I coach English-speaking freelancers on setting themselves up as self-employed in Germany. A typical coaching will take you through the basics – how to get a freelance tax number, what information you need to have on your invoices, how the Finanzamt will treat you for tax purposes, information on the insurance system, dealing with clients in other countries, tips and tricks I’ve picked up along the way.
Over the years, I’ve gathered a list of issues that really perplex expats. You might not think these things are a big deal right now, but they certainly would be if you get audited 5 years down the track. Here are some tips for starting out your German freelance adventure with great accounting habits.
1. Your Tax Identification Number does not belong on your freelance invoices.
When you registered your address, you probably received a tax identification number called a Steueridentifikationsnummer (St-IDNr.). The number is 11 digits long. Store it in a folder and pull it out if you ever get an employment contract or need to give it to a German public offices. It does not belong on your client invoices. For those, you need a Steuernummer. It’s 10 digits long, grouped like this (e.g. 12/345/67890). To get this number, you have to fill out a seven-page form and submit it to the Finanzamt, so that they can decide on how to treat your business for tax purposes before you start sending invoices. Talk to Red Tape Translation if you need support with this process.
You CAN put your VAT ID number (USt-IDNr.) on your invoices instead of your Steuernummer. But your St-IDNr. has no place on your invoice, just as chicken has no place on a pizza.
2. You need a legal statement at the bottom of your invoices that explains your VAT calculation.
That is, unless you’re charging the standard 19% VAT. If you’ve opted to take advantage of the small business rule and you neither charge VAT on your invoices nor claim VAT on your expenses, it will look something like this:
Gemäß § 19 UStG wird keine Umsatzsteuer berechnet. (In accordance with §19 of the German VAT law, no VAT has been added to this invoice.)
If there’s another reason why you’re not charging 19% VAT, there will be another clause to quote. You might be charging 7% VAT because you’ve granted copyright to a client for your intellectual property. You might be doing reverse charge VAT for a client within the EU, or charging no VAT because they’re a business based in the USA or Australia. Either way, make sure to justify it on your invoice by quoting the relevant paragraph of the VAT law. Every. Single. Time.
3. Make sure your invoice numbering system is logical.
It’s common to hear this advice: “Generate random invoice numbers with multiple digits so that your clients think you have more customers than you really do.” The idea is good but if you get audited, you risk getting an earful. So do it smartly.
Case study (a true story): Jonathan got audited for 2013. He had sent out 75 invoices in total and numbered them consecutively (the last invoice number was 2013-75), but he couldn’t account for invoices 13, 44, 47 and 69. They were missing. He must have just skipped the numbers.
The Finanzamt looked at Jonathan’s average invoice amount. Most of his invoices are for approximately 250EUR, so they assumed that those 4 missing invoices must have been for 250 Euros each. They determined he’d made an extra 1000 Euros in 2013 that he needed to pay tax on. No big deal, Jonathan was happy with that solution.
But if your highest invoice number is #2017-141 and in reality, you’ve actually only sent out 70 invoices, it looks like you’re hiding a whole lot of invoices. It will raise some red flags. There are plenty of ways to organise your numbering system so that your client has no idea how many invoices you send out. For example, Year-Month-Day-Invoice No. or Year-Client-Invoice No.
2017-0704-0001 (this looks like you expect to send out at least 1000 invoices on the 4th of July)
2017-KP-0001 (this looks like you expect to send your new client Kathleen Parker at least 1000 invoices).
4. German clients will often demand a correct and complete invoice before paying you.
Your American, Canadian (etc.) clients usually just pay you with a Paypal money request and they don’t think anything of it, but don’t be surprised if your German client hassles you for a correct and complete invoice before they pay you. This is because if important information is missing, the Finanzamt might not allow your German client to deduct your invoice as a business expense. If something doesn’t look right, your client will ask you to correct it before they issue payment.
5. If you don’t submit a profit and loss, the Finanzamt will look at what you told them you’d earn.
Remember that form you filled out, the Fragebogen zur steuerlichen Erfassung? You made some predictions about what you would earn in your first year of business and your second year of business. The Finanzamt used this information to work out how to treat you for tax purposes.
Fast forward 18 months later. Life got complicated and you forgot to submit a profit and loss. That’s OK, says the Finanzamt. We’ll just use the information you already gave us. You said you’d earn 27,000 EUR in 2017, so we’ll just make you pay income tax on 27,000 EUR.
Fine, if your predictions were accurate. Devastating if you ended up earning significantly less. So make sure you submit a profit and loss. You have until May of the following year if you do it on your own, or until December of the following year if you hire a tax advisor to do it for you.
This is all way too complicated for me.
That’s OK. I know some great English speaking tax and insurance advisors that are good at making sure you get things started with good habits. They can also help you find a good solution if you’ve made some mistakes along the way. I know I’ve made plenty!