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Safe through the legal jungle of self-employment: Freelance, business registration and Co.
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As a self-employed author, you can register a business for your activity and make use of the small business regulation. We explain in the article what you have to pay attention to as a freelancer.
Even as an independent sole trader, you always have a partner on board: the tax authorities are always there. So that this "partner" is also informed about your activities, you have to register a business - but only if you are actually doing business. Alternatively, it should be checked whether your services should be assessed as a freelance activity. Whether and when one or the other is the case is one of the fundamental questions of entrepreneurship. In order to take advantage of certain advantages and to save yourself trouble, you should know where you stand. We will therefore show you what to watch out for.
Who has to register a business?
The measure of all things is § 14 of the trade regulations. If you start the "independent operation of a standing trade", you have to report this to the competent authority and register a business. You only need not to register a business if you are a freelancer. Freelancers enjoy a special tax status. In practice, this leads to the question of who is commercially and who is a freelancer. The terms “self-employed”, “freelancer” and “sole proprietorship” describe services from different perspectives and usually mean the same thing as a result. If you are self-employed, you are also a freelancer and sole proprietor. If you are a sole proprietor, you are usually also a trader. Even freelancers are sole traders, even if this term is rather uncommon.
If you want to start your own business, the best you can do is not register a business immediately. Because with the business registration you set the course for your tax future. Once you have registered as a trader, it will later be difficult to be subsequently recognized as a freelancer. So you have to check (or have checked) beforehand whether your service can be classified as a freelance activity or not. In order to assess yourself, you should orient yourself by the principles according to which the law draws the boundaries. You can best understand these limits yourself if you consider what legislators and case law are assuming and take typical cases as an example.
What is the difference between entrepreneurs and freelancers?
The distinction between freelancers and tradespeople stems from a long time ago, when the professional world was structured much more simply. Doctors and lawyers were typical freelancers, while the manufacturing entrepreneur was considered a trader. The legislature tries with the description of so-called Catalog occupations in Section 18 of the Income Tax Act to provide a guideline. If you do one of the catalog jobs mentioned there, you are automatically a freelancer. Journalists, editors, translators and writers are among these catalog professions because of their independent artistic and / or writing activities.
So it really depends on what you do. The delimitation of whether you work as a freelancer or commercially is therefore to be made from the point of view of § 18 EstG. As a trader, you must first register your activity with the trade office. The trade office informs the tax office. From there you will receive a multi-page form in which the tax office inquires about your business situation. Freelancers who do not have to register with the trade office register themselves at the tax office and also receive the questionnaire for tax registration. Here, too, the basics for the tax framework are fixed. So you have to know exactly where you are.
When do I work as a freelancer?
If you do one of the catalog jobs, you are automatically freelance. This applies, for example, to lawyers, doctors, auditors, tax advisors and accountants. Journalists, photo reporters, interpreters and translators are also named as catalog professions. But even if your service cannot be found by name in the catalog professions, you can be a freelancer. Your service just has to be similar to that of a catalog job. The prerequisite for this is that you are self-employed in a scientific, artistic, literary, teaching or educational role. The essential characteristic of freelance work is immediate, personal and individual work performance. General assessments are not possible, it always depends on the individual case. As a rule, freelancers have an academic or comparable special professional qualification or creative talent, so that the focus is on personal, self-reliant, not bound by instructions and professionally independent service. Often there is also a special relationship of trust with the client.
Examples of professional / commercial activities
If you work as a writer, you are undoubtedly working as a freelancer. The work of consultants is also partially recognized as being a freelance professional if they are active scientifically, artistically or as an author. The BGH (Der Betrieb 1960, 900) had recognized freelance work for an advertising consultant, while it had denied it for a doctoral consultant (BGH VIII R 74/05) - so the boundaries are fluid. The IT consultant was also not recognized as a freelancer. The same applies to financial advisors, real estate agents or building society representatives. The operator of a fitness studio is also commercially active. Also in one case in which a consultant acted as a freelance and independent employee for costs, revenue planning, controlling, personnel planning, marketing, location assessment for the opening of new branches and the selection of executives, the case law denied the freelance activity and qualified the service as a self-employed activity (Bundesfinanzhof NJW 2004, 463).
If you offer "digital" services on the Internet, it depends on what exactly you are offering. The more individual and independent you present yourself, the more your work falls into the freelance field. Even if you need qualified training for this, you are more likely to be a freelancer.
Practical tips for freelancers
It is your job to present those aspects that speak in favor of freelance work. So if the tax office should be of the opinion that you are commercially active, you have to argue why in your opinion the freelance aspects predominate. Do you have your income in the Income tax return declared as income from freelance work, you have to expect that the tax office will carry out an external audit in your office and inspect your business documents in case of doubt.
