietor as well as the term trader.
The basis for this separation is formed by § 18 of the EStG:** “Freelance activities include (…) the self-employed occupation of physicians (…) survey engineers, engineers, architects, (…) consulting economists and business economists (…) and similar professions“. §18 lists some freelance professions. However, there is no universal definition of a “freelance profession”.
The following professions are important for the IT industry: engineers, architects, industrial consultants. Once you have positioned yourself as, let’s say a software engineer or software architect or IT-consultant, you have a good chance to be classified as a freelancer.
Freelance work is assumed to be based on academical education. If you graduated in programming or similar disciplines, your chances of becoming a freelancer are increasing.
It does not necessarily have to be a university degree. The knowledge of the subject can also be acquired by the freelancer in self-study. Or by his professional experience. However, this knowledge must be at least at the bachelor level.
All other professions are considered to be Gewerbe (according §15 EStG). The question is – who decides if you are a freelancer or a trader?
This decision will be made by tax office (Finanzamt). All you have to do is to complete a form for tax registration (Fragebogen zur Steuerlichen Erfassung) send it to your local tax office and wait for their response. If they classify you as a freelancer (Freiberufler), you can start right away – deliver your services and send out invoices.
If the tax office will classify your activity as a trade (Gewerbe) – complete this form Gewerbeanmeldung and register for €15-31 at your local trade office (Gewerbeamt). After that you can start.
– How do I find my local tax office or trade office? Quite simply!
– In Google type in the desired office, your city and the district.
Example for the tax office: type Finanzamt Berlin Charlottenburg
Example for the trade office: type Gewerbeamt Hamburg Altona
The main advantage: freelancers do not pay trade tax (Gewerbesteuer). A freelancer does not have to prepare a balance sheet no matter how much he earns. He can always run a simplified accounting and only issue an EÜR (so-called net income invoice method).
Revenue-surplus accounting (EÜR) is the simplest way of calculation of profit.
Which taxes do IT-freelancers have to pay? Read this article.
The trade tax is paid into the funds of the cities and municipalities. Thus, the municipal infrastructure is financed by trade tax. It is assumed that freelancers have little use for the infrastructure.
TRADER vs FREELANCER – EXAMPLE 1:
TRADER vs FREELANCER – EXAMPLE 1:
John is running a satellite antennas store. He drives his van through the streets to deliver and install the antennas. That called Gewerbe. According to German tax law, John is a trader (Gewerbetreibender).
Peter is a software engineer. Peter does not drive through the streets, but works from home or office. According to German tax law, Peter is freelancer (Freiberufler). Engineer is one of freelance professions (in German: freie Berufe).
Wenn in deinem (Einzel)Unternehmen gemischte Leistungen (s. Beispiel 1) erbracht werden, musst Du feststellen, welche Tätigkeit tatsächlich ausgeübt wird.
TRADER vs FREELANCER – EXAMPLE 2:
Here you can see separate mixed activity. You have two different ways of income. They are must not be recorded in the accounting and not run over the same bank account. Register separately as a trader AND as a freelancer and the problem is solved.
TRADER vs FREELANCER – EXAMPLE 3:
As the two activities are closely connected, the decision must be made in favour of trade.
* – German technical terms and abbreviations explained in English are to be found in Glossary
** – This translation is not legally binding
Hopefully I’ve been able to clarify things a little. If you would like to add your examples to this article, please leave a comment. If you don’t agree with some parts of the text, please leave your question (s) in the comment as well.
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