Who is considered self-employed?

A self-employment is particularly common among freelancers. A freelancer is someone who works independently and is self-responsible, practising a specific professional activity or occupation listed in § 18 para. 1 EStG.

Freelance professions require an activity that does not necessarily have to be preceded by a university degree. It only needs to be a scientific type of training. This also includes self-study or knowledge acquired through employment. The knowledge must be equivalent to a university degree.

(1) Freelancers are, on the one hand, individuals who perform a specific activity (§ 18 para. 1 no. 1 EStG), namely a

• scientific, artistic, literary, teaching or educational activity.

(2) Freelancers are also individuals who practise a specific professional occupation explicitly mentioned in the Income Tax Act (§ 18 para. 1 no. 1 EStG):

• Medical professions: doctors, dentists, alternative practitioners, dental technicians, physiotherapists, nurses, hygiene specialist nurses.
• Legal and business consulting professions: lawyers, notaries, patent attorneys, auditors, tax consultants, consulting economists and business administrators, sworn accountants, tax agents.
• Technical and scientific professions: surveyors, engineers, architects, commercial chemists, pilots.
• Media professions: journalists, photojournalists, interpreters, translators.

(3) Freelancers can also be individuals who practise a similar profession comparable to the listed professional occupations in terms of activity and training. The list of freelance professions in § 18 para. 1 no. 1 EStG is not exhaustive. It is important that the activity is carried out in a leading and self-responsible manner based on one's own expertise. This applies, for example, to the following professions:

• Geriatric nurses, dieticians, occupational therapists, podiatrists, speech therapists, orthoptists, medical pedicurists, state-certified masseurs and therapeutic masseurs, medical bath attendants, paramedics, dental practitioners, midwives, psychological psychotherapists, child and adolescent psychotherapists, IT consultants, business consultants.
• Software engineering, work as a network or software administrator and supervisor (BFH rulings of 22.9.2009, VIII R 31/07, VIII R 63/06, VIII R 79/06).

(4) Activities that are not considered freelance work and do not constitute a business operation fall under other self-employment. A characteristic here is also personal work performance. However, other self-employment is usually carried out occasionally and only exceptionally on a sustainable basis (§ 18 para. 1 no. 3 EStG):

• Executors, asset managers, supervisory boards, property managers, insolvency administrators, trustees, carers, estate administrators, arbitrators, interviewers for state statistical offices, childminders, legal guardians, etc.

The distinction between a business and self-employment is often difficult, as freelance work is also generally not without the intention of making a profit. Many activities therefore fall under the characteristics of both freelance work and business. In these cases, the decisive criterion is the intellectual, creative work that is the focus of freelance work.

(2022): Who is considered self-employed?

What is a net income method?

With the income statement according to Section 4 (3) EStG, you can easily determine your business profit. Business income and expenses are recorded and compared using the cash basis method. This simple form of accounting does not take provisions into account, for example.

Another advantage is that the income statement does not require the maintenance of balance accounts or an inventory.

If you determine your profit using the income statement, the surplus of your income over your business expenses is the profit that is declared for taxation in the tax return.

(2022): What is a net income method?

Do I need to submit Form EÜR (income surplus calculation)?

The "income surplus calculation - EÜR form" standardises the income surplus calculation.

In the EÜR, you must provide detailed information about your income and expenses.

Until 2016, you were only required to submit this form if your business income exceeded 17,500 Euro and the profit was not determined through accounting (genuine bookkeeping). However, since the 2017 tax year, the simplification rule has been abolished, which allowed a non-formal income surplus calculation to be submitted instead of the formal "EÜR form" if business income was less than 17,500 Euro. Now, all taxpayers who determine their profit using the income surplus calculation are generally required to complete a standardised "EÜR form" and also submit it electronically to the tax authorities, just like the income tax return.

The previous statutory hardship rule still applies: To avoid "unreasonable hardship", the tax office may allow the tax return to be submitted to the tax office in paper form using the officially prescribed form (§ 25 para. 4 sentence 2 EStG; § 13a para. 3 EStG; § 18 para. 3 sentence 3 UStG; § 14a sentence 2 GewStG). In addition to the individual legal regulations, the Fiscal Code contains a general hardship regulation (§ 150 para. 8 AO): The tax office can waive electronic data transmission if it is economically or personally unreasonable for the taxpayer.

