How Are Small Business Owners Taxed? (Besteuerung Gewerbetreibende)

Not all self-employed people are sole traders. While both traders and freelancers do their job sustainably, the types of income they earn couldn’t be more different. Even so, the issue of whether their trade is a primary or secondary activity does little to influence them from a tax law perspective. However, the tax office is looking more closely at how it categorises income types.

Today, it recognises three broad income categories

• Income from agriculture and forestry (Land- und Forstwirtschaft)
• Income from a business enterprise (Gewerbebetrieb)
• Income from freelance work (Freiberufler).

When does trade activity apply? The term “freelancer” only refers to the kind of work being done. Freelance activities include self-employed engineers, doctors, economists, and similar professional roles. All other professions are considered trades. The tax office is responsible for deciding on your classification. If they categorise you as a freelancer, you can begin work immediately, but if they categorise you as a trader, you will need to register with your closest trade office. Sole traders have a distinct business structure that is subject to trade tax, which pays for municipal infrastructure used by traders. In some cases, both freelance and trade work is carried out by the same entrepreneur. Mixed activities have two different forms of income that must be listed in your books. You’ll be required to register as both a freelancer and a trader.

Difference to Additional Income

When does an activity as a trade apply? In addition to sustainability and having profit-making intent, revenue must not apply to the agricultural, forestry (land- und forstwirtschaftlich) or professional sectors (freiberuflich). Sometimes, however, this regulation is not quite as selective, which is why there are sometimes pending lawsuits.

Examples of Commercial Occupations (gewerbliche Berufe):

• Mail order business
• Retail sales
• Informal markets
• Commercial agent services
• Building society representatives
• Insurance agents
• Real estate agents
• Loan brokers
• Financial advisors
• Credit consultants
• Skilled occupations
• Dental technicians
• Gastronomy
• Workers in the hotel industry
• Alternative energy suppliers

Taxation of Traders (Besteuerung von Gewerbetreibenden)

Small traders and freelancers aren’t taxed in the same way. Regulatory differences only become a factor after a certain company size and revenue limit is met.

Profits from a commercial activity can be determined in several ways:

• Double entry accounting (doppelte Buchführung) with balance sheet (Bilanz) and profit and loss account (Gewinn- und Verlustrechnung): necessary if business profits exceed €50,000 or net annual turnover exceeds €600,000
• Income surplus calculation in Euros (Einnahmen-Überschussrechnung EÜR): Variant for small traders up to a limit of €17,500
• Businessman in the commercial register (Kaufmann im Handelsregister): accountable (buchführungspflichtig)

Note : This form of bookkeeping is only necessary if the tax office requests it.

Freelancers must register with the professional association that applies to their profession, which may entail document lodging and official form completion. After you’ve registered, your tax authority will assess your income and profession to determine how high your tax instalment payments will be.

Foundation and Closure of a Business

Anyone who wants to open a business must register it with the municipality because it’s subject to trade tax (Gewerbesteuer). Registration must be completed within one month. Traders do not have to report to the tax office in this regard, as community associations handle it instead.

The functioning or sale of a business is tax-efficient if business activity has already been terminated.

If you’re structuring a business, capital gains and surpluses become increasingly important. Capital gains of up to €45,000 are tax-free as long as the entrepreneur has reached the age of 55 or has a permanent occupational disability. The tax-free amount can only be declared if the capital gain or exempted surplus is taxed at a reduced rate of 56 % of the average tax rate.