Registering a business and handling entrepreneur tax is no cakewalk. Add this to the many bureaucratic hoops and the significantly higher taxes in Germany, and you have all the reasons to feel unsure about continuing as an entrepreneur in Germany.
So, it is a good idea to learn your way around Germany’s tax system to avoid any complications and efficiently lead your business.
Now, let’s go through the steps of registering your business at the German tax office and managing entrepreneur tax in Germany.
Registering with the tax office (Finanzamt)
The Finanzamt is your local tax office responsible for collecting and returning tax, and business registration.
Registration at the Finanzamt and your business’s association is the first step to setting up a business in Germany. In addition, remember that you need to have liability insurance.
To register at the Finanzamt, send a letter with your name, contact details, and the name and details of your business to them.
Shortly after, you will receive a detailed questionnaire called Fragebogen zur steuerlichen Erfassung (tax collection questionnaire). This will ask for information such as your general information, business assets and activity, your estimated income, and the accounting and profit plan. The legal forms can also be found online on the webpage of the German Ministry of Finances, known as the Bundesministerium der Finanzen.
Finally, you must go to the tax office with the completed form to finalize your tax registration. If all the necessary information is provided, the tax office will provide you with a tax number for your business. At this stage, most of the work is done!
You may also be required to have a membership at HWK (Chamber of crafts) or the IHK (Chamber of Industry and Commerce).
Deciding Your Business Type
As we stated earlier, there are legal forms which correspond to different business types. In Germany, businesses can be divided into three main types:
- Einzelunternehemen: Sole Proprietorship
- Personengesellschaften: Partnerships
- Kapitalgeselschaften: Corporations
Based on your business type, you can choose the legal form that suits you best. For example, if you are starting a large startup, you need a different form than a small freelancer.
Deciding Your Tax Divisions
Entrepreneurs are responsible for their business taxes. There are normally two divisions of taxes:
- KG, GbR, OHG: these are taxes for sole proprietorships and partnerships
- GmbH, AG, KGaA: these are taxes for corporations
Let’s go through each division and the related taxes to find out more:
Sole Proprietorships and Partnerships
With sole proprietorships, there is only one owner who is responsible for all the taxes of his or her unincorporated business.
In partnerships, there are at least two individuals or companies involved as legal entities.
Taxes for these business divisions include:
- Income Tax (Einkommensteuer)
As the name suggests, this is the tax you have to pay from your income. However, you can still deduct business costs and special expenses from your income and pay the tax based on the remaining balance. Depending on how much you make, you could be exempt from paying taxes or you might have to pay as much as 45% of your annual income.
- Trade Tax (Gewerbesteuer)
If your company makes more than €24,500 per year, you are obliged to pay a trade tax. Freelancers are exempt from this tax.
- VAT (Umsatzsteuer or Mehrwertsteuer)
- The Payroll Tax (Lohnsteuer)
Payroll tax is mandatory for anyone you hire for your business. You deduct this tax from your employee’s payroll.
Between one and five people can form a corporation with some start-up capital. By establishing a corporation, you protect your business assets from debt. But at the same time, you are required to register at the Chamber of Commerce and your taxes are higher.
If you have a corporation, then aside from trade tax, VAT, and payroll tax you also have to pay:
- The Corporate Tax (Körperschaftssteuer)
- The Capital Gains Tax (Kapitalertragsteuer)
Freelancer or Trader?
As an entrepreneur, it is important to know the difference between the two so that you can determine the amount and type of taxes you have to pay. It is also helpful to know the distinction before you register your business at the tax office.
If you are a trader (Gewerbetreibender) in Germany, you need to pay the trade tax. You also need to obtain a licence (Gewerbeschein) and register at the trade register (Handelsregister).
On the other hand, as a freelancer (Freiberufler) there is less paperwork that needs handling. You need to remember that this title only applies to certain jobs such as doctors, teachers, engineers and other jobs such as nature guides are considered trades. Most commercial websites are also registered as trades.
Therefore, you need to check your profession beforehand to find out which title suits your business best.
Managing Entrepreneur Taxes With Online Tools
Anyone who’s employed in Germany has to pay taxes. But how does that work with entrepreneur tax? As a business owner, how are you supposed to calculate taxes without hiring a tax advisor?
There are online tools that help you pay your taxes if you are self-employed or the owner of a small business.
Let’s learn about two useful websites specifically designed to help entrepreneurs with their taxes:
This is a digital tax tool that offers assistance with a freelancer’s business journey. Sorted guides entrepreneurs through their taxes and get advice from tax professionals. The best feature of this tool? You can directly submit your tax reports to the tax office after creating them.
With Sorted you can do many things such as:
- Register with the tax office
- Receive a tax number
- Arrange tax reports for clients outside and inside Germany
- Get automatic tax reports and expense categorisation
- Create invoices
- Have an income and expense overview
Kontist is a free app that can help you manage your payments and invoices, get professional advice, do bookkeeping, and send them directly to the tax office.
With Kontist you can:
- Register your business with the Finanzamt and get a tax number
- Handle your bookkeeping
- Submit your tax reports
- Receive a consultation from professional tax experts
- Create invoices
- Have your own business bank account in Solarisbank AG in Berlin
In this article, we went through the steps of registering your business at the tax office, as well as the different types of business and the corresponding taxes you need to pay. In the end, we introduced two helpful digital tools to help you handle entrepreneur tax. At first glance, starting a business in Germany can seem a little tricky, but with the right information, you can do it without too much hassle.