This is particularly the case if the taxpayer does not have the necessary technical equipment and creating the technical means for remote data transmission of the officially prescribed data set would only be possible with considerable financial effort, or if the taxpayer is not or only partially able to use the remote data transmission options due to their individual knowledge and skills. However, the tax authorities very rarely grant exceptions!

Check all the data in your EÜR for plausibility and compare it with data from other entrepreneurs if possible. If your information deviates significantly from the usual, the tax office may be prompted to conduct an individual audit.

If you wish to submit your tax return and especially your profit calculation for freelance or business income in paper form, you must submit a "hardship application under § 5b para. 2 sentence 2 EStG in conjunction with § 150 para. 8 AO" to the tax office, provide sufficient justification, and refer to the current rulings.

Important: According to the BFH, the hardship application may only refer to the respective assessment period (BFH ruling of 16.6.2020, VIII R 29/17). This means the application must be submitted anew for each year. It must not state "I request exemption from the assessment period ...", but only "I request exemption for the assessment period ...".

(2022): Do I need to submit Form EÜR (income surplus calculation)?

When can I determine the profit using the net income method?

In the cash basis accounting method according to § 4 para. 3 EStG, business income is compared with business expenses, and the result is the profit or loss.  

Traders and farmers can currently determine their profit using cash basis accounting if

• the annual turnover does not exceed 600,000 Euro and
• the annual profit does not exceed 60,000 Euro in the calendar year or financial year.

Freelancers, such as lawyers, notaries, tax consultants, doctors, journalists, artists, etc., and other self-employed individuals can always use cash basis accounting for their profit calculation - regardless of any turnover and profit limit. They are generally not required to keep accounts, but may do so voluntarily.

Merchants as defined in §§ 1 ff. in conjunction with § 238 HGB are always obliged to keep accounts - regardless of any turnover or profit limit. This accounting obligation also applies to tax law (§ 140 AO). The regulation applies to merchants who operate a commercial business, as well as entrepreneurs whose business operations require a commercial organisation due to their nature and scope.

(2022): When can I determine the profit using the net income method?

Is it possible to choose the net income method retrospectively?

Taxpayers who are not required to keep accounts and do not voluntarily keep books and make financial statements have the right to choose between the business asset comparison under section 4 (1) EStG and the cash basis accounting under section 4 (3) EStG:

• A taxpayer not required to keep accounts has - according to previous opinion - effectively exercised their right to determine profits through inventory comparison under section 4 (1) EStG only when they prepare an opening balance sheet, set up commercial bookkeeping, and make a financial statement based on inventories.

• If, on the other hand, the taxpayer has only recorded business income and expenses, they have exercised their option for profit determination through cash basis accounting in accordance with section 4 (3) EStG based on this actual practice.

According to the new opinion, the entrepreneur can also exercise the option after the end of the year, in principle indefinitely until the tax assessment becomes final. If the entrepreneur then prepares an annual financial statement, they only decide on profit determination through accounting at that point - and not already with the establishment of bookkeeping at the beginning of the financial year (BFH ruling of 19.3.2009, BStBl. 2009 II p. 659).

However, the option is restricted by certain conditions (section 4 (3) sentence 1 EStG). For example, the choice of surplus calculation is no longer possible after the financial statement has been prepared. Similarly, the choice of profit determination through inventory comparison is excluded if the taxpayer has not prepared an opening balance sheet and set up commercial bookkeeping promptly at the beginning of the profit determination period. The choice between the types of profit determination may also be excluded if the taxpayer is bound by a choice made for a previous financial year.

Note: This interpretation also serves the simplification purpose of cash basis accounting. The taxpayer can opt for cash basis accounting to avoid preparing the financial statement, even if they have already set up bookkeeping. For the tax office, it is only important that it actually receives the cash basis accounting after the choice has been made.

(2022): Is it possible to choose the net income method retrospectively?

Is there an obligation to submit the EÜR electronically even if the profit is small?

The Rhineland-Palatinate Tax Court has ruled that taxpayers with income from profits are required to submit their income tax return electronically to the tax office, even if they earn only minor profits from part-time work. The electronic form is mandatory if the profit exceeds 410 EUR (Rhineland-Palatinate Tax Court, 15.7.2015, 1 K 2204/13).

