60 to 70 percent of the tax literature published worldwide is written in German.
So you just started out working as a freelancer in Germany and everything is great. But then you find a letter from recycling paper in your mailbox. Its head is crested with the prominent letters Bescheid. Your eyes scroll down the page and find a very big sum next to a date in the very near future.
Do not panic
Take your time to thoroughly understand the Bescheid. Germany is a constitutional state which gives you room for juridical wriggling in most cases.
I recommend setting up a separate bank account for your business. This way it is much easier to keep track of your funds for business besides your funds for living. You will want to keep a stock to your business bank account to pay several types of taxes.
- VAT – the VAT you bill is never yours. It remains in fiscal authority possession at all time, even as a number on your bank account. The VAT you will have to transfer is the difference between VAT billed and VAT payed. Finanzamt knows no fun when it comes down to VAT.
- Income tax – this is a percentage of your revenue in a given period. Earnings and expenses are counted against each other according to the ridiculously complex German tax law. You will pay a percentage of what is left afterwards.
- Business tax – this tax must be payed to the city/region for letting you do business in their sovereign territory. It is 7 percent of your revenue at least.
- Chamber of Industry and Commerce contribution – it’s technically not a tax but a compulsory membership. If you’re a carpenter though, you will become contributor to the Chamber of Crafts. If you feel lucky you could try to achieve non-contributory-status to your respective chamber. Good luck with that.
A good rule of thumb is to keep all the VAT you will have to pay, which is pretty easy to keep track of. You better start imagining yourself as a VAT-service-hatch. It’s fiscal property you’re just allowed to gather. On top of that you will want to keep up to 40 percent of your income until you get to advance payment mode after your first tax declaration. You can then switch to a 10 to 20 percent safety reserve of your annual income.
Make it personal
I usually try to call or even meet my clerk in charge personally if something goes off track. More often than not I come upon someone struggling as much with the system as I do.
You should be calm and friendly when handling tax officers. Just imagine having to deal with German tax regulations every day, eight hours each. My nerves would be strained as well, that’s for sure.
Get professional help
There’s a reason why we have even more tax consultants in Germany than pharmacies: you can hardly survive without one here. But find a good one because bad ones will cost you good money.
I am neither tax consultant nor lawyer, but if I can further assist you from my position of twentyplus years of experience with the system, feel free to contact me. May the funds be with you!