What is a freelancer, and why does it matter?
Freelancers are self-employed individuals that – because of the type of work they do and/or because of their qualifications – are exempt from trade tax (Gewerbesteuer) and do not need to register as a business (Gewerbeanmeldung). In many countries, you can work as a freelancer quite easily, but in Germany, self-employment is highly regulated. The German social welfare net relies heavily on the role of the employer. Employers pay high payroll taxes for their employees – approx. 50% on top of what employees receive in gross salary for each employee. These taxes include unemployment insurance, maternity leave insurance, sick leave insurance, retirement insurance, and health and long-term care insurance, all of which serve as safety nets for citizens. Many of the regulations surrounding freelance work are designed to prevent employers from using freelancing to avoid paying these taxes.
Who can be a freelancer?
The "Freie Berufe"
There are two ways to achieve freelancer status in Germany. If you belong to one of the “Freie Berufe” or specific professions that are based on a set of professional qualifications or creative ability, and where there is a specific interest in having these services done by an autonomous professional, you are permitted to register as a freelancer. The law defines these professions as follows “The free professions are generally based on special professional qualifications or creative talent, and involve the personal, autonomous, and professionally independent provision of services of a higher nature in the interest of the client and the general public.” (§1 (2) PartGG.
These are typically professions that provide external services that would not be done in-house, such as lawyers or consultants, or professions which typically involve doing work for a variety of clients, such as surveyors, translators, or journalists. The list of the “catalogue” free professions – the professions listed in income tax law – are listed below:
- Healers/alternative medicine practitioners
Natural science/technical professions:
- Commercial Chemists
Legal, tax and business advisory professions:
- Patent Attorneys
- Tax consultants
- Tax agents
- Consulting economists
- Business economists
- Certified public accountants and auditors of accounts
Language and information communication professions:
- Interpreters and simultaneous translators
There are four additional professions listed in the Partnership Company Laws:
- Healing masseur
- Expert Consultant
You can also be a freelancer in fields similar to the professions listed above – if you are unsure, the tax office will help you to determine whether your profession is considered freelance. You can also consult a tax advisor, but the tax office is generally willing to help you and will do this for free.
Along with the professions listed above, there are several occupations that are considered freelance occupations based on the tasks being done. These are scientific occupations (research, consultation), artistic occupations, literary occupations, teaching occupations, and childcare. The deciding factor in determining whether someone can be a freelancer is what they’re doing in their day-to-day work, not their original qualification. For example, if a lawyer founds a start-up, they’re no longer working as a lawyer and typically would no longer qualify as a freelancer.
How do I know if I can be a freelancer?
All freelancers must have their occupation/profession registered with the tax office. The tax office will determine whether you can be a freelancer based on the description of the work that you do. It’s best to be as general as you can when describing your work, and to remember that certain professions and occupations require you to pay into the retirement insurance while others don’t. Some free professions are required to register with professional organizations (guilds/chambers) that regulate their professions. Many free professions are additionally regulated and require government permits.
Taxes and Insurance
Everyone in Germany must have adequate health insurance. The immigration office looks most kindly on public insurance. I recommend the TK – they have an excellent English-speaking customer service department – but any public health insurance will cover you adequately. You do not need to register with the Gewerbeamt (trade office) – the trade office handles trade. Freelancers do not pay trade tax. Most freelancers also do not need to pay social security taxes – although this depends on your profession! If you are an artist, journalist, or author, you are required to pay social security tax and you will need to register with the Kunstlersozialkasse.
Whether or not you will need to pay into the public retirement insurance system depends on your profession and occupation. German law considers certain jobs as “in need of protection” – coaches, teachers, trainers, and other educators are in this category, as are nurses, midwives, physical therapists, and speech therapists. Artists pay into retirement insurance through their membership in the Kunstlersozialkasse. In general, if your job places you in a dependent relationship with a client, you will be required to pay into public retirement insurance. You can make an appointment with the local DRK office if you’d like to find out more (note: when dealing with the retirement insurance, it’s absolutely ok to ask hypothetical questions – I generally recommend gathering information first before officially informing the retirement insurance office of your status).