The case: The claimant is self-employed part-time as a photographer, author, and diving instructor. The tax office first informed him in 2011 that he was required to submit his income tax return electronically due to this self-employment. The claimant argued that the profits from his self-employed work would only be around 500 Euro per year in the future. He also fundamentally opposed the transmission of personal data via the internet, as he had already had relevant experiences with internet misuse. Even with internet banking, absolute security could not be guaranteed.

According to the tax court, the Income Tax Act requires the electronic form if the profit exceeds 410 Euro. This form was not unreasonable for the claimant. The residual risk of a hacker attack on the stored or transmitted data, remaining after all technical security options have been exhausted, must be accepted in view of the state interest in administrative simplification and cost savings.

Absolute confidentiality of data cannot be guaranteed anyway, as data stored "analogue" in paper form could also be stolen, e.g. in a burglary at home or – as reported in the media on 13.6.2015 – in burglaries of bank mailboxes. Electronic tax returns are also required for VAT, and the Federal Fiscal Court has already ruled that this is constitutional despite the "NSA affair".

Currently, the Münster Tax Court has ruled that a balance sheet may also be submitted to the tax office in paper form if the creation of the technology for data transmission would be financially too costly (judgment of 28.1.2021, 5 K 436/20 AO).

However, the Federal Fiscal Court has ruled that a financial expense of 40.54 Euro for the required electronic transmission of the balance sheet and the profit and loss account in the officially prescribed data format is also (economically) reasonable for a "micro business" (Federal Fiscal Court judgment of 21.04.2021, XI R 29/20).

Note: Employees and pensioners who are not required to submit an electronic tax return and receive expense allowances for their voluntary work up to the amount of the volunteer allowance of 840 Euro or the trainer allowance of 3.000 Euro per year may, in our opinion, continue to use the paper forms for the tax return. However, the tax offices are increasingly handling this more restrictively.

(2022): Is there an obligation to submit the EÜR electronically even if the profit is small?

Is there also an obligation to submit the EÜR form electronically for secondary business income?

For self-employed individuals, tax returns in paper form are no longer accepted. This also applies to private households with photovoltaic systems and individuals with additional business income of more than 410 Euro, such as part-time winegrowers. Tax offices consistently reject tax returns submitted in paper form.

This means: If there is no hardship case, a paper tax return is considered not submitted. A hardship case applies if the purchase of the necessary technical equipment with a PC and internet connection is only possible with significant financial effort, or if the knowledge and personal skills to use them are not or only partially available.

In this case, late fees may apply.

Note: Employees and pensioners who are not required to submit an electronic tax return and receive expense allowances for their voluntary work up to the amount of the volunteer allowance of 840 Euro or the trainer allowance of 3.000 Euro per year may, in our opinion, still use the paper forms for the tax return. However, tax offices are increasingly handling this more restrictively.

(2022): Is there also an obligation to submit the EÜR form electronically for secondary business income?

What is included in capital gains?

Income from self-employment also includes profit from the sale of a freelance practice, office or related assets, an independent part of the assets, or a share in the assets. The sale also includes the closure of a practice, office, etc. (§ 18 para. 3 EStG). For tax purposes, the capital gain is treated according to special rules and must therefore be distinguished from the current profit.

Anyone who sells or closes their business or partnership share can take advantage of two important tax benefits:

• Capital gains allowance: The capital gain is tax-free up to 45,000 Euro. However, this amount is reduced if the capital gain exceeds 136,000 Euro, by the excess amount. Therefore, the capital gains allowance is no longer available from a capital gain of 181,000 Euro (§ 16 para. 4 EStG).
• Reduced tax rate: The capital gain remaining after deduction of the allowance is eligible for the one-fifth rule. Upon request, it can also be taxed at a reduced rate, namely at 56% of the average tax rate and at least 14% (§ 34 para. 3 EStG).

The capital gains allowance and the reduced tax rate are only granted under certain conditions:

• You must be at least 55 years old or permanently occupationally disabled in the sense of social security law.
• You can only claim the benefits once in your lifetime: the capital gains allowance from 1996, the reduced tax rate from 2001.
• You must apply for the benefits.

