Freelancer Knowledge for IT Companies
Freelancers pursue independent professions, which are defined in the EStG. They differ from tradespeople and free employees. Find out below how freelancers are defined and what they have to pay attention to when carrying out their activities.
What Is a Freelancer?
Freelancers are sole proprietors. They carry out professional activity on a self-employed basis, i.e. they are not in an employment relationship. They do not count as traders and therefore do not have to pay a trade tax.
However, they are still subject to sales tax. Furthermore, it is sufficient for them to submit an income statement (EÜR) when preparing their tax return. They do not have to submit a balance sheet and profit and loss account and are therefore not required to keep accounts. In Germany, Section 18 of the German Income Tax Act (EStG) defines who exactly is considered a freelancer.
Which Professions Count as Freelancer?
Freelancers do not pursue a trade and therefore do not fall under trade regulations. Instead, their professional activity is defined by law as educational, artistic, scientific, teaching, or medical profession. This results in occupations that are classically practiced by freelancers.
The decision-making authority on who is recognized as a freelancer lies with the tax office. Members of the freelance professions receive a corresponding tax number here after registration. The tax authorities are not always sure which activities are accepted as a freelancer. It may well happen that a profession is classified as partly freelance and partly commercial.
In addition, some freelancers are required to be members of a chamber. These include, for example, doctors, lawyers, pharmacists, tax consultants, auditors, and architects. They must register with the chamber responsible for them before taking up their freelance activity.
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What Taxes Do You Pay as a Freelancer?
If you are a freelancer, you do not have to pay a trade tax. For freelancers, only sales tax and income tax are due. The latter depends on the amount of individual earnings. No income tax is due up to a basic tax-free amount of EUR 10,347 (2022). If your earnings are above this, a tax rate of 14% applies. The top tax rate is 42%. If there are sudden increases in profits during a year, it is advisable to set aside money for tax.
As a rule, the sales tax in Germany is 19%. In exceptional cases, only the reduced sales tax of 7% is due. As a rule, members of the freelance professions must add the sales tax to the amount payable in their invoices.
What Insurances Are There for Freelancers?
As a freelancer, you are obliged to insure yourself with a health insurance fund. If you belong to an artistic profession, you are legally insured through the „Künstlersozialkasse (KSK)“. In other professions, you can also choose private health insurance. Accident insurance is also mandatory.
Insurance for old age is recommended, but not mandatory. Freelancers should take care of old-age provisions in their own interest. Liability, occupational disability, and legal protection insurance are also recommended.
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What Is the Difference Between Freelancers and Free Employees?
In principle, both groups of persons are to be regarded as self-employed. However, there are some relevant differences that need to be taken into account. Therefore, the terms “freelancer” and “free employee” cannot be used synonymously.
A freelancer is a free employee who is not bound by instructions. He usually works for different companies or clients and receives his earnings on the account. A freelancer can be a member of the freelance profession. However, this does not necessarily apply. The freelancer status is not limited to certain professions, so there are very many activities possible. A particularly large number of freelancers can be found in the IT sector, for example. In contrast to free employees, freelancers are considered tradespeople and are therefore obliged to pay a trade tax.
Free employees are limited to certain professional groups compared to freelancers. These are defined in § 18 of the EStG and are exempt from trade tax. The status of free employees is only assigned by the tax office.
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What Do I Need to Consider When Hiring a Freelancer as a Business?
Freelancers are not employees in the traditional sense. They are persons who work in your company on a self-employed basis. In order to comply with legal requirements, the freelancers independence in the working relationship should be maintained at all costs. This means that freelancers may not have fixed working hours and are not bound by instructions. As a boss, you merely commission an activity. The goal is the fulfillment of this task. How and at what times the freelancer fulfills this task is not your responsibility.
Freelancers must also earn at least 1/6 of their annual revenue from other clients. Otherwise, your company could be accused of employing bogus self-employed persons.
What Are the Pros and Cons of Being a Freelancer?
For many professionals, the idea of working freely and on their own terms sounds very tempting. After all, the term “freelancer” already implies that the group of people concerned can shape their professional life according to their own ideas in terms of time and content. But what exactly are the advantages and disadvantages of being a freelancer?
Advantages:
- More freedom and autonomy in the organization of professional life
- Freelancers do not have to pay a trade tax
- No double-entry bookkeeping necessary; the EÜR is completely sufficient. You save time and money
- In contrast to tradesmen, free employees do not have to become members of the „IHK“
- Actual taxation can be requested
Disadvantages:
- Some professions are not clearly defined as freelance. These include, in particular, activities in the IT sector. Therefore, it is possible that your profession is both freelance and commercial. This in turn leads to difficulties in defining the status at the tax office.
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FAQs
What Is a Freelancer?
Freelancers are self-employed and are sole proprietors. They are clearly distinguished from tradespeople and, unlike the latter, do not pay trade tax. Furthermore, they are not required to keep accounts and only have to submit an income statement (EÜR) in their tax return. Whether you receive the status as a freelancer is decided by your tax office.
Who Counts as a Freelancer?
The activities that are recognized as freelance are defined in Section 18 of the German Income Tax Act (EStG). By definition, the activity performed must be of an educational, teaching, medical, scientific or cultural nature. Examples of freelance activities are, for example, doctors, pharmacists, midwives, artists, engineers, computer scientists, tax consultants, notaries or lawyers.
How Do Free Employees and Freelancers Differ?
According to the law, free employees belong to a group of firmly defined professions, some of which are also subject to chamber liability. They are not considered to be tradespeople. Freelancers, on the other hand, are tradespeople and must pay trade tax accordingly. They are not restricted to certain occupational groups.
Freelancers are self-employed and are sole proprietors. They are clearly distinguished from tradespeople and, unlike the latter, do not pay trade tax. Furthermore, they are not required to keep accounts and only have to submit an income statement (EÜR) in their tax return. Whether you receive the status as a freelancer is decided by your tax office.
The activities that are recognized as freelance are defined in Section 18 of the German Income Tax Act (EStG). By definition, the activity performed must be of an educational, teaching, medical, scientific or cultural nature. Examples of freelance activities are, for example, doctors, pharmacists, midwives, artists, engineers, computer scientists, tax consultants, notaries or lawyers.
According to the law, free employees belong to a group of firmly defined professions, some of which are also subject to chamber liability. They are not considered to be tradespeople. Freelancers, on the other hand, are tradespeople and must pay trade tax accordingly. They are not restricted to certain occupational groups.
