Freelancers are self-employed entrepreneurs and take over economic responsibility for their activities. They decide for themselves how much money they take from the company and what or whether to take risks. The responsibility that freelancers take over is very high and in case of mistakes they are liable with their private and business assets. But whoever decides to become self-employed is faced with some important decisions and tasks before the foundation.
Without the right business model it is difficult to establish oneself on the market in the long run. As a freelancer, you are constantly responsible for providing the offered services and acquiring customers. Therefore you should ask yourself at the beginning if you have the necessary know-how to bring your project on the road to success. It is recommended to write a business plan and to record all important details. A detailed analysis of the competition, target customers and the market strengthens the own abilities and can help to minimize or exclude later risks.
Business company or freelance?
In contrast to tradesmen, freelancers are exempt from certain accounting obligations and trade tax. The legal basis for the tax office is § 18 of the Income Tax Act, which specifies which professions are recognized as freelancers in self-employment. All so-called freelance professions are listed in a catalog (“catalog professions”). Among them are artistic and literary as well as scientific and educational activities. Medical personnel, legal advisors, tax representatives and freelance trainers and teachers are also included. If the assignment to the group of freelancers is clear, it is recommended in the next step to check whether certain admission regulations must be observed. This can be a specific training or skill. If there are no regulations for the freelance profession, it is sufficient to register the foundation with the responsible tax office. To be on the safe side, it is recommended to contact a tax advisor, a legal advisor for business start-ups or a business start-up consultation in advance. Because in many professions there is still uncertainty on the part of the tax office regarding the status as a trader or freelancer. Especially in new professions and in the IT sector. It is not uncommon for the assignment to end in mixed forms. One part freelance and the other part commercial. This is the case, for example, if you work as a freelance copywriter and at the same time run an online store. In order to be recognized as freelancer in by the tax office, the freelance part must be larger than the commercial part.
Freelancer is legally a sole proprietor and not a company. Even several freelancers who join together, for example in a GbR, remain freelancers* as a community. In order to limit their own financial liability it is even possible to found a limited liability company (GmbH) or an Unternehmergesellschaft (UG). Here it is important to note that the freelancer is exempt from trade tax
because the profits of corporations are subject to trade tax.
When setting the prices or daily rates, it should be taken into account that in addition to the costs, the own living expenses as well as the own and business’s insurance should be covered. To calculate realistic prices and to represent them confidently to customers is indispensable for entrepreneurial success. A comparison of how much money other freelancers in the industry take for comparable services is helpful. Many freelancers sell their services below value. This not only harms themselves, but also the entire industry.
In addition to the usual insurance protection such as health and pension insurance, consideration should be given to risk minimization. While health insurance is either statutory or private, pension insurance is differentiated according to the type of activity. In case of the cases it is recommended to take out a professional liability insurance. Professional mistakes can quickly put the established existence in financial distress and danger. In the worst case, timely coverage protects against high claims for damages, for example, if the freelancer has made a mistake and caused damage to another person.
Freelancers pay income and sales tax. In the case of income tax, the profit achieved is decisive for the calculation of the amount. The higher the profit, the higher the tax rate. At the beginning of the freelance activity the tax office asks for the expected income. The taxes are calculated on this basis. At the end of the year it is then checked whether too much was paid; then the freelancer gets taxes back. If too little was paid, the freelancer has to pay extra. In addition, freelancers are subject to sales tax. This means that they have to pay 19% VAT on their services and show this on their invoices and pay it directly to the tax office. In accordance with §18 UstG, entrepreneurs must submit a VAT advance return to the tax office. In the first two years after starting their business, freelancers are obliged to do so on a monthly basis. Thereafter, the responsible tax office determines how often the advance turnover tax return must be submitted.
In contrast to tradespeople, freelancers are spared a lot of paperwork. They can therefore concentrate on their core business. To ensure that all hurdles are well mastered, precise planning before taking the step into freelance work is advantageous. Comprehensive information and legal protection contribute their share to the entrepreneurial success.
If you have any questions, you can always contact the responsible tax office.