If the business is sold before the age of 55, without being permanently occupationally disabled, only the one-fifth rule applies. However, this rule does not result in any tax savings if current income is already taxed at the top rate.

When selling a partnership share, you are also entitled to the full capital gains allowance, not just a proportionate amount. However, if you sell only a part of your partnership share, the capital gain is considered current income, and neither the capital gains allowance nor the reduced tax rate or the one-fifth rule apply (§ 18 para. 3 in conjunction with § 16 para. 1 sentence 2 EStG).

(2022): What is included in capital gains?

What is the instructor allowance?

Do you earn income from part-time work, e.g. as an instructor, educator, trainer, or similar occupation? This income is tax-free up to an amount of 3,000 Euro per year (until 2020: 2,400 Euro) (§ 3 No. 26 EStG). The same limit applies to part-time artistic activities or if you care for elderly, sick, or disabled people on a part-time basis. The condition is that the work is carried out on behalf of the public sector or for charitable, benevolent, or religious purposes.

If you earn more than 3,000 Euro in your job, you must declare the income as income from self-employment or employment.

Beneficiaries under the instructor allowance include:

• Sports trainers or team supervisors
• Choir leaders, orchestra conductors, or church organists
• Youth leaders, holiday supervisors
• Paramedics at sports events, cultural events, and parades
• The following activities are not eligible
• Board members
• Cashiers or equipment managers of a sports club
• Animal trainers
• Hall managers

The COVID-19 vaccination is a mammoth task. Therefore, there should be a tax concession for those who volunteer in vaccination or test centres or mobile vaccination teams. The dedicated helpers make an important contribution to health protection and combating the pandemic. As early as 2020 and 2021, volunteers in the vaccination and test centres could benefit from the so-called instructor or volunteer allowance.

The finance ministries of the federal states and the Federal Ministry of Finance have now decided to extend these concessions for the year 2022 (source: Ministry of Finance Baden-Württemberg, announcement of 7.2.2022). The following regulations apply for the years 2020 to 2022:

• For all those directly involved in vaccination or testing - i.e. in information sessions or in the vaccination or testing itself - the instructor allowance applies. In 2020, the instructor allowance was 2,400 Euro, since 2021 it has been 3,000 Euro per year. Those involved in the administration and organisation of vaccination or test centres can claim the volunteer allowance. This was 720 Euro in 2020 and increased to 840 Euro from 2021. This also applies to mobile vaccination and test centres.
• Due to tax regulations, volunteers in the test centres can only claim the instructor or volunteer allowance if the client or employer is a charitable organisation or a public employer, such as the state or a municipality.
• For the vaccination centres, the federal and state governments have agreed that the instructor and volunteer allowance can also be considered if the vaccination centre is operated on behalf of a legal entity under public law with the involvement of private individuals or entirely by private individuals.
• Both the instructor and volunteer allowances only apply to remuneration for part-time work. This is usually the case if these activities do not take up more than one-third of the working hours of a comparable full-time position or if the regular weekly working hours do not exceed 14 hours. This also applies to helpers who do not have a main occupation, such as students or pensioners.
• The allowances are annual amounts granted to volunteers only once per calendar year. If there are several activities for which the instructor allowance is applicable (e.g. helper in the vaccination area and trainer of a youth team), the income must be added together. The same applies to the volunteer allowance.
• If the volunteers are employed part-time in both the vaccination/testing area and the administration/organisation of the vaccination and test centres, both allowances can be considered simultaneously. However, this requires that the activities are agreed upon and remunerated separately.

Doctors' surgeries are not COVID-19 vaccination centres in this sense. If doctors pay their staff a bonus for the additional work, the instructor or volunteer allowance cannot be claimed. Part-time helpers are usually considered employees and therefore earn income from employment.

The occasionally held view that self-employed income may be involved is not shared by the tax authorities - as far as can be seen. The allowances of 3,000 Euro or 840 Euro can also be taken into account by the employer when calculating the income tax. In this case, however, the employee must confirm in writing to the employer that the respective allowance has not already been "used up" elsewhere. The employer must keep the declaration in the payroll account.

