Being a freelancer often means more freedom! However, before you celebrate your newly claimed freelancer status, there are some administration tasks, mainly surrounding taxes, that you need to become familiar with first.
Taxes could be a headache but not to worry, this guide will assist you with understanding what VAT is, and what steps you need to take as a freelancer in Germany to make sure you’re always in the clear.
Important vocabulary to understand VAT
First and foremost, there are some German vocabulary words you’ll need to wrap your head around to fully understand the VAT process better. These are:
- Umsatzsteuer/Mehrwertsteuer (MwSt.): VAT, Value Added Tax
- Umsatzsteuernummer: VAT ID
- Steuernummer: tax ID
- Finanzamt: tax office
- Kleinunternehmer: a small business that doesn’t charge VAT
- Steuerberater: tax advisor
- Freiberufler: freelancer
What is VAT?
Simply put, VAT, or Umsatzsteuer or Mehrwertsteuer, is a tax added to goods or services. Both Umsatzsteuer and Mehrwertsteuer are used interchangeably so don’t get confused if you see both. VAT stands for Value Added Tax and is used throughout Europe and some other countries too, similar to sales taxes in the United States.
While you’re freelancing in Germany, you might also have clientele elsewhere in the world. With that said, it’s important to note that goods or services sold to customers abroad are not subject to VAT.
What exactly does that mean? When should you charge VAT?
When do you charge VAT?
Here is a simple breakdown of when to charge VAT prepared by an official German tax advisor (Steuerberater):
During your first year freelancing, you most likely won’t charge VAT, but it depends on your situation. If you received less than EUR 22.000 during your first year as a freelancer, and less than 50.000 euros the next year, you can declare yourself a Kleinunternehmer (small business), and are therefore exempt from VAT. In either case, you should always ask your tax advisor about whether or not you should charge VAT, as it’s a rather grey area and is complicated.
Right now Germany’s VAT is at 19% on services and products (see table above). Like I mentioned earlier, if you have clients abroad, then VAT is not applicable. If you’re a Kleinunterhmener, you need to note this on your invoices to German clients so the Finanzamt knows they don’t need to pay it. If you do charge VAT, always list your VAT ID on your invoices.
Now, let’s talk further in detail about what you need on your invoices.
What do you need to do for VAT on your invoices?
- Your name, address, and email
- Your client’s name, company name, address, and email
- A unique invoice number (no number should be the same)
- Date of invoice
- Your Steuernummer
- Your VAT ID number (if applicable)
- A description of the work you are charging for
- The price per unit (this can also be per hour)
- The total amount charged
- If you’re a Kleinunterhmenher (don’t charge VAT), then you need a statement somewhere that says that
- (Optional but a good idea) payment due date
Another reminder is to list both you and your client’s VAT IDs so you don’t make a mistake. If you don’t list theirs within the EU but outside Germany, you have to pay VAT yourself from the invoice, and you wouldn’t want that to happen.
The last part of the puzzle is to always save an electronic version of your invoices so you can refer back to them when needed.
How can you apply for a VAT number in Germany?
You could apply for a VAT number at the Finanzamt (tax office) by yourself, or through a tax advisor. In either case, you’ll need to gather particular documents before applying.
You can apply for it at the same time you apply for your tax ID as a freelancer by filling in the questionnaire (Fragebogen zur steuerlichen Erfassung). If you do it after you’ve been registered already at the tax office, you can fill up the Vergabe einer USt-ID form. Fill in your location (Bundesland), your tax ID (Steuernummer), and your freelancing activity. You will then receive your VAT ID by mail within a few days.
Quick note: If you have any doubt about whether you should charge VAT or need help with filling this out, I strongly recommend getting a dedicated tax advisor to help you with all of those. As your business grows, your questions will become increasingly complex and you’ll need that support regardless.
How do you make VAT payments to the tax office?
You can pay VAT through direct deposit, but how often depends on your income. Usually payments will be quarterly, then as your income increases, it might move to monthly. How often you pay is determined by the Finanzamt, and again it’s much easier to understand this if you have a tax advisor.
The German fiscal year runs from 1 January to 31 December, so come January or February the next year you should start getting your income tax in order. Taxes are due by the 31st of July to the Finanzamt (tax office).
Because your income during the first or second year as a freelancer can fluctuate, it’s best to keep a savings fund for extra money you might owe back to the tax office (so you’re not stuck with a giant surprise tax fee when the time comes). The Finanzamt is known for working extremely slowly to approve the amounts, so it’s always good to keep your savings topped up for these larger payments.
Is there a way to reduce VAT payments?
Most freelancers starting out aren’t aware that saving receipts can save money on taxes in the long-term. However, you can write off business expenses such as:
- Office costs (rent)
- Home office costs (if you work from home this means your rent)
- Business meals (you cannot write off getting a Starbucks coffee by yourself because at least one other business associate must be present)
- German classes (considering this would help you get higher-paying clients)
- Accounting costs
- Client gifts (one per client per year, up to 40 euros each)
- Car and mileage
- Any sort of equipment you need to do your job such as computers or cameras
- Interest on business credit cards
- Travel costs such as hotels and transportation
…and a whole lot more.
You should keep all receipts for business write-offs up to five years after as the government has the authority to audit your business and ask for proof.
To sum up, make sure you always keep your receipts, keep some money in your savings, and talk to a local Steuerberater about your situation if you have further questions!