Kleinunternehmer + VAT Tax
If you are a freelancer and you invoice less than 22.000,00 € a year, you don’t have to worry about VAT taxes (unless the tax office decides they want you to start filing them – they’ll let you know if they do). If you go over in the middle of the calendar year, don’t worry. You don’t need to start paying VAT in the middle of the calendar year unless you go over 50.000,00 €. You will need to inform your clients – on your invoices – that you are invoicing according to § 19 of the VAT tax law. Being a small business also has some benefits for your income taxes.
Watch out for pseudo-self-employment!
Germany wants to make sure that freelancers are really freelancers. Those high payroll taxes I mentioned above could create a big incentive for employers to outsource work that should be done in-house by a protected, insured employee with access to unemployment and sick leave to freelancers. In order to prevent this, Germany has additional regulations surrounding the relationship between clients and freelancers.
Freelancers must retain their independence and operate as independent professional service providers. In general, clients cannot behave as employers, and may not mandate work hours, work location, give direct instructions and feedback, integrate employees directly into the company structure, or require freelancers to provide regular reports. Freelancers should not take official vacation and should not be required to clear absences with other employees. They should not receive sick pay, and in most cases, they cannot be wholly dependent on a single client.
In order to maintain freelance status, freelancers should work in their own space, for multiple clients, and should not take on long-term contacts with individual clients (if you work heavily with a single client, you ideally agree on work terms for each individual project). Freelancers should also have the freedom to design and organize their own work, have an individual market presence, be able to decide when and where they work, have the freedom to decide which meetings they will attend, and should be paid far over the going rate for employees – enough to cover the additional costs associated with paying their own insurance and taxes.
Pseudo-self-employment is decided on a case-by-case basis, and it depends heavily on the context. There are also some cases where the rules are a bit different. In general, freelancers are advised to make sure that no more than 5/6 of their work comes from a single client. However, having multiple clients isn’t always enough if you don’t meet the other criteria in the list. If you’re not sure, I’d recommend consulting with a tax advisor.
What happens if I’m pseudo-self-employed?
If the clearinghouse of the German retirement insurance runs an audit and determines that social insurance payments were required in your case, you’ll typically be required to pay a maximum of 3 months of your portion of the social insurance payments and relevant taxes retroactively. You’ll also have to edit all of your invoices and clear up any incorrectly paid VAT taxes. Your client – now technically employer – will be required to pay up to the maximum limit, in some cases up to 30 years, for missed social insurance payments as well as any relevant taxes. You’re technically employed now, so you have a right to all employee benefits, such as paid vacation and protection from termination.
Caution: Some employers have attempted to sue pseudo-self-employed freelancers for “overpayment” with the argument that the taxes and insurances have already been paid, at least in part, through the freelancer’s higher fees. This used to be quite difficult but a law change in 2019 has made it much easier for employers to succeed in court. It’s quite important to make sure that you’re not pseudo-self-employed, as it could have serious consequences for your finances. If you’ve ticked all of the boxes above, you should be fine, but if you’re uncertain, it’s best to contact an expert. This could be the tax office, a tax advisor, the retirement insurance office, or an employment lawyer.
Need more information?
You’ll find a lot of information in the Existenzgründungsportal, created and maintained by the Ministry for Economic Affairs and Climate Action. Much of it is also available in English. Government sources are typically up-to-date, so they’re excellent for making sure you have the latest information. If you have questions about tax or regulations, I’d suggest asking your tax office clerk first. You can find their name and extension at the top of any letter or document you’ve received from the tax office. If your German is advanced enough, they’re typically glad to answer questions. If you’re a bit nervous to call, most tax offices in Berlin have (or at least had, pre-COVID) an advice counter. Tax advisors are great if you’re earning enough that you think you’ll be able to save money if you filed more strategically, but for small freelance businesses, you might consider a one-off consultation when getting started and a good tax program – or alternatively, use a tax club! More on tax basics to come soon!