If pharmaceutical staff were employed in the vaccination centres and received their remuneration from the Chamber of Pharmacists, no income tax was usually deducted in 2021, as there appear to be special leniency agreements between the tax authorities and the Chambers of Pharmacists. The income must then be declared and taxed in the employee's tax return. Caution: From 2022, this leniency regulation is no longer expected to apply, meaning that income tax must also be paid for pharmaceutical staff if the tax-free allowances are exceeded.

(2022): What is the instructor allowance?

What is the allowance for voluntary service?

Income from part-time work in charitable, non-profit, or church-related sectors is tax-free up to 840 Euro per year (up to 2020: 720 Euro), provided the trainer's allowance does not apply (§ 3 No. 26a EStG). This benefits individuals who volunteer in non-profit associations and organisations and take on responsibilities. The following conditions apply:

• The work must be part-time.
• The work must promote charitable, benevolent, or church-related purposes.

The tax exemption for expense allowances under § 3 No. 12 EStG cannot be claimed for income from the eligible activity.

Please note that part-time work is defined as work that does not exceed one-third of the working hours of a comparable full-time job over the calendar year.

If you incur business expenses in connection with such work, you can only deduct them if they exceed the allowance.

The COVID-19 vaccination is a mammoth task. Therefore, there should be a tax benefit for those who volunteer in vaccination or test centres or mobile vaccination teams. The dedicated helpers make an important contribution to health protection and combating the pandemic. Already in 2020 and 2021, volunteers in vaccination and test centres could benefit from the so-called trainer's allowance or the volunteer allowance.

Currently, the finance ministries of the federal states and the Federal Ministry of Finance have decided to extend these reliefs for the year 2022 (source: Ministry of Finance Baden-Württemberg, announcement of 7.2.2022). The following regulations apply for the years 2020 to 2022:

• For all those directly involved in vaccination or testing - such as in counselling sessions or the vaccination or testing itself - the trainer's allowance applies. In 2020, the trainer's allowance was 2,400 Euro, and since 2021 it has been 3,000 Euro annually. Those involved in the administration and organisation of vaccination or test centres can claim the volunteer allowance. This was 720 Euro in 2020 and increased to 840 Euro from 2021. This also applies to mobile vaccination and test centres.
• Due to tax regulations, volunteers in test centres can only claim the trainer's or volunteer allowance if the client or employer is a non-profit organisation or a public employer, such as the state or a municipality.
• For vaccination centres, the federal and state governments have agreed that the trainer's and volunteer allowance can also be considered if the vaccination centre is operated on behalf of a legal entity under public law with the involvement of private individuals or entirely by private individuals.
• Both the trainer's and volunteer allowance apply only to remuneration for part-time work. This is usually the case if these activities do not exceed one-third of the working hours of a comparable full-time position or the regular weekly working hours do not exceed 14 hours. This also applies to helpers who do not have a main occupation, such as students or pensioners.
• The allowances are annual amounts granted to volunteers only once per calendar year. For multiple activities to which the trainer's allowance applies (e.g., helper in the vaccination sector and youth team coach), the income must be added together. The same applies to the volunteer allowance.
• If volunteers are part-time in both the vaccination/testing sector and the administration/organisation of vaccination and test centres, both allowances can be considered simultaneously. However, this requires that the activities are agreed upon and remunerated separately.

Doctors' surgeries are not considered COVID-19 vaccination centres in this sense. If doctors pay staff a bonus for additional work, the trainer's or volunteer allowance cannot be claimed. Part-time helpers are generally considered employees and thus earn income from employment.

The occasionally held view that self-employed income may exist is not shared by the tax authorities, as far as can be seen. The allowances of 3,000 Euro or 840 Euro can also be taken into account by the employer when calculating income tax. In this case, however, the employee must confirm in writing to the employer that the respective allowance has not already been "used" elsewhere. The employer must include the declaration in the payroll account.

If pharmaceutical staff were employed in the vaccination centres and received their remuneration from the pharmacy chamber, no income tax deduction was usually made in 2021, as there appear to be special leniency agreements between the tax authorities and pharmacy chambers. The income must then be declared and taxed in the respective employee's tax return. Caution: From 2022, this leniency regulation is no longer expected to apply, meaning that income tax must also be paid for pharmaceutical staff if the tax-free allowances are exceeded.

(2022): What is the allowance for voluntary service?