In this article we look at the small business regulation (Kleinunternehmer-Regelung) from the perspective of foreign citizens. If you are not from Germany and still want to test your freelance or business idea, this article may be exactly the one you are looking for.
Small business regulation is the simplified form of taxation for freelancers and tradesmen with a small turnover. The legal basis is the Value Added Tax Act (§ 19 UStG).
This regulation serves to simplify the start-up phase of freelance or business.
The difference to the so-called standard taxation (Regelbesteuerung) is that according to Small Business Regukation the freelancer / trader is free from the levying of 19% sales tax (also called value added tax).
If the annual turnover is to be less than €9,000 (for the family this minimum doubles to €18,000), you do not pay INCOME TAX either.
As you may know, there is a tax difference between freelancers and tradesmen in Germany. However, the small business regulation applies to the two groups mentioned.
1: Your residence permit must include a note allowing self-employment: “Self-employment permitted” (s. the small screenshot). If this note is not on your Blue Card, contact the responsible immigration authority (Ausländerbehörde).
Important! Small entrepreneur – is a form of taxation as explained above. But the term sole proprietor or sole trader (Einzelunternehmer) – refers only to a person who works for himself, being his/her own boss.
2 and 3: Here it is important that both conditions are fulfilled. Remember, it’s the turnover, not the profit. Profit is less than turnover.
Turnover (Umsatz) shows total income (Einnahmen), which is received on the company account within a period (e.g. one year). Turnover is just income.
Profit (Gewinn) is the sum remaining after all expenses. Profit = Income – Expenses.
Again: in our case (€17,500 in the 1st year and €50,000 next year) it’s about turnover, not profit!
Important! If your status is a small business owner (Kleinunternehmer), all of your invoices must include an extra note: Als Kleinunternehmer im Sinne von § 19 Abs. 1 UStG wird Umsatzsteuer nicht berechnet. Which means: “According to the §19 Abs. 1 UStG (small business regulation), VAT will not be charged”.
The business process is extremely simplified. The whole accounting is reduced to two lines: 1) the sum of all incomes and 2) the sum of all expenses.
VAT is excluded from the very beginning – not only in invoices, but also for business expenses.
There are no advance tax returns and no advance tax payments.
Image can suffer. Some clients think you’re an amateur. A professional is expected to pay 19% sales tax on invoices.
Total expenditure is higher. A small businessman does not charge 19% VAT, therefore he cannot deduct the 19% of his business expenses.
To obtain the status of small businessman, it will be enough to put a cross in the questionnaire for tax registration – Fragebogen zur steuerlichen Erfassung, Zeile 133, (s. Screenshot above)
What if your turnover unexpectedly exceeds €17,500 or €50,000?
– It’s no problem at all. As soon as the above mentioned limit is exceeded, you start to pay the tax according to “regular taxation”. By the way, you or your tax consultant should be aware to change to regular taxation at the right time. Don’t wait until the state warns you.
Important! Always enter the tax number (Steuernummer) in all correspondence with the tax office.
Ups…. that’s not easy! If you levy 19% tax from the beginning of your self-employment, then you cannot change this for the next five years. So think carefully before you start as a small business owner.
First let’s just calculate: maximum turnover €17,500 in the first calendar year and €50,000 in the second calendar year – is it really your case? Does it work for you?
What does tax term calendar year mean? If you started on September 1st, your first year includes 4 months. If you started on December 1st, then your first year includes only 1 month.
However there are two situations, however, when small business status is recommended:
1: a simple and legal way to earn a sum equivalent to several months’ salary on a part-time basis.
2: a simple and legal way to test your business idea or your freelance work in Germany.
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