Everyone who is self-employed has to submit an invoice. Then the topic of “tax” is never far away. The tax authorities earn money from (almost) every action, whether self-employed on a small scale or as an entrepreneur on a larger scale.
Due to the complexity of the topic, we would like to give you an insight into when the different types of tax apply. Which tax mode comes into effect and when?
The sales tax
In principle, it must be paid if the income generated (gross!) did not exceed 17,500 euros in the previous year and is unlikely to exceed 50,000 euros in the current year.
In this case, the so-called “small business regulation” applies. In order to document that this regulation is applied, it is sufficient if you issue the invoice without showing sales tax.
Otherwise, this must always be shown on the invoice.
You have to check every year whether your earnings are still within the stated limits. Even if you have exceeded the turnover limit in previous years, you can still take advantage of the small business regulation for the current year without having to submit an application.
However, the tax office must be informed of the change from the so-called “standard taxation” back to the small business regulation in order to no longer receive a request to submit the advance VAT return.
It should be noted that even as a small business owner, you generally have to issue an invoice within six months of providing a service. For example, if you only became self-employed in June of a current year, the expected sales will be converted into total annual sales for the first year.
However, even as a small business owner, you are not spared from filing an income tax return. Unless you earn less than the current 8,130 euros as a single person and 16,260 euros as a married person.
The trade tax
This tax liability applies when you earn income from your business. This often happens at the same time as the business is registered.
However, this does not necessarily mean that you have to pay trade tax immediately. Profits above and beyond this amount only have to be transferred if the amount exceeds 24,500 euros.
The legislature defines a business as “any activity that is carried out on a long-term and sustainable basis for the purpose of making a profit and is neither freelance nor in agriculture or forestry”.
If you are self-employed in accordance with Section 18 Paragraph 1 of the Income Tax Act, then you are exempt from paying this type of tax. However, if you as an entrepreneur have founded a GmbH, OHG or another corporation, then you are generally obliged to pay this tax. In this context, the entrepreneur is the person on whose behalf the business is operated.
Trade tax is therefore based on the income you earn from your business and - with possible small deviations - roughly corresponds to the profit that is also reflected in corporate or income tax.
It is also important that this tax is a so-called “municipal tax”, the amount of which the municipalities can determine individually using the “assessment rate”.
The corporate tax
The good news first: If you are a sole proprietor or have founded a partnership, such as an OHG (general partnership) or a GbR (company under civil law), you do not have to pay corporation tax.
It is levied by the federal states and is aimed at the profits of corporations, such as a GmbH (limited liability company) or AG (stock corporation). Corporate tax is a so-called “direct tax”, in contrast to sales tax which is an “indirect” tax. On the other hand, cooperatives and mutual insurance associations, for example, have to pay corporation tax.
The income tax
Regardless of whether you have become self-employed as a one-man business or founded a company as an entrepreneur: no German citizen in Germany can avoid paying income tax.
Exception: Unless you are single and earn less than 8,130 euros or 16,260 euros if you are married.
Income is defined as “profit minus extraordinary expenses and minus special expenses”. However, this situation does not exempt you from filing your income tax return.
Summary
Due to the particular complexity of the topic, especially if you have only been self-employed or working as an entrepreneur for a short time, it is advisable to seek the advice of a professional. The fact that you will be faced with an invoice in such a case does not have to worry you. You can then claim the costs as tax deductible.
With the invoice downloader GetMyInvoices you can conveniently and automatically download and manage your incoming invoices.