What are the advantages and disadvantages of registering a business?
If your service does not qualify as a freelance activity, there is no avoiding the trade registration. There are no advantages. Especially if your activity is subject to special supervision or approval, you have to register a trade anyway. You can find details in §§ 30 ff of the Trade Regulations. Activities that require approval are carried out, for example, by brokers, investment advisors, property developers and insurance brokers.
The consequence of commercial activity is this Trade tax liability: Your income is subject to trade tax. One consolation is that you are granted an exemption of € 24,500 on your winnings. Above all, it depends on the municipality in which you operate your business. Municipalities collect so-called assessment rates, which they set largely autonomously. The usual rates of assessment are between 200% and 650%. This then results in the trade tax, which the municipality sets in a tax assessment and demands quarterly advance payments. You can determine this profit using the income statement if the annual turnover does not exceed € 500,000 and the annual profit is not higher than € 50,000.
What are the advantages and disadvantages of freelance work?
The key advantage of freelance work is that you don't have to pay any trade tax on your income. In addition, the bookkeeping is made easier for you. Tradespeople have to draw up a balance sheet from a certain profit. Freelancers, on the other hand, decide freely, even with high profits, whether to draw up a balance sheet or just limit themselves to the income surplus calculation (EÜR). The Income surplus calculation is much easier and cheaper and can be created without a tax advisor.
The sales tax law gives freelancers another advantage. As a freelancer, no matter how high your annual turnover is, you can opt for the so-called actual taxation. With actual taxation, sales tax is only due on your sales when your customer pays. Traders who are subject to debit taxation must pay the sales tax to the tax authorities as soon as they have created the invoice, without it being important when the customer pays.
Use the small business regulation!
As a trader or freelancer, you can do the Small business regulation use for you (§ 19 UstG). This saves you a lot of bureaucratic effort. You are considered a small business owner if your annual turnover plus the applicable sales tax in the previous calendar year or in the year of founding did not exceed € 22,000 (gross turnover, from 01/01/2020; for the years before this limit was € 17,500) and you in current calendar year will in all probability earn a maximum of € 50,000. In this case you do not have to make a VAT return.
The advantage is that you don't have to include sales tax on your invoices. You can also reduce the bureaucratic effort if you use the small business regulation.
The disadvantage, again, is that you cannot claim input tax on the invoices you have paid to third parties. In the Start-up phase, in which you may have high investment costs with high input tax, it could therefore be advantageous if you waive the small business regulation and claim input tax.
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Practical tax tips for freelancers
As a trader and freelancer, if you do not make use of the small business regulation, you are subject to sales tax. How often do you Advance VAT return must submit, depends on the amount of sales tax collected. If the sales tax in the previous year does not exceed € 1,000, it is sufficient to submit an annual sales tax return. If the sales tax in the previous year is not higher than € 7,500, you only need to submit a quarterly sales tax return. However, sales tax amounts over € 7,500 require you to submit a monthly sales tax return.
You have the same fate as Entrepreneur In the first two years of founding your company: In this case, too, you have to register sales tax on a monthly basis (Section 18 (II) sentence 4 of the UstG). If possible, you should use the Pre-tax calculation based on average rates use. Many entrepreneurs are allowed to use average rates instead of the actual input tax. As a freelance journalist or author, your input tax rate is 4.8% of your net sales. Details can be found in Section 70 of the Sales Tax Implementation Ordinance (UStDV).
Also the Flat rate operating costs brings advantages. As a full-time self-employed journalist or author, you can deduct 30% of your operating income as operating expenses, up to a maximum of € 2,455 per year. Only if your business expenses are above this amount should you take the trouble and account for the expenses individually. There are other practical tax tips for freelancers here.
Business registration for freelancers: yes or no?
As you can see, whether you are to be classified as commercial or freelance depends on a number of factors. It's partly in your own hands. As a rule, freelance work should be more advantageous, because freelancers work less bureaucratically. Regardless of what applies to your case: at least from a tax point of view, there are a number of starting points for working well with the tax authorities.
We hope that this overview has helped you to find the right regulation for you. However, the contribution does not replace advice from the tax office or tax advisor. Therefore, if you have any questions about your case, please contact the appropriate office. Since tax exemptions and laws can change, we do not assume any liability for the completeness and correctness of the information.
About the author
Jurist VB has many years of experience as a lawyer and managing director of a GmbH and knows "joy and sorrow" from independent work first hand.
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- Lawyer VB
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