The last of 3 taxes you need to know as a sole proprietor / trader
First of all, the bad news: if your monthly profit is higher than 2.041,00 Euro, you as a trader must pay pay trade tax. And now the good news: for sole proprietors (“1-man company”) and partnerships there is a reduction (more precisely see below). And now the best news: Freiberuflers are free from this kind of tax!
The trade tax is paid into the funds of the cities and municipalities. Thus, the municipal infrastructure is financed by trade tax. Therefore every trader / sole proprietor has to pay trade tax.
Freelancers, however, have little use or no use of the infrastructure. Therefore, freelancers (Freiberufler) are not subject to trade tax.
About differences between entrepreneurs and freelancers see: Why is there a separation between trade and freelance professions?
If you have a one-man business or work with partners in a partnership (e.g. GbR, OHG, KG), there is an annual tax allowance of €24,500, which means that as a trader / sole proprietor you only pay trade tax if your annual profit exceeds €24,500.
In other words: If you run your IT Freelance as a sole proprietor alone or with other people, your trade tax will be lower.
If you fill the questionnaire for the tax registration, in lines 110-115 you estimate your expected income. The tax office will contact you and inform about the sum of trade tax. You can calculate this sum by yourself. You do this calculation in 3 steps.
The first step is to determine the expected profit. For this you estimate your income and your business expenses*. The profit results after the business expenses are deducted from the income. The tax-free amount of €24,500 is deducted from this profit. In our example, the income is €80,000 and the business expenses €30,000, resulting in a profit of €50,000.
Income 80.000 Euro
Expenses 30.000 Euro
Profit 50,000 Euro
Tax allowance 24.500 Euro
To be tax-payed 25.500 Euro
So taxable amount will be: €25,500.
Now you have to find out the tax basis (Steuermessbetrag). This requires the so-called tax indicator (Steuermesszahl). This tax indicator of 3.5% is the same all over Germany. This is multiplied by the taxable amount.
25.500 Euro x 0,035 = 892,50 Euro
So your tax basis is 892,50 Euro.
To complete the calculation, you need the so-called trade tax multiplier (also called assessment rate). This varies strongly from region to region in Germany – from municipality to municipality between 200% and 490%. In Berlin, the assessment rate has remained unchanged at 410% since 1999.
892,50 Euro x 4,1 = 3.659,25 Euro
To make the pill less bitter, good news for you. You are probably a sole proprietor or want to work independently in a partnership. In this case the assessment rate is reduced from 410% to 380%.
Therefore, the previous calculation will be corrected:
892,50 Euro x 3,8 = 3.391,50 Euro
Your reduction is €3.391,50 Euro. Consequently you have to pay €267,75 less to the tax office. (3.659,25 – 3.391,50 = 267,75 Euro)
I don’t want you to worry about making the calculations wrong. The amount is finally calculated in the tax office. If the amount calculated by you or your tax consultant is too low, you will receive a request for additional payment. If the amount is too high, you’ll get the payback from the tax office.
Sowohl Freiberufler als auch Einzelunternehmer können für den gleichen Auftraggeber absolut gleiche Arbeit erledigen. Die Unterschied ist rein steuerlich – Unternehmer / Einzelunternehmer zahlen zusätzlich die Gewerbesteuer.
Both: Freiberufler and sole proprietors (Einzelunternehmer) can do absolutely the same work for the same client. The difference is purely for tax reasons – entrepreneurs / sole proprietors have to pay trade tax. Freiberufler don’t.
In order to be exempted from trade tax, you must be recognized as a Freiberufler by the tax office.
Differences between different types of self-employment are explained in the following article: IT Freelance in Germany: FREELANCER vs TRADER
If the tax office classified you as trader (and not as Freiberufler freelancer), you have to pay the trade tax of €3.391,50 – according to our example. If you don’t want to pay this €3.391,50 trade tax, maybe it is worth hiring a good specialist lawyer**? A good lawyer could convince the tax office to classify you as a Freiberufler freelancer.
* – Business expenses can be one-time (e.g. purchase of a notebook) and ongoing (e.g. rent of place of work, Internet, hosting etc.).
** – For a good lawyer you can send me an email. Maybe I can help